Because of Thatcherism, we can't get a good Brexit trade deal – here's why

Britain is not able to dictate terms in trade negotiations with the EU – or with China and the US, the two other predominant forces shaping the future of global trade. The source of Britain’s weakness lies in the policies it pursued between 1973 and 2008.

Britain pursued a Thatcherite programme of deregulation and competition, both domestic and international – and the country now has an open economy which provides it with little leverage in trade negotiations.

Given the fact that we are going to need new trade deals following our split from the European Union, this does not bode well.

Britain’s entry to the European Economic Community (EEC) sharply opened the economy to trade: trade as a proportion of GDP jumped from 40 per cent in 1972 to 57 per cent in 1974.

From the early 1980s, the UK progressively relaxed restrictions on foreign ownership of business and property. This had far-reaching implications for the City of London, starting with the “big bang” reforms of 1986. Britain encouraged foreign ownership through takeovers and mergers of financial institutions, and deregulated financial markets, opening the City to greater competition (and unwittingly leading Britain to be heavily exposed to the 2008 financial crisis).

Successive governments removed job protections, weakened trade unions and imposed tougher conditions on receiving welfare. Employers could more easily create new jobs, which, while often insecure compared to other rich countries, made Britain a favoured destination for migrants from the EU and elsewhere – at least before the Brexit vote.

This shock-and-awe approach to laissez-faire led to a bout of economic restructuring that makes it difficult for Britain to impose its will on the rest of the world, let alone Europe.

The UK’s large trade deficit in goods started in the mid-1980s. Foreign competition and technological progress resulted in steadily falling employment in manufacturing and heavy industry. As a result of its openness, achieved through EU membership and globalisation, the UK shifted towards the services sector more rapidly than most other developed countries. 

Its trade advantages are strongest in financial services and its sub-industries of law, consulting and accounting, but also design, branding, tech industries and advertising – all sectors in which the country exports far more than it imports.

The EU’s single market does more for services than any other trade agreement. It is not complete – there are restrictions that prevent, say, a French architect from easily practicing in Germany. But in financial services, telecoms and data, aviation, accounting, pensions and insurance – services that are easily traded – the EU has created common minimum standards and harmonised regulations – and this has prevented national governments from favouring their own companies. 

Monique Ebell of the National Institute of Economic and Social Research has found that the single market has boosted services trade between its members by 60 per cent, while free trade agreements do not raise services trade at all.

The UK can try to make up for lost trade with Europe, either through a series of bilateral trade agreements, or unilateral free trade. But bilateral agreements are highly unlikely to offset the losses from foregone trade, investment and migration with the EU. Britain’s economy is already very open, so it can’t offer much in return for other countries agreeing to open their markets. 

Trade deals with the US and China would have some economic impact, because those economies are large – but size means power in trade negotiations, and the UK would find itself bounced into lopsided agreements that offer little access for its services industries. Other markets, like Australia, are too small or too distant to matter.

Yet the alternative, unilateral free trade, is not negotiable with the British electorate. By eliminating all tariffs and deregulating its economy even further, the UK would offset some of the productivity losses from hard Brexit. Cheaper imports would lead to many of Britain’s manufacturing companies to go under, and capital and labour would flow to companies that could compete internationally, or which did not face much import competition in the first place. But the result would be higher unemployment, at least in the short term, greater job insecurity and even higher regional inequality. 

London could cope with another radical bout of liberalisation; Sheffield for example, could not.

The world has been taking careful note of the Brexit negotiations so far. They have seen Britain repeatedly capitulate to the EU’s demands, and, if hard Brexit comes to pass, they know that they will be entering talks with a country that is desperate for deals. The EU has been negotiating trade agreements since 1968, and the concessions the UK has made so far demonstrates that it is able to dictate terms to lesser powers.

Now that the Brexit talks will move on to trade, Britain will have to choose. It can maintain EU rules and stay in the customs union, minimising economic costs. It is true that it would then not be able to influence new EU rules. But the alternative is worse: ministers can go to Washington and Beijing, but they’ll be told: “sign here”. What good is achieving sovereignty, only to immediately give it away?

John Springford is the Deputy Director of the Centre for European Reform