What’s the Deal with the Brexit Deal?

Read the first article of this series here: In the Name of Freedom – Is Britain Choosing an Increase in Regulations

The UK is eager to arrive at a deal with the EU before it finally exits the single market. Lawmakers have voted in favor of a Brexit extension yet again in case the terms of the deal are not favorable. But will a Free Trade Agreement (FTA) with the EU, no matter how seemingly favorable, really help Britain repair its economic condition? Let’s have a look.

Limitations of FTAs

FTAs differ immensely in their scope, depth and effects on trade and industry. The one thing that’s for sure is that any FTA between Britain and the EU is bound to be messy at best.

Nontariff Barriers

Even if the FTA removes trade tariffs between the UK and EU, multilateral agreements have historically had trouble lowering nontariff barriers. These take several forms, like customs procedures, paperwork, restrictions to market access and different regulation. Nontariff measures are typically even more complex and costly.

Behind-the-Border Barriers

Apart from border-related costs, whether tariff or nontariff, there are costs associated with what is known as behind-the-border barriers. These arise from differences between regions in their regulations and economic policy. This means manufacturers need to adapt their production of goods and packaging to meet the standards specified by different countries.

Services

There are serious issues with arriving at a deal related to services. Currently, the EU has what are called “passporting rights,” which gives companies based on one member state the right to provide services across all member states, without any differences in regulation or border barriers. Multilateral negotiations have historically failed to lower nontariff barriers for services.

The bottom line is that any FTA, no matter how extensive in scope, cannot outweigh the benefits from free trade.

The Cost of Brexit

Of course, the highest cost of exiting the Single Market to the UK would be if trade with the EU is conducted under World Trade Organization terms. However, even if the UK does manage to strike a deal, there would be efficiency losses due to the new barriers to trade and migration.

The free and easy access into the EU markets that UK currently enjoys will be replaced with border delays, more red tape and increased costs. Businesses are already opting out the UK and setting up their base in EU countries. Over 100 UK-based companies have already moved to the Netherlands so far this year, and another 325 businesses are in talks with the government to do so.

Increased trade costs adversely impact the welfare of citizens not just because of higher import prices, but also because businesses don’t have free access to resources to specialize according to their comparative advantage. This lowers production efficiency and output. Also, with the protection of trade barriers, less-efficient businesses are given a chance to survive, which impacts proper utilization of resources and lowers productivity. Moreover, welfare is affected by lower product variety.

The cost of these efficiency losses far exceeds the fiscal savings that UK would have when it stops making its fiscal contribution to the EU budget following Brexit. So, Brexit would be a net negative for Britain, even with a deal in place.