Brexit: Benefits of a trade agreement must be made clear

The free trade talks between Great Britain and the EU have been stalled for months, but since last week they have reached a new low. The brexite drama is back. Once again, everything seems to be heading for a no-deal brexite that would set British trade relations with the EU back to WTO level in an unregulated way. The economic losses that would then be expected for Britain do not seem to play a major role in Boris Johnson’s political calculations. Or are they just not high enough compared to the loss of prosperity that would also be feared if a free trade agreement were successfully concluded?

The fact is that Britain’s withdrawal from the internal market will once again create numerous barriers in trade with the EU that were long removed. Some of these barriers to trade could be avoided with a free trade agreement, especially the reintroduction of import duties. Many non-tariff trade barriers, on the other hand, are likely to occur under a free trade agreement, border controls, for example to check quality standards, or market access restrictions for service companies, such as the London banks and investment companies. It is likely that the trade barriers under a free trade agreement would be far from being as high as under WTO rules, but certainly higher than in the domestic market.

In our view, this will result in a noticeable loss of prosperity for Britain. Especially immediately after leaving the internal market, strong adjustment movements are to be expected, because then the new trade barriers will be abruptly raised. The losses would be much greater in the event of a no-deal breakout, if only because a sharp devaluation of the pound would create additional burdens. But even if a free trade agreement comes into force, economic growth is likely to be slowed down noticeably for the time being.

Against this background, the British government will have long since asked itself how much freedom it is prepared to cede to Brussels. In our view, it would therefore be time for the EU to move away from its maximum demands, especially with regard to the „level playing field“ rules. It would also be important to integrate the service sectors that are so important to Britain as far as possible into a trade agreement in order to make the advantages of a free trade solution as clear as possible compared to the WTO case. In particular, the planned equivalence rule for the British financial sector should be considered here. Then a compromise solution in the trade talks is still conceivable.

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