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Deficit Wouldn't Make EU Desperate to Deal With UK

14/03/2016 14:24 GMT | Updated 12/03/2017 09:12 GMT

Eurosceptics are fond of pointing out that we have a big trade deficit with the EU. It exported £291 billion to us in 2014 while we exported £229 billion to it. So the other member states would, they say, lose more if our trading relationship broke down. So if we hang tough in our negotiations, we'll get a good deal. The likes of BMW would be so desperate to sell to us that they would force the German government to open the EU market to us in return.

Chris Grayling, Leader of the House of Commons, trotted out this line on the BBC Today Programme (1 hour 38 minute mark) on March 10. Daniel Hannan, the Tory MEP, and Douglas Carswell, UKIP's only MP, have made similar points.

There are many problems with the argument.

One is that it totally ignores proportionality. Britain's exports to the EU represent 12% of our GDP. The rest of the EU's exports to Britain represent just 3% of its GDP. Neither side would win from a trade war. But we would be hit proportionately much harder. We need them more than they need us. They could afford to play hard ball. We couldn't as, if they limited access to the single market which accounts for 44% of our exports, we would be hit badly.

Another problem is our fallback position. If we didn't get a trade deal, we'd have to rely on the World Trade Organisation (WTO). The snag is that the WTO works well for goods (where the Germans are strong) and doesn't do much for services (where the UK is strong). We wouldn't be able to put many restrictions on German and other exports to us, but they'd be pretty much free to shut us out of their services markets, including finance. So we'd have a weak negotiating position.

Yet another problem is that some EU countries might see our departure as an opportunity to grab some of our crown jewels. The two main prizes would be: to slice up parts of the City and entice it to Frankfurt, Paris, Amsterdam or Dublin; and to attract some of the large flows of foreign direct investment that now come to Britain, in part so that businesses can access the entire EU market. This would give some EU countries an incentive to stop us getting full access to its market post-Brexit, CEPS, a Brussels-based think-tank argues in a recent report.

That might not be the only incentive to play hardball. The EU might not want a velvet divorce as that might encourage other countries to peel off.

As if that's not enough, the argument that the EU needs us because we have a deficit assumes the only good thing about trade is exports. But imports are beneficial too. If EU exports to the UK were artificially restricted, our consumers would be harmed. They would have to pay more when they shop and would have less choice. It's particularly odd to find Tory free-marketeers, who are supposed to understand the flaws of mercantilism, ignoring this point.