It is time for politicians to face up to reality. For good or ill, the Withdrawal Agreement is dead in the water. The EU has repeatedly said it will not renegotiate and, even if it did make a move on the backstop, that will not be enough to get the agreement through Parliament. There are only two realistic outcomes, and this has been the true since December last year. Either the UK leaves the EU without a withdrawal agreement (“no deal”) or we revoke Article 50 completely. Everything else – more negotiating, an election, another referendum – is just delaying the inevitable final choice.
This is not where anyone wanted to be. Even the most hard-line Brexiteers argued for leaving with a free trade agreement between the EU and UK. But the combined incompetence of Theresa May’s Government, the opposition’s position and EU intransigence have rendered this virtually impossible, at least before we leave the EU.
As a result, when politicians tell us that “no deal” should not be countenanced under any circumstances, this is code for saying that, sooner or later, Brexit should be cancelled. But the question of whether “no deal” will indeed be as disastrous for the economy as the CBI and the Treasury would have us believe still needs to be faced.
The most obvious problem with “no deal” is that the UK would lose the advantages of trading within the single market and customs union. Outside of these, and without a formal trade agreement, both sides have to levy the same tariffs as they do to other external countries (“WTO rules”), whilst goods may be subject to other checks such as rules or origin. This will increase the costs of trade with EU countries compared to now.
We should not overstate the problems though. The vast majority of border checks now take place electronically and away from the border while most EU tariffs on goods are low, usually 4% or less, the chief exceptions being food and cars. Even with cars, the 10% tariffs which UK exporters would face is already compensated by the competitive advantage brought about by the post-referendum depreciation in sterling.
A further compensating factor is that tariffs give companies an incentive to shift manufacturing to the country where they sell the goods. The effect (in the short run at least) is likely to be a net boost to manufacturing for the country with a trade deficit. In this case it is the UK which imports more goods than it exports to the EU to the tune of about £95 billion per year. We have already seen several examples of this effect, including companies such as Medstrom bringing manufacturing back to the East Midlands and Nissan seeking to source more parts from the UK.
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More fundamentally, the customs union also involve economic costs as well as benefits. It forces the UK to charge high tariffs to countries from outside the EU. This causes higher prices for consumers and producers both because of the direct effect of the tariffs but also because tariffs protect EU companies from external competition, reducing incentives for companies to invest in productivity-boosting innovations. “No deal” will mean the UK can set import tariffs to suit its own economy rather than the EU as a whole. It will also mean the UK regains the freedom to strike free trade deals with fast growing countries outside the EU.
Similarly, although the single market makes cross-border trade easier by guaranteeing that standards are compliant, it does so by forcing all firms to comply with common regulations, not just those who export to the EU. Some of these regulations are beneficial to the UK but others are the result of lobbying by special interest groups or are aimed at helping continental producers. Leaving without a deal will allow the UK to design regulation and some taxes such as VAT for the benefit of its own producers and consumers.
Outside the strictures of the EU, there are a number of ways – quite legal within WTO rules – in which the UK could assist those sectors most affected by no deal. These can include agricultural assistance for sheep farmers, more targeted regional policy, procurement rules favouring UK firms, R&D credits for car manufacturers and even some transitional payments. And what’s more, avoiding the £39 billion so-called divorce bill can help to pay for these measures. Even under no deal, the UK should seek to meet its responsibilities, but the strict financial liability under international law is probably somewhere between zero and about £4 billion. The UK might eventually choose to offer the EU more than we owe in return for a long term trade deal but, in any case, there will be a significant fiscal boost which can be used to help those parts of the economy struggling with the transition under “no deal”.
Apart from anything else, leaving with “no deal” would bring an early end to uncertainty for business. The Brexit vote did not lead to the Doomsday scenarios forecast at the time by the Treasury. Indeed, unemployment has decreased to record lows, growth has been steady if not spectacular and foreign direct investment into the UK (perhaps the best indicator of long term confidence in the economy) has outperformed continental competitors. But there is no doubt that uncertainty over Brexit has led to some firms holding back investment in the short run. Further delays, whether due to another referendum, an election or even the nuclear option of revoking Article 50 completely, would mean even more instability and uncertainty for the economy.
The term “no deal” is something of a misnomer given the large number of side deals that have already been agreed with the EU and others covering cross border transport within the EU, mutual recognition on standards with the US, a number of financial services and continued free trade with important partners such as Switzerland and South Korea. Leaving with no trade deal on the 31st October does not mean no deal for ever. Striking a sensible future long term trading relationship will continue to be in the interests of both the EU and the UK and will happen sooner or later.
That said, “no deal” is not the best the UK could have done and is certainly not without risks. But a good case can be made that it will provide a net boost to the UK economy. Whatever our judgement of the precise benefits and costs, given the alternatives, “no deal” is almost certainly the best the UK can do for now.
David Paton is Professor of Industrial Economics at Nottingham University Business School. He is co-editor of the International Journal of the Economics of Business and is a member of Economists for Free Trade.
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