Brexit

A no deal Brexit would be a spectacular act of self-harm

BY Ben Kelly | tweet thescepticisle   /  13 March 2019

It comes to this. Nearly three years after the referendum and at the end of two years of negotiations, we are still mired in uncertainty. Leaving the EU was always going to be problematic, it’s a huge political project with many risks.

Ultimately though, it meant ending membership of an international organisation that we have been in for forty years. There are far bigger global challenges coming in our future. There were sensible ways of managing this and certain ways the difficult diplomacy and statecraft could have been approached.

Instead, our political system has been found wanting. MPs of all stripes have failed us. The Prime Minister has failed us. The process has been mishandled in every conceivable way from the very beginning.  Now it’s time to get a grip.

The government will today allow a free vote on a no deal Brexit motion. Although the only way of preventing no deal is approving a deal or cancelling Brexit, it would send an important political message that the will of parliament is against it. Then it’s time for MPs to do their duty and manage this political problem and move forward.

No mandate for no deal

No matter how many times it’s argued for the contrary, there is no credible democratic mandate for a no deal Brexit. As a key part of their campaign, Vote Leave said there would be a ‘careful change, not a sudden stop’, their spokesmen repeatedly said we would get a deal and a negotiated exit based on remaining part of a “free trade zone”.

I argued for Leave and voted for Leave. Yet I consistently argued that a “WTO” no deal Brexit would be disastrous and should never be contemplated. The “Leave Alliance” campaign group I was part of in 2015/16 did much to advance the argument against no deal and neutralise the misinformation about. I wrote about in blogs, articles and on social media, but I never thought our government would contemplate it.

The increased support for a no deal Brexit is the ultimate failure of the Leave movement. It’s the inevitable consequence of the refusal to grasp details, come to terms with complexity and coalesce around a plan. It’s the height of the sloganistic “Brexit means Brexit”, “Leave means Leave” unthinking dogmatism.

A successful Brexit needed to be based on an intellectual foundation. It would mean compromise and taking a long-term view. It needed careful project management and a phased approach. This exercise in destruction is not it.

No deal is illogical

There is common sense or logic in a no deal proposition. It’s an idea founded upon “alternative facts” that debase our political debate.

First, logic. In a no deal Brexit, Britain would unplug itself from an integrated system of trade and cooperation with the EU and all of its major trading partners. Overnight it downgrades itself to the “WTO” legal foundation that only developing countries rely on. The political and economic integration of EU member states is complex and very far reaching, touching every area of trade and governance. Is the severance of our entire framework for trade and political cooperation overnight likely to have good or bad consequences? I really do urge readers to consider this thoughtfully.

There’s a myriad of complex regulatory, trade and political issues to address. Hence, we need a negotiated settlement. The global system is built on formal, legal relationships. Britain has long been a major player and should not throw that away to be a pariah. That is not global Britain.

Advocates of no deal Brexit can’t explain this: If the “WTO option” is so great, why do countries negotiate trade agreements to enhance trade? Why do they advocate signing trade deals with the rest of the world? It’s because WTO rules are wholly inadequate as a basis for trade and economic cooperation for advanced economies. There are a whole range of trade treaties used to build on the basic WTO framework, even countries with which the EU doesn’t have an FTA (China, USA, Australia etc) don’t trade on a WTO basis alone.

Subject matter experts are rejected as peddlers of project fear. This is the poor state of our debate and political climate. No deal supporters think they know more than trade experts, former trade negotiators and people who have actually worked in the WTO. They have spread nonsense about WTO agreements to make people believe that they will cushion the blow.

Debunking alternative facts

Let’s revisit some of the myths used to think no deal is a good idea and consider some expert opinion. It can do no harm to challenge oneself with opinions based on expertise and experience.

What about the GATT Article 24 silver bullet which allows tariffs and quotas to continue at zero whilst a full and comprehensive FTA is negotiated? It does not. Peter Ungphakorn has written a great blog here concisely debunking it.

There are plenty of myths doing the rounds about how the WTO Sanitary and Phytosanitary Agreement and the WTO Technical Barriers to Trade Agreement will prevent major trade and customs barriers with EU. Dmitry Grozoubinski tears into lies about the world trade system here. And Peter Ungphakorn again on what WTO agreements do and do not say.

