Theresa
May’s high-stakes trade gamble
Britain
underestimates German resolve to preserve the single market.
By HANS VON DER
BURCHARD, SIMON MARKS AND CHRISTIAN OLIVER 1/19/17, 8:00 PM CET
Updated 1/20/17, 7:59 AM CET
U.K. Prime Minister
Theresa May is basing her trade strategy on a dangerous assumption.
Her plan to make a
clean break with the EU single market and the customs’ union in
2019 poses a grave threat to core British industries, ranging from
carmakers to sheep farmers, who will suddenly find themselves paying
high tariffs to export to Europe.
May’s big gamble
is that a deal can be done quickly to maintain privileged access for
important goods. Her economic logic is compelling: EU companies say
they are terrified about disruption to trade with the U.K. and want
to avoid tit-for-tat tariff disputes that could ramp up prices for
consumers on the Continent.
But this could be a
potentially fatal political miscalculation. Europe’s most powerful
policymakers — most critically in Germany — are willing to soak
up mid-term economic pain in order to preserve a 440-million person
single market. Ultimately, the single market is more important to
Germany than the U.K. is.
Volker Treier,
deputy chief of the influential German Chamber of Commerce (DIHK),
said German businesses were right behind Chancellor Angela Merkel
when she said that the U.K. could not “cherry-pick” its economic
relations with the EU.
“This would create
a dangerous precedent,” he said, arguing that such special
bargaining would boost populist movements across Europe and undermine
the single market.
“When it comes to
an ‘either-or’ situation, the integrity and further development
of the single market is clearly more important for German companies
than any possible damage to trade with the U.K.,” Treier added.
British politicians
pin many of their hopes for a tailor-made deal on their supposed
allies within Germany’s all-powerful car industry. Matthias
Wissmann, the head of the German car lobby VDA, does indeed fear that
May’s hard Brexit will be “arduous and expensive” for both
sides. But he played down hopes of a quick trade accord to
counterbalance it, arguing that it “will take years to wrap up new
agreements.”
Prosecco vs. fish
and chips
May’s problem is
that her ministers have almost certainly overestimated their
leverage. While about 45 percent of U.K. exports go to the EU, only
about 8 percent of exports coming from EU countries head to the U.K.
The imbalance was
laid bare by Italian Trade Minister Carlo Calenda at the end of last
year, when he recounted to Bloomberg TV one of his arguments with
British Foreign Secretary Boris Johnson. “[Johnson] said: ‘You’ll
sell less prosecco.’ I said: ‘OK, you’ll sell less fish and
chips, but I’ll sell less prosecco to one country and you’ll sell
less to 27 countries.’”
France’s Foreign
Minister Jean-Marc Ayrault has also repeatedly insisted that the U.K.
cannot have an “à la carte” deal with the EU.
“The political
dimension of this issue is more important on the side of the 27
remaining members to keep the cohesion. Of course, there are some
trade interests … but the signal would be even more disastrous for
countries with important elections like France, if Europe was seen to
have an open door for trade negotiations,” said Elvire Fabry, a
senior research fellow at Notre Europe, a think-tank based in Paris.
“My expectation of
the EU side is the response will be a hard one,” she added.
This strong
opposition in Paris, Rome and Berlin to bending EU rules means
British companies will be facing far higher costs.
Higher tariffs
According to World
Trade Organization rules, British-made cars will face 10 percent
tariffs entering Europe once London leaves the EU, while sheep
farmers will face 12.8 percent duties on their lamb.
Other companies such
as machine makers and Scotch whisky distillers will find themselves
facing far higher costs around the world when they crash out of the
EU’s many trade agreements, ranging from Canada to South Korea.
Kathy Roussel, head
of the Brussels office of AHDB Beef and Lamb, a large livestock
lobby, said 95 per cent of British lamb exports go to the EU.
“Any disruption
there will have a significant impact,” she said. “A tariff of
even 12 per cent would mean that the U.K. would become less
competitive.”
While attention
tends to focus on complex EU-wide supply chains in the engineering
sector — such as Airbus wings being made in the U.K. — it is also
a major issue in the food business, said John Royle, chief livestock
advisor at Britain’s National Farmers Union.
British beef is
often exported for processing to the Netherlands and Ireland, then
re-exported back to Britain as burgers, he said. This could leave May
in the unenviable political position of driving up food prices.
“If you have
tariffs, do you have it both ways? If so, then all of a sudden, you
have to ask what the impact would be on consumers,” Royle said.
Dutch threat
Britain’s strategy
to exert leverage in negotiations is to threaten to deregulate, bring
down taxes and set itself up as Europe’s free-wheeling Singapore.
“[Britain
is] threatening to become some sort of pariah on the edge — a
fiscal paradise” — Dutch Finance Minister Jeroen
Dijsselbloem
The difficulty is
that the EU, again, holds many of the cards. The EU not only decides
whether to issue “passports” to British financial institutions,
but effectively grants all countries a right of veto over trade
deals.
That means that
countries can block any potential trade arrangements over other
grievances. Poland, for example, can use its trade veto to exercise
leverage on migration issues.
Most significantly,
the Netherlands, one of the U.K.’s closest allies among liberal
northern European economies, has said that it will not accept Britain
turning itself into an offshore tax haven.
In an interview with
NRC Handelsblad, Dutch Finance Minister Jeroen Dijsselbloem argued
that Britain was in danger of reverting to its economic malaise of
the 1970s: “outdated, massive unemployment and totally
impoverished.”
“They are
threatening to become some sort of pariah on the edge — a fiscal
paradise. That is exactly the direction we must not take.”
Additional reporting
by Jakob Hanke.
Authors:
Hans von der
Burchard , Simon Marks and Christian Oliver
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