No Deal

No-Deal is not a destination: it is a failure to reach a destination. And it would be perceived rightly – by our international partners and investors – as a signal failure of sense, statesmanship, and strategy. We would drop overnight into the margins of the world’s trading system. We would have left all the fundamental questions, about our future, unresolved and uncertain. And our reputation, prosperity and influence would be damaged for no benefit. A sensible Brexit deal, by contrast, would not only avoid the mess of no-deal. It would provide a constructive and predictable environment for our businesses, for government, and international trade – from which Britain can grow its influence and standing in the world.

No-deal is not a destination – it is a holding place for negotiating future deals with Europe, or the US, or Japan, over some years, which would then need to be approved by parliament.

There is no transition under no-deal. We literally crash out on November 1st with nothing in place – with the Irish border issues, our payments to the EU, and citizens’ rights unresolved – and our entire web of relationships with the EU severed. All these things instead of being resolved are left suspended and unknown.

No-deal knocks us out over 50 existing trade deals overnight. All our current relationships with the EU and the 50 nations with which the EU has free trade agreements (including Japan and Canada) would cease to be operable overnight and we would be forced to revert to the basic ‘schedules’ of the WTO defining tariffs and quotas.

WTO: These are by definition the highest tariff possible in every country on every good. Free trade agreements, such as the EU Customs Union exist precisely in order to secure more favourable terms than the WTO. (For example, cars and milk which are zero-tariff in our current EU arrangements would be under the WTO schedule 10 per cent for cars and more than 35 per cent for dairy products). Jacob Rees-Mogg has suggested that we could somehow rely on one of the WTO articles – GATT 24, to give us tariff free access to Europe for ten years. Trade experts are unanimous that this is nonsense – inapplicable, unacceptable to the EU, and unenforceable.

And no-deal would still leave us with the same divisions in public and parliament – making it very difficult to get out of no-deal/WTO and make any future trade deal.

USA: The key US demand will be to accept their agricultural products and standards. Would we want our farmers stuck between cheaper goods coming in from the US, and the tariffs of over 40 per cent that Europe would be forced to put up to protect their own farmers?

India: Would we accept India’s demand in the last India-EU trade round that a trade deal is conditional on granting hundreds of thousands of visas to Indian citizens every year?

Europe: Negotiations with Europe – our largest trading partner – are likely to be even more difficult than they have been for the last two and a half years because they will be resentful about our messy and economically damaging departure and negotiating bitterly about the 39 Billion pound bill.

External tariffs: Should we prioritise our motor industry (which employs 850,000 people and is entirely dependent on frictionless trade with Europe), or accept a negative impact on the car industry into order to secure free external tariffs? How would we protect against cheap and inferior goods being ‘dumped’ on the UK markets?

Our inability to answer those questions now suggests that no-deal may last far longer and be far messier than we like to think.

And we will be negotiating from a weaker economic position than now. Every economist (the Bank of England, the OECD, the LSE, the Treasury etc etc) is confident the impact would be negative. This does not mean that a precise number can be put on this, because so much would depend on market and government reaction. If investors and consumers are confident, for instance, that we know what we are doing, and have a clear vision for exactly what deals will follow no-deal, they could make a difficult situation better; whereas if they withhold investment and spending, while they wait and see, they could make a difficult situation much worse. Governments can also make this better and worse.) But we do know that in a no-deal Brexit:

Key sectors will suffer significantly from tariffs – including the automobile industry and agricultural exports which have grown, protected by high tariff barriers from non-European competition while exporting tariff-free to Europe. Under no-deal proposals we would pay 95 Euro a tonne to export wheat to Europe, but charge zero-tariff on wheat imports; and 46 per cent tariffs would cripple our current sheep exports (4.5 million sheep a year). Similar problems for chicken, beef and pork would render many UK farming businesses unviable. No-deal also creates severe problems for international lawyers, accountants, architects, doctors and nurses. Passporting would end for the City – forcing them to establish EU branches to trade in the EU.

Delays at the European borders are inevitable – not least because companies and customs officers will be new to the paperwork, (Rod McKenzie, head of public affairs at the Road Haulage Association, said: “In no way are we ready for a no-deal Brexit.”) Friction at the border will seriously undermine automobile just-in-time supply chains (some of their automobile parts cross the channel multiple times in the course of making a car), and of course disrupt supplies of fresh food from Europe.

Macro-economics

For these and many other issues, the situation would be ‘by clear orders of magnitude materially worse for Britain’s economic outlook’ than the bank of England’s current forecasts. We should expect:

· a sharp fall in output (particularly in the manufactured goods sector),
· a sharp fall in employment
· a sharp fall in exports
· a sharp increase in prices (particularly in food)
· a fall in the value of sterling

All of this is likely to contribute to a fall in the value of the pound, uncertainties over interest rates, a drop in household incomes, a reduction in government revenue and a rapid increase in deficit and debt. Estimates put the economic impact somewhere in the region of the impact of the 2008 financial crash. The consequences for the economies of Northern Ireland will be much worse. (In Ireland, the no-deal scenario would see us erect no tariffs against the EU, while the EU erect its tariffs against us – meaning that UK businesses could pay the standard EU tariff of over 40 per cent exporting cheese or lamb to the Republic, and they would pay nothing exporting to the UK).

Security and Ireland

The hard border which would follow in Ireland would be a fundamental challenge to the principle of the Good Friday Agreement, which based the agreement on the absence of a border. Politically, a no-deal will increase demands for Northern Ireland to leave the United Kingdom. And for Scotland to leave as well. No-deal Brexit would force us to revert to slow and cumbersome systems of extradition and information exchange, hindering our ability to fight crime. We would struggle to transfer and exchange data with EU members for a significant period of time.

Conclusion

No-deal is not the answer to anything – it is simply another way of kicking the can down the road but into a much more fragile economic situation. We would face more years of debts and austerity, undermine Britain’s reputation for competence and reliability, and take us no further forward in defining any future relationships with the EU or anyone else.