The height of dishonesty was relabelling the most basic foundation for trade with the world, that no major economy relies on, as a “world trade deal”.  Dmitry Grozoubinski again, a man who negotiated in the WTO, says “a World Trade Deal, it ain’t’.

Holger Hestermeyer does a valiant job of skewering the canard that because our laws are aligned on day one, no deal won’t be a problem and trade and customs barriers will be minimised.

Tim Durrant of the Institute for Government disputes the idea that a “managed no deal Brexit” is viable and a means of softening our landing.

The UK in a Changing Europe issued this report to describe what trading on WTO terms means and I – though I have spent a lot of time researching this I do not claim to be an expert – have made my own attempt previously for Reaction to explain why the consequences of this outcome would be dire.

The government knows the implications of no deal are dire

There is a clear consensus among experts of the fields of trade, economists and indeed British business that a no deal Brexit would be a disaster. Nonetheless, the government adopted no deal as their plan B. Anna Soubry finally managed to get the government to publish its report on the implications of no deal. It is not pretty.

The report implies that no deal does not fulfil the mandate of the referendum. Even Vote Leave was clear that we’d leave with a deal. No one campaigned on severing all agreement, ruining relations with our allies and plunging us into economic and political chaos:

The Government’s primary aim is to ensure that the UK leaves the EU on 29 March with a negotiated deal which will honour the result of the referendum. However, as a responsible government, it continues to plan for all eventualities, including one in which the UK leaves the EU without a deal. Guidance for businesses and citizens on how to prepare for a no deal scenario can be found on the Government’s Exit guidance website, www.gov.uk/EUExit.

Paragraph 2 makes it clear just how much Britain would be at the mercy of the actions of the Commission, EU member states and indeed how businesses within the country react. The government will lose control of the situation.

Over recent months, the Government has undertaken significant action to prepare for a potential no deal scenario. Getting ready for this scenario depends not only on Government action, but also on action from a range of third parties. A no deal scenario would also have impacts on the EU and other Member States, and the steps the Commission and Member States have been taking also have a significant influence on the UK’s preparations for no deal.

Paragraph 8 states that we could be on the brink of ‘no deal’ and yet 1/3 of the most critical projects are not on schedule.

Notwithstanding very significant efforts to prepare for a ‘no deal’ scenario, the latest internal Government-wide delivery reporting reveals the scale of risk remaining in the limited time available. In February, Departments reported being on track for just under 85% of no deal projects but, within that, on track for just over two thirds of the most critical projects. The delays to no deal preparations are partly due to communications to third parties, including many businesses, not having the intended effect (see below), and also because the acceleration of preparedness since December is not yet bringing delivery of these preparations back on track where there has been prior slippage.

Paragraph 9 states that we are spending billions on preparing for an outcome that would be terrible for Britain and there is no public mandate for. This is not taking back control of our money, it’s wasting it.

The Treasury has made in excess of £4bn available for EU Exit planning since 2016, £2bn of which was allocated in December 2018 to support core EU exit preparations for the 19-20 financial year. This funding will apply regardless of whether a deal is agreed, and is ring-fenced to specifically support EU exit.

The government has admitted there will be a major gap in coverage where international agreements with the EU and third countries will not be replaced on exit day. The consequences of this will be bad – to what extent and for how long we cannot be certain.

The Government has also been working where possible to adopt agreements made between the EU and third countries transitionally, which would otherwise fall away once the UK leaves the EU. A number of the most critical international agreements have been signed and are on track to come into force on exit day, including on aviation and civil nuclear cooperation and safeguarding. Those that are not may not be in force on exit day. If contingency options were not in place, there would be a gap in coverage for some international agreements, the impact of which would vary depending on the nature and scale of the agreement.

The government is well behind in rolling over trade agreements. A WTO Brexit is not a free trade Brexit.

Around forty of these agreements are trade agreements. To date, the Government has signed trade agreements with Switzerland, Chile, the Faroe Islands, members of the Eastern and Southern Africa (ESA) Economic Partnership Agreement, Israel and the Palestinian Authority […] As above, if the UK leaves the EU without a deal, some agreements will not be concluded in time and therefore will not be in place for exit day.

The government confirms that what all informed opinion has long argued, that GATT Article XXIV will not give us tariff free trade with the EU for ten years.

One argument that has been put forward in relation to our future economic relationship with the EU is that the UK can simply rely on the provisions under Article XXIV of the General Agreement on Tariffs and Trade (GATT) to have tariff free trade with the EU for a ten-year period. This is a misunderstanding of what the rules are.

