International commerce is stalling. The growth in exports of goods and services is this year set to fall below the overall expansion of global GDP for the first time in 15 years. Myopic politicians, ignoring the lessons of history, are succumbing to the siren calls of protectionism. The world economy is becoming more insular.
The World Trade Organization, the most important trade body on earth, just slashed its 2016 forecast for the increase in total international commerce from 2.8pc to 1.7pc – well short of its 2.2pc estimate for the growth of the world economy as a whole.
This will mark the first time the share of trade in global economic activity has fallen since 2001 – when terrorist atrocities in New York led to a lock-down on inter-continental travel and financial flows, bringing cross-border commerce to a shuddering halt. Actual trade volumes are set to fall this year to their lowest level since 2009, the epicentre of the global financial crisis.
This worrying trade slowdown is partly because, across the world, investment is sluggish and corporate debt is high and rising. Despite years of low interest rates and central bank money-printing – or perhaps because of them – countless businesses, large and small, are delaying international ambitions, as financial markets remain on edge.
Less remarked upon is the rise in the imposition of myopic, politically-driven barriers to imports. The number of discriminatory trade measures introduced worldwide in 2015 was 50pc up on the year before according to the Global Trade Alert database – an astonishing rise. The proposed Trans Pacific Partnership between 12 countries around the Pacific Rim – the engine-room of global growth – now looks doomed. Parallel EU-US negotiations, meanwhile, known as the Transatlantic Trade and Investment Partnership, have been declared “dead” by both sides.
As anti-globalization sentiment rises, political leaders are reaching for easy, yet ultimately deeply counter-productive, solutions. Both candidates in next month’s US presidential election are now actively campaigning against free trade – a first in post-War American history. Now the WTO itself is ringing the alarm bells, warning that protectionism is growing at “at an accelerating rate”. This is the backdrop against which the UK is navigating its exit from the European Union.
There is widespread carping that the government “lacks a plan for Brexit”. Yet given that we’re embroiled in an extremely complex and ever-changing situation, involving 27 countries, each with their own commercial lobbies and electorates, any detailed Brexit roadmap would be obsolete before it was written. This was always, and by necessity, going to be an iterative process.
And anyway, even as the government engages in the initial post-referendum skirmishes, and processes the information they yield, it makes no sense for ministers to broadcast their endgame from the rooftops. To think otherwise is naïve in the extreme. To publicly argue otherwise is to display a woeful lack of business and strategic acumen.
While the government should mostly keep schtum, then, and its political opponents should understand why (some hope), the role of commentators is to both speculate and suggest with regards to what will actually happen. So let me put my neck on the line and state that, based on the political and diplomatic exchanges we’ve seen since the June referendum, and numerous conversations I’ve had with those involved in the UK and abroad, I think the least worst option – economically and politically, for the UK and the world in fact – is a “hard Brexit”.
There are three basic “Brexit” outcomes. The first is a relatively easy, off-the-shelf solution under which Britain joins the European Economic Area – the so-called “Norwegian model”. The trouble is being in the EEA involves continuing our large, multi-billion pound annual payment to Brussels. It also entails being forced to accept numerous EU rules and regulations – including “freedom of movement”.
While many wise people advocate the EEA option as a “staging post”, my concern is that, if we go down that route, we’ll get stuck. That would amount to a betrayal of British voters. A sizeable slice of the 17.5m who voted Leave did so in part because they wanted their elected representatives to control our laws and borders. On that score, EEA doesn’t deliver.
The second option is to invoke Article 50, then use the subsequent 2-year window to negotiate a bespoke UK deal. This has benefits. As the world’s fifth-largest economy, with a £60bn trade deficit with the EU, we can surely get a better deal than Norway – with due respect to my Norwegian readers and friends.
The “Bespoke UK” option, though, would involve a long, drawn-out negotiation – which could last well beyond 2 years, given that we may not pull the Article 50 trigger until after French and German elections in 2017. That would maximize business uncertainty and hinder investment – risking Brexit doing economic damage before it starts doing economic good.
In the current protectionist environment, with some European electorates in particular growing more restive, not last given the high unemployment stemming from euro membership a multi-year UK-EU negotiation will end up not only becoming extremely bad-tempered, but could result in prolonged gridlock. That wouldn’t only make uncertainty semi-permanent, doing serious damage to both the UK and the EU as a place to do business. It would also see voters on both sides of the Channel holding their heads in despair at the rank incompetence of their leaders.
So I favour the third option – a short Parliamentary bill absolving the UK of its EU obligations while carrying over EU statute applying to Britain into domestic law. We then send our Article 50 letter and leave.
Under such a “Hard Brexit” the UK would trade with the EU under WTO rules. EU countries wouldn’t dare to break those – as we’d take them to WTO arbitration and win. WTO rules aren’t a disaster for Britain – far from it. They currently govern our trade with countries including the US and China that make up the 85pc of the world economy outside the EU. The non-EU accounts for almost 60pc of UK trade and rising, of course. While we have a huge EU deficit, with the non-EU we run a £30bn surplus – all under WTO rules.
Hard Brexit means leaving the single market – a deeply imperfect set of rules that discriminates against the services in which the UK excels. The EU tariffs we’d face are in the low single digits. On manufactured goods that average 2.4% – far less than the recent fall in sterling. And that’s a worse case scenario. The importance of the UK to German carmakers, French food producers and the rest of them means we should be able to negotiate tariffs down further.
Hard Brexit is relatively quick – taking months, not years. That minimizes business uncertainty. Our EU contribution would immediately stop. The wholesale “on-shoring” of EU laws and regulations means the Parliamentary opponents of Brexit can’t object as, in the short term, nothing will have changed. It would then be our MPs, our ministers, our trade unions and civil society can then, over a period of time, decide what EU-sourced legislation we keep and what goes overboard. That is how is should be.
And, thankfully, under “Hard Brexit”, no-one could argue for a sneaky, “second referendum on the deal”, with status quo EU membership back on the ballot. That because “the deal” – Britain’s future – would be determined, in our own time, in our own way, in our own Parliament. That is democracy. That is the UK’s defiant, trail-blazing answer to rising global protectionism. That is Brexit.