Will a no-deal Brexit be the EU’s parting gift to Britain?

It’s a fair guess that the winner of the Conservative party leadership contest (and thus the UK’s next PM) will be committed to leaving the EU on 31 October.  But come that date, will the UK leave with an agreement or without one (putting aside the less likely option of not leaving at all).

From the British perspective, the agreement required can be seen as modest: letting UK transition (as a complete united kingdom) to an independent trading and regulatory model, but one aligned with Europe.  Not a million miles from the deal initialed with the EU by soon-to-be-departing PM Theresa May.

But the European perspective is different. Brussels thinks that the relatively closed and highly regulated trading bloc is a big economic and political advantage. It’s reluctant to grant access, even on worse terms than now, without large financial commitments and long-term regulatory concessions. It thinks the UK must accept its terms, because the costs of no-deal are too great.

So while an agreement makes a lot of sense for both parties come 31 October, in the longer term, less so.  Which, in turn, is why there must be a fair chance of no-deal on that date.

So how bad would a no deal exit be?

Disastrous says much conventional opinion. Senior Financial Times columnist Martin Wolf gives six reasons in his latest column. Three are economic: disruption; limited EU co-operation to end it; and less access to EU markets.  Three are political: the UK values access, but the EU values political integrity; the UK suffers more pain (because costs are spread across a smaller population than the EU); and the UK loses international credibility.

A raging success says Patrick Minford of Economists for Free Trade in his most recent paper. A clean (ie, no-deal) Brexit could increase GDP by 7% over 15 years by four drivers: moving to free trade with non-EU countries that currently face high EU protection in goods trade; substituting UK for EU-based regulation; stopping the subsidy of unskilled immigrants from the EU; and ending the UK’s contribution to the EU budget.

Minford claims he has already won the first round in the analytical battle, with the government’s economists abandoning their earlier use of ‘gravity’ trade models (which provided the now-discredited forecasts of recession the day after a Brexit vote).  He says that both sides are now using the conventional Global Trade Analysis Project (GTAP) trade model but – not surprisingly – come up with very different outcomes. The difference is the assumptions – and this is where it gets really interesting.

Minford calculates that the cost of EU tariffs in no-deal would be small – about 1% of GDP – and is far outweighed by the benefits of free trade with the rest of the world (equivalent to 4% of GDP).   Trade thus provides a net 3% of his estimated 7% gain.

But he reckons that the Government’s Cross-Whitehall study estimates a no-deal trade loss up to 6% of GDP.  How come?

  • The government assumptions about free trade with the rest of the world show a benefit of less than 1% of GDP.  This (in his view) is deeply conservative.  He cites a study for the Australian government suggesting freer trade gave the Aussies a GDP boost of more than 5%.
  • The government’s estimated costs of more barriers to trade with Europe are up to 7% of GDP – much higher than Minford’s 1% estimated cost of tariffs.  The extras appear to be a mixture of border costs (ie, cost of paperwork and delays) and new non-tariff barriers (ie, claiming UK products do not meet EU standards). Wolf also expects new non-tariff barriers, although Minford points out that these are illegal under WTO rules.

In a debate where most folks seem to pick their assumptions and models to suit their preferred outcome, this analysis will not be conclusive.  But there are a few general pointers for everyone.

First, the benefits of freer trade, and particularly opening one’s own markets to the world, are significant and often under-estimated.  Point to Minford.

Secondly, the EU can impose non-trivial costs on the UK.  Point to the Whitehall economists.  Admittedly, this would cost Europeans just as much.  And national governments like the Dutch and Irish may jib at ‘taking one for team’, implementing job-destroying decisions for the greater European good.

Thirdly, the accession of a Prime Minister genuinely willing to contemplate no-deal might change the terms of the debate in the UK from fear towards opportunity.  This may already have started.  Britain’s Cabinet Secretary raised a few eyebrows when he said this week that the government was in “pretty good shape” for a no-deal departure in October.  This from the man who warned Ministers in March of dire recession, corporate collapses, 10% food price hikes and the police unable to keep public order. And should a new official face be needed for a new official message, Tom Scholar, the Treasury Secretary, has for some reason been inconspicuous to date.  Do not be too surprised if there is yet another forecast showing no-deal with a wider range of outcomes, both positive and negative.

Finally, you might like to speculate about the wider political dynamic which economic models can’t explain.  No deal means choosing a decisive break with the status quo.  Might this provide the impetus for a more radical political experiment on the lines of Margaret Thatcher, Roger Douglas, Donald Trump or even (although at this stage it seems less likely) Jeremy Corbyn?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.