In paragraph 15 the Party that prides itself on economic management and its pro-business philosophy has sent out warnings to British business to prepare for a situation that will cause them damage. Many businesses will simply become unviable.

In August, September and October 2018, the Government released a series of technical notices, outlining in detail the potential impacts of a no deal scenario, as well as the steps that businesses and traders might want to consider taking to prepare.

In paragraph 16 the Party of business essentially attempts to blame business for not preparing well enough for what amounts to governmental failure.

Despite communications from the Government, there is little evidence that businesses are preparing in earnest for a no deal scenario, and evidence indicates that readiness of small and medium-sized enterprises in particular is low.

In paragraph 17, the government warns the voters that they have not done enough to prepare. MPs, especially Conservative MPs, should really consider the likely reaction of voters to a downturn in the economy and inflated prices. It is never kind to the government that caused it. The Conservative Party would pay.

Evidence suggests that individual citizens are also not preparing for the effects that they would feel in a no deal scenario.

Paragraph 21 – The government confirms that a no deal Brexit will be an economic disaster, especially in the short term (but don’t worry, it will also hurt our allies). It will particularly hurt Scotland and Northern Ireland, thereby doing serious damage to the Union. Unionists should not support this.

The Government has already published long term analysis of the impact of a no deal scenario that implicitly assumes a smooth, orderly transition to WTO rules. This estimates that the UK economy would be 6.3-9% smaller in the long term in a no deal scenario (after around 15 years) than it otherwise would have been when compared with today’s arrangements, assuming no action is taken. There would also be significant variation across the UK (Wales -8.1%, Scotland -8.0%, Northern Ireland -9.1% and the North East of England -10.5%). This analysis does not account for any short term disruptions, which would be likely to have additional short and long run economic impacts in an immediate no deal scenario. No modelling can completely capture the complex ways in which the UK economy could be affected by exiting the EU, particularly given the unprecedented circumstances of the UK’s departure. While the analysis draws on a robust set of tools and evidence, there is an inherent uncertainty around this type of economic analysis. The results are therefore presented as ranges, and should be interpreted with caution. EU Member States are also expected to face economic risks following a no deal exit.

Goodbye reciprocal free movement rights. In fact, under no deal goodbye even to enhanced mobility.

When the UK leaves the EU, it will leave the Single Market and the Customs Union, and, in the absence of a trade agreement, the EU will treat the UK as a third country for trade in goods. On exit, this could affect the availability of goods in a number of ways, including customs administration and delays at the border. In the absence of an alternative agreement, UK citizens would be treated as third country nationals by Member States, and potentially be subject to full Schengen checks. This would mean they would no longer be able to use e-gates, and checks to enter EU Member States could take longer than they currently do.

Here government confirms what so many Brexiteers won’t accept. A WTO Brexit means hugely increased bureaucracy. It means more technical barriers to trade and higher tariffs. It’s the anti-free trade, anti-business, anti-economy option. There is no two ways about it. Read it for yourself in paragraphs 25 – 27:

In a no deal scenario, both the UK and EU would need to apply customs and excise rules and VAT to goods moving between the UK and EU, as they are currently applied to goods traded in the rest of the world. Every consignment would require a customs declaration, and so around 240,000 UK businesses that currently only trade with the EU would need to interact with customs processes for the first time, should they continue to trade with the EU. HMRC has estimated that the administrative burden on businesses from customs declarations alone, on current (2016) UK-EU trade in goods could be around £13bn p.a. (not accounting for any behavioural change).

Industries with supply chains that are integrated within the EU would face additional costs and burdens as a result of new customs procedures, compliance requirements and reductions in traffic-flow across the Channel.

Although the Government has made progress in ensuring that additional controls at the UK border would not cause disruption, including phasing Entry Summary Declarations and Transitional Simplified Procedures, those imposed by Member States would be disruptive. There have been efforts from some Member States to put in place the new infrastructure which would be required at the border to implement customs controls. However, this work is at an early stage and even when completed would lead to new burdens, and would not be the same as the fully free-flowing border in place today. In particular, third country rules applied by the EU, including France, would mean that no goods are allowed to leave the port until they have provided the correct paperwork and have been customs cleared (including any necessary checks at the port, for example on products of animal origin). More significantly, Member States would hold any goods which are not correctly customs cleared. This would hold up all goods where trades are not prepared, expected to be a significant proportion in the early period after exit day. The Government’s worst case planning assumption is that, as a result of French checks and lack of businesses readiness, the flow of goods through the Short Channel Crossings (Dover and Eurotunnel) could be very significantly reduced for months.

