LONDON — You wouldn’t know it from reading Brexit coverage lately, but the U.K. has far more leverage in Brexit negotiations than many would like to acknowledge.
Analysis of the cost to the regions of EU member countries — carried out by the EU’s Committee of the Regions — found that a no-deal scenario would be hugely damaging for the bloc. With global growth rates potentially shaky, it’s hardly the time for the EU and U.K. to drop the ball on a comprehensive trade agreement.
The U.K. has no reason to feel unduly boxed in by the EU’s negotiating mandate. Inflexibility on the part of EU negotiators will cause member countries to wonder whether they are being properly represented in the negotiations. That’s a lose-lose for the bloc.
But the true effects of not having a trade deal would be much more significant, as EU services would suffer a potential reduction in access to U.K. markets.
In addition, without a financial services deal, the cost of capital would also increase on the Continent, potentially causing investment deals to be aborted as a result. Current estimates of the cost to EU member countries of no trade deal are in fact a considerable underestimate of the total — given that these ripple effects would be considerable.
In the absence of a “zero-for-zero” tariff agreement allowing the status quo to continue, both customs territories will end up applying the Common External Tariff to each other’s goods. For agricultural sectors in particular, this would mean tariffs as high as 63 percent on beef and 52 percent on dairy. Other sectors may be subject to lower tariffs, but the losses could be largely dependent on the value of current trade.
To be sure, the U.K. could unilaterally lower tariffs to EU products in the event of no trade deal. But it would have to do that for the whole world as a result, something its farmers would almost certainly make politically impossible.
The fallout in Europe could be politically explosive too. In Germany, the automotive industry will be significantly affected, with producers potentially losing around €2.2 billion to €7.6 billion in annual revenues, according to Legatum Institute research. This would translate into 8,600 to 29,400 jobs lost. The dairy industry also stands to lose out. Similarly, the beef and dairy industries in Ireland could see their exports decline by 34 to 50 percent and 23 to 42 percent respectively.
Not only do the EU’s regions stand to suffer significant losses if both sides fail to conclude a successful trade agreement, but these losses will be focused on specific regions that are politically sensitive — such as Bavaria, northern Italy and Catalonia.
The concerns of specific EU regions make it clear that, far from being a supplicant, the U.K. in fact has considerable leverage in Brexit talks. The European Commission will need to show its citizens that it can muster the flexibility needed to ensure that real people do not lose their jobs and won’t suffer as a result of Britain’s exit.
It’s only a matter of time until these democratic realities take hold in EU thinking and bring about a more flexible approach to the trade negotiations. The bloc relies on access to the U.K. and London should take advantage of this leverage by getting on the front foot and making positive, proactive offers, even if the EU’s initial response is a resounding “no.”
As all countries that negotiate with the EU can attest, the EU’s opening bid is always considerably higher than their bottom line, and their “mandates” should be seen as aspirational goals. The U.K. must send a signal and come up with its own negotiating mandate. It is important that the U.K. does not open with its bottom line.
It’s looking increasingly dangerous for the EU to be intransigent in the negotiating process. If the U.K. pushes its agenda more vigorously, the Commission will have little choice but to be more compliant, resulting in a positive outcome for all parties.
Shanker A. Singham is chairman of the Legatum Institute Special Trade Commission.