Is a no deal better than a bad deal?

Plus ça change. Prior to the General Election, Ministers appeared to row back from (or at least row back from repeating) their claim that no deal with the EU over Brexit would be better than a bad deal. Yet, hey presto, it reappeared in the Conservative Party manifesto.

And now, after a summer in which the cabinet (finally) seemed able to agree amongst themselves that a transitional deal will be necessary to avoid a ‘cliff edge,’ we hear that the International Trade Secretary is planning to go on the offensive and argue the case for no deal.

There are various possible scenarios here. If there’s no agreement over the divorce by March 2019, we simply leave: we could call this a ‘timed out Brexit.’ Alternatively, following an acrimonious breakdown in negotiations, the UK may decide unilaterally to stop payments to the EU and revoke the European Communities Act: a ‘premature Brexit.’

Each possible outcome will have different implications. What concerns us here is the real ‘no deal’ scenario: a chaotic Brexit.

In legal terms, a ‘no deal’ Brexit would indeed be chaotic. Take pre-Brexit contracts between firms, for instance. They would need to be honoured and enforced in order for business to continue – but by who?  While the European Union (Withdrawal) Bill stipulates that EU rules on ‘choice of law’ will continue to apply, this won’t bind other member states.

Legal uncertainty will be costly and time consuming but is only the tip of the iceberg. Under this scenario, customs checks, tariffs and regulatory barriers between the UK and the EU would re-emerge. But none of the necessary infrastructure would be in place, causing chaos at ports and severely impacting on trade. Complex cross-border supply chains would be disrupted. When