In paragraph 29, the government highlights our dependency on frictionless supply chains within the Single Market for food. There will surely be shortages. Terrible for us all, especially the poor. The public won’t react well.

One of the most visible ways in which the UK would be affected by delays in goods crossing the Channel is our food supply, 30% of which comes from the EU. Although our food supply is diverse, resilient, and sourced from a wide variety of countries, the potential disruption to trade across the Short Channel Crossings would lead to reduced availability and choice of products. This would not lead to an overall shortage of food in the UK, and less than 1 in 10 food items would be directly affected by any delays across the Short Channel Crossings. However, at the time of year we will be leaving the EU, the UK is particularly reliant on the Short Channel Crossings for fresh fruit and vegetables. In the absence of other action from Government, some food prices are likely to increase, and there is a risk that consumer behaviour could exacerbate, or create, shortages in this scenario. As of February 2019, many businesses in the food supply industry are unprepared for a no deal scenario.

In paragraphs 31 and 32 the government confirms the obvious that goods are going to get more expensive. Bad for consumers. Bad for the economy. Absolutely appalling for our agricultural industry.

In a no deal scenario there would be wider macroeconomic effects, and a number of factors would impact on the trade and economic viability of UK industries, and in particular could be expected to increase the price of imports Such factors would include the resurrection of non-tariff barriers with the EU, and countries covered by EU free trade agreements but not yet new UK ones, and any restrictions at the border which could delay imports and exports. Despite the use of a continuity approach where possible, and notwithstanding very significant efforts to prepare for a no deal scenario, the impact of a no deal scenario is likely to be severe in a number of areas.

Industries would need to respond to the application of EU tariffs. These would vary by sector. While for some sectors (such as life sciences or electronics) the effect of any tariffs would be minor, other sectors would be more affected. For example, the EU would introduce tariffs of around 70% on beef and 45% on lamb exports, and 10% on finished automotive vehicles. This would be compounded by the challenges of even modest reductions in flow at the border. Given the unprecedented nature of the sort of economy-wide adjustment that would be required in a no deal scenario, it is impossible to accurately predict the ability of businesses to adapt. The second order effects on local economies dominated by a small number of industries, or on businesses in the supply chains for those companies, is also hard to predict with precision, although it would be likely to be uncertain and costly

No deal is very bad for the automotive industry. There will be many more bleak days like the day the Swindon Honda factory announced closures.

Case study: The automotive industry. The UK automotive industry is highly export intensive. In 2018, 81.5% of UK vehicle production (1.24 million vehicle) was exported. 42.8% of UK vehicle production was exported to the EU27. The risk of no deal is of major concern for the industry, due to the high tariffs which would be applied on exports to the EU. This would be 10% on finished vehicles, and around 2.5 – 4% on components. Although wider macroeconomic effects will influence how the sector is affected, low operating margins may mean that in many cases extra costs could be likely to be passed on to consumers at the showroom. Car manufacturers also use a just-in-time production model, which would be disrupted by delays at the border.

Paragraphs 35 to 38 concentrate on making it clear that the a no deal scenario is a catastrophe for Northern Ireland, and indeed our important friend and ally the Republic of Ireland. No deal would destroy the framework for cross border trade and cooperation that relies on an open border and a vast range of agreements that would be severed overnight. This is an act of gross irresponsibility that will destroy the union and our reputation.

Overall, the cumulative impact from a ‘no deal’ scenario is expected to be more severe in Northern Ireland than in Great Britain, and to last for longer. This is because of Northern Ireland’s unique circumstances, including in particular its geographical position as the only part of the UK with a land border with the EU, and the current lack of an Executive in Northern Ireland.

No respectable government can pursue this policy any longer. It’s an act of self-harm. We would be making ourselves a pariah in the international rules-based system. It’s reckless and stupid and thoroughly un-British.

I know Brexiteers have pursued Brexit based on certain instincts and principles and that economic concerns are not all there is to it, but this is just masochism. This would be a serious failure of government and a worse failure of leadership from our woeful Prime Minister. MPs must make clear today that they do not think no deal is an option so that a more sensible route ahead can be pursed.


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