17 December 2020

Alasdair Smith is Emeritus Professor of Economics at the University of Sussex and Fellow of the UK Trade Policy Observatory.

If the UK leaves the EU transition period without a trade deal there will be disruption and delay at the borders in the short run; and in the longer run, there will be the economic costs of trade barriers for important parts of the UK economy like agriculture, food manufacturing and the car industry. There will be problems too for the EU.

The biggest obstacle to a deal is the arcane issue of the ‘level playing field’. Does this really matter enough to both sides to prevent an agreement?

The ever-reliable Tony Connelly quotes the rationale of a “weary EU diplomat”: “How do you allow a third country to do whatever it wants, and at the same time enjoy the benefits of the internal market?” But Anand Menon rightly points out that the UK (for good or ill) has opted out of the ‘internal market’, the common regulatory arrangements of the EU and rest of the EEA.

The UK’s riposte to the weary diplomat should be “We don’t want the benefits of your regulatory union, we just want the benefits of free trade access to the EU market, and you in return will get the benefits of free trade access to the UK market. Surely we should be free to choose our own economic rules?”

To understand the EU’s anxieties, we need to go back three months, when the ‘level playing field’ discussion focussed on the issue of state aid.  As I wrote then, governments can be tempted to give aid to support national champions in ‘strategic’ sectors so they can gain market share at the expense of foreign companies.

The UK government wanted to have no restraints on its freedom to give state aids (and also seemed to have little regard to rules about public procurement), so it was not surprising that the EU wanted safeguards against the possibility of UK national champions being given an unfair advantage over EU firms. The UK subsequently made significant concessions on state aid by outlining a UK scheme for controlling state aid. An optimist might have hoped that the playing field was now level enough to satisfy the EU.

However, the EU side evidently remains concerned about UK social and environmental policies being used to give an ‘unfair’ advantage to UK firms in competition with EU firms.

Let’s take labour market policies as an illustration of this issue. What’s the problem? The EU trades with many developing countries which have much lower wages and much lower levels of labour market regulation than the UK, so why should it worry about the UK?

Sadly, the EU has little need to worry that the UK will adopt education policies which quickly and successfully raise the skill levels of the UK workforce enabling the UK to grab a disproportionate share of high-tech production. It focusses rather on the risk of the UK pursuing labour market flexibility at the lower-wage end of the labour market, increasing employment by holding down real wages.

That’s pretty much what happened in the UK during the 10 years of austerity since the global financial crisis of 2008: stagnant real wages for most workers, poor productivity performance, and buoyant employment. During this period the UK was a member of the EU. Is Brexit really going to give the UK dangerous labour market freedoms that it did not already have? There’s little current appetite here for repeating, never mind intensifying, the experience of that unhappy decade, so the EU’s worries seem theoretical rather than real.

Meanwhile, on the UK side, the instinctive revulsion against being bound by EU rules on the level playing field contrasts with the reality that in large swathes of the UK economy, UK producers have strong commercial incentives to stick with EU rules. Farmers, food manufacturers, chemical companies, car manufacturers, and financial service providers all have to conform to EU regulations if they want to keep on selling in their largest overseas market.

Freedom of movement was a real issue and it was settled once the UK government decided to leave the single market. The rest of the regulatory freedom from the single market that Brexit promised was largely illusory.

State aid was a real issue; and it was settled when the UK retreated. The rest of the level playing field discussion seems mostly about symbolism.

Surely the negotiators are not going to inflict the heavy costs of no-deal on our economies in a disagreement that is about symbols rather than substance?

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