Neither the UK nor the EU will walk away without a deal

A hard Brexit is economically and politically dangerous for the UK and the EU, which is why it will not be allowed to happen

BY Ben Kelly | thescepticisle   /  20 March 2017

David Davis sent the Remain camp into hysteria overdrive last week after confirming that no new analysis has been conducted to predict the economic consequences of a “no deal” hard Brexit. To those pushing the narrative that we are heading irrevocably and inevitably towards a crash landing, this is more ammunition. We are, they say, about to leap off a cliff with our eyes closed.

For the hardline contingent amongst Brexiteers, a hard Brexit isn’t a danger to be avoided at all costs but a desirable objective. The threat from Theresa May that Britain is prepared to walk away because “no deal is better than a bad deal” was a giant fish for the seals clapping eagerly for a no compromise approach. The real hardcore bunch called for the government to forgo negotiations entirely – others say we should walk away as soon as demands are made that we don’t like.

The reality is that in threatening to walk away without a deal is a giant bluff, and as we shift in our seats our opponents can read a thousand tells in our body language. In fact, they know the cards we hold and they know we cannot afford to pay out if they decide to call our bluff. Putting overstretched metaphors aside for a moment, my point is that “no deal” is not an option for Britain or the EU; it’s not in any way desirable and both sides will be striving to avoid it.

Advocates of a “hard Brexit” invariably say that tariffs won’t be an issue, why would the EU raise tariffs? It’s not in their interest! After all, China and the US trade with the EU under simple WTO rules without any issues, so what’s the problem? Sadly, it just isn’t as simple as that.

Very few countries in the world trade with the EU under WTO rules alone and certainly none of its significant trading partners. Despite the myth, neither the US nor China trade with the EU under WTO rules alone. A wide range of both bilateral and multilateral treaties govern trade relations between these countries and this has been the case for decades. A long list of said treaties can be found on the EU’s database and easily looked up on the internet. No countries with developed trade links with each other use simple WTO rules because, quite simply, they are not sufficient.

David Davis confirmed that without a deal the UK would adopt “most favoured nation” status under WTO rules by default. What this means practically is that when imposing tariffs on the UK, the EU would merely following the rules of the WTO trading system, not acting out of anger. The WTO prevents countries discriminating between their trading partners, so if you raise or lower tariffs for one nation you must do so for all WTO members. This is what the principle of “most favoured nation” treatment means in practice.

Furthermore, the UK cannot impose retaliatory tariffs on imports from the EU in response, because WTO anti-discrimination rules would require us to impose the same tariffs on all of our trading partners (aside from those with which we have a trade agreement with). Neither can we remove all tariffs from EU products, because we’d have to do the same for all WTO members. Some economists actively endorse this of course, but they are showing scant regard for British manufacturing and the agricultural industry.

Tariffs are one thing, but the real issue is “non-tariff barriers”. This is what the Single Market, as a single regulatory system, seeks to address and what a preferential trade agreement – to a lesser extent – also seeks to deal with. In a “no deal” scenario the UK will run into an array of extra costs and delays when trying to trade with EU countries because of regulatory divergence. With trade disrupted the supply chain breaks down, British business suffers, and the economy takes a major hit.

This is why a “bad” deal is actually better than no deal at all. Even if we left the negotiating table with a very basic trade deal that achieved mutual recognition of standards and conformity assessments, with minimal tariffs, it would be better than nothing. It would mean that trade would continue to flow, albeit with more customs barriers and technical issues than exist between us now. Most importantly, it would be something to build on and develop.

I may be dismissed as overly pessimistic by some, but I am just being realistic. Moreover, I don’t actually believe for a moment that the scenario I have outlined will come to fruition. It isn’t just the UK that can’t afford to walk away without a deal; our trading partners in the EU will suffer greatly from disrupted access to one of their most important export markets – not to mention the importance of the City of London to the Eurozone. A hard Brexit is economically and politically dangerous for the UK and the EU, which is why it will not be allowed to happen.

Little wonder, then, we are hearing common sense prevail. “Let’s listen to Hippocrates and do as little harm as possible. We don’t want to harm ourselves, and we don’t want to harm you,” said the Commission’s vice-president Frans Timmermans. “We are very concerned that it will not happen, and we will be engaged. It would be a disaster for all of us. We have to minimize the damage for the United Kingdom and Europe,” said Wolfgang Schauble on the subject of a “hard Brexit.”

EU member states are counting the potential costs to their individual economies and the EU as a whole, and they are concluding that a mutually beneficial agreement must be achieved. All project managers know how important transition management is, as the UK and the EU embark on the vast political project of Brexit; they know what is at stake, and they know what has to be done.

Ben Kelly is an Executive Director of Conservatives for Liberty.