Sterling’s value is being driven, for the most part, by political rhetoric – more specifically, the state of play between Britain and EU, as we enter the Brexit endgame.
There were always going to be massive theatrics as the de-facto mid-October deadline for these negotiations loomed large. This extended psychodrama reached new heights last week, as the Government admitted it is prepared to “break international law”, albeit in a “very specific and limited way”, and the eurocrats threatened to sue.
Amidst the subsequent political mud-slinging, and media hype, it’s not easy clinging on to any vestige of economic reality.
Yet if the UK does leave the EU with no FTA, we’ll trade with the 27-nation bloc instead under World Trade Organisation rules. And that, in the words of Roberto Azevedo, the outgoing WTO director general, is “perfectly manageable”.
Britain already imports and exports under these default arrangements with the US – our biggest single-country trading partner, accounting for a fifth of UK exports. The US and China sell hundreds of billions of dollars of exports to the EU each year using WTO rules – the framework, in fact, for the majority of all trade across the globe.
For many years, Britain’s trade with the EU has been falling as a share of our total overseas commerce, and in deficit – despite the much-vaunted merits of the single market and customs union. Our non-EU trade, in contrast, generates a surplus – and having grown much faster than UK-EU trade for some time, it now accounts for a clear majority of British goods and services sold abroad. Such trade is conducted largely under WTO rules.
The Government needs to hold its nerve and emphasis that, if we do leave with no FTA, UK exporters to the EU will pay WTO tariffs that are generally low.
Britain’s trade deficit with the bloc will anyway generate substantial net tariff revenues, which could be used to compensate UK exporters in sectors where tariffs are higher.
While the details of this latest cross-Channel spat are complex, the gist is that the EU, having previously offered Britain the kind of trade deal it has already agreed with others, has – since Brexit became unstoppable after the 2019 election – withdrawn that offer.