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11 July 2017

The soft Brexit delusion

by Alan Oxley

Originally published by CapX.

The eradication of Theresa May’s majority in the UK election has fostered something of a kickback against Brexit and even some temporising in her own Cabinet. The idea of a so-called “soft Brexit” now has fresh currency in UK political circles, although precisely what that means is unclear. There appears to be an idea a “partial” Brexit can be executed.

This is yet another illustration of how few public office holders in most EU capitals understand how the EU works. That is particularly true when it comes to trade policy. For example, most UK seem to have been unaware that the UK (and for that matter all EU member-states) had not surrendered membership of the World Trade Organisation by joining the EU.

Nor is the laxness of housekeeping of all things trade-related in most EU agencies widely appreciated. For example, the European Commission still hasn’t completed its revision of EU trade commitments following the accession of new members nearly a decade ago. In fact, EU institutions generally have a rather careless habit of failing to fully implement many regulatory arrangements.

Which is why the concept of a “soft Brexit” is such folly. The implication of this concept is that the decision to withdraw could cover some issues and provide time for others to be assessed. One suggestion is the UK might join Norway as a member of the European Economic Area. The claim that this might be tolerable to the Germans and the French shows a misunderstanding of how the EU functions on the part of its exponents. Leaving the UK to mull over what to do having triggered the withdrawal process would be unacceptable to them.

There is more at stake here then just working through the EU’s regulatory morass. There is clear appreciation in Conservative ranks in the UK that implementation of Brexit creates platforms for promoting economic growth. The work of the Legatum Institute details how a post-Brexit environment can foster a more open and faster-growing economy.

The UK has a strong base from which to move. It is already the biggest trader of services among EU member-states. There is an erroneous view that financial services is the leading services export industry in the UK. It is not. According to the UK Office of National Statistics, professional, scientific and technical services – including management consultancy, accounting, engineering and architecture – generate 29 per cent of services exports. Information and communication services account for 24 per cent. Financial and insurance services come in third, generating just 15 per cent.

There is a recognition among the leading trading economies in the WTO that action is needed to open global services markets. There is opposition to this, so around 50 members of the WTO (total membership 150) who account for about 90 per cent of global trade in services have been negotiating for several years on a fresh set of measures to open services markets, the Trade in Services Agreement (TiSA). Unfortunately the process has not advanced as much as the more open economies such as the US would like. Disappointingly, the EU has not been as willing as other participants to liberalise.

As an independent member of the WTO, the UK would clearly be able to give impetus to efforts to open global services markets and increase export opportunities for the UK and other competitive suppliers of services.

The whole idea of Brexit has shifted perspectives in the UK. It is now appreciated that opportunities to raise living standards are on offer. The UK is the most open of the larger members of the EU. It is a leading foreign investor and has the most competitive services sector in the EU. Luckily for the UK, services businesses generate more wealth than goods in advanced economies.

Setting up to seize the new opportunities should not wait until the Brexit has been completed. Britain should be readied for implementation as soon as that process concludes, and before that where feasible.

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