Prime Minister Boris Johnson has already made it clear he will urgently look for a trade deal with President Trump. From a purely political viewpoint, this clearly makes sense in a world where the EU is mortally afraid of what President Trump might do next to it. However, there is also an economic logic to it which is worth spelling out, both for those embarking on the US deal at this end and for those seeking an EU response to our offers of a trade deal. What a US trade deal would do would be to open up our markets to US goods, both food and manufactures, in return for UK tariff-free access to US goods markets and easier access into US services markets, where we already operate fairly freely in practice. From the EU viewpoint it is the former that matters: US barrier-free supply of food and manufactures into the UK market would mean that UK prices would fall sharply in response to the more or less infinite (relative to the UK market) availability of supplies from efficient and large US suppliers at best world prices. Effectively UK home prices would fall to world levels, a drop of some 20%, this being the scale of EU tariff and non-tariff protection against world competition. From our trade viewpoint this would therefore operate like unilateral free trade, lowering consumer prices and forcing competition on our home suppliers, who would have to meet it by raising productivity. The gain to UK GDP and welfare of even half of this would, we calculate, be around 4%; double that if it all goes through. This makes a US trade deal highly desirable for us in its own terms. Of course this deal will be fought tooth and nail by all the usual business and protectionist lobbies – the CBI etc. Ministers must be ready for the full litany of objections; they should be in no doubt that for this deal to go through, they must rebut the whole stable of these stale arguments, whether it is the preservation of jobs (read ’existing jobs’ for that – new jobs are constantly being created by our economy); the collapse of manufacturing (only if it cannot raise productivity, which it has done relentlessly for three decades); the disappearance of our farm industry (but it too can raise productivity and will be helped by our new farm support policies); the pollution of food standards (by higher-standard US food?); and so it will go on. Assume our new government has the determination to get this through. What then happens to EU attitudes? Already no doubt ‘softened up’ by worries about losing the £39 billion promised in the Withdrawal Agreement, these attitudes are now transformed by the new economics of failing to do a trade deal, that’s what. Suppose now no trade deal so that tariffs go up both ways between the EU and ourselves. EU sales to us are bigger and on higher tariff items, so our tariff bill on these would be £13 billion a year. On our sales to the EU their tariff bill would be £5 billion a year. But more importantly, who ‘pays’ these tariffs, in the sense of being worse off to the tune of these amounts? Once a US trade deal is in place and UK prices are at world levels, the apparently surprising answer is that all these tariffs, both ways, are paid by EU traders. Consider why. First, EU export traders, to sell in the UK market at these world prices, will have to match them; they cannot raise prices when the tariffs go on, or they risk selling nothing at all. So these EU exporters must absorb the tariffs. The UK Treasury will thus receive its £13 billion direct from EU exporters. Second, EU importers of UK exports. UK exporters can sell their products at home now at world prices, so they will not take less for EU exports; hence EU importers will not be able to ‘pass back’ the EU-levied tariffs to UK exporters. Instead they will add them into EU prices. Will this reduce UK exports to the EU? No, because remember EU prices are above world prices by 20%, the effect of EU protection. So in effect EU importers can well afford to absorb the EU tariffs on UK exports (which average about 5%, much less than that overall 20% world protection inclusive of non-tariff barriers), and still be cheaper than other EU competition. So what all this means is that the £5 billion tariff revenue of the EU is simply taken from EU businesses. So overall, a failure to do a trade deal will cost EU businesses £18 billion a year in lost profits. £5 billion of this will go to the EU in extra revenue, £13 billion to the UK Treasury. From the EU’s internal viewpoint, these are non-trivial costs to business; the fact that some of it is directly levied by the Commission will add to its unpopularity with business opinion, which is the biggest Brussels lobbying voice. Total gross profits in the EU27 are around €4,000 billion, of which some two thirds is capital depreciation, giving net profits of about €2,500 billion, so implying on a normal dividend payout ratio dividends of about €500 billion. So we are talking here of a significant hit to company dividends in the rest of the EU from a no trade-deal Brexit. Up to now, the assumption in EU circles has been that no trade deal would be unpleasant in some parts of the EU but the worst effects, such as in Ireland, would be manageable, through some sort of compensation to this small economy. With the UK still a protected market with high prices, EU producers would not face tough competition and so could possibly pass on UK tariffs to UK consumers without too much loss of market share. Meanwhile UK exporters would absorb EU tariffs with their alternative market only being the limited home market or much lower-priced world exports. This all changes, as we have seen, once a US-UK trade deal is signed. The EU trade deal arithmetic is transformed to a nasty corporate loss across the whole EU business sector. There is more. When the UK signs the US trade deal, the direct effect on the prices the EU can sell at in the UK market will be a fall of 20%, even with no change in UK tariffs. Similarly our exporters to the EU will now sell to them at those 20% lower (now world) prices, assuming no EU tariffs. As we import some £100 billion a year more from the EU than we export, this 20% price fall will cost the EU £20 billion – even before any action on EU-UK tariffs. This will also come directly out of EU business dividends. So when we sign a US trade deal, the EU will lose £20 billion at once, and a further £18 billion if there is no UK-EU trade deal so that mutual tariffs are levied – a total of £38 billion a year, nearly 8% of EU corporate dividends. This implies that the EU will be anxious to dissuade us from making a US trade deal by being more obliging in its negotiating approach over Brexit. Of course, in doing this they will risk annoying President Trump; nor is our new Government anyway likely to be dissuaded from such an important strategic deal. But it all goes to show that the route to getting sense at last from Brussels lies through Washington and President Trump. It is good to see that Mr. Johnson is planning to take this route in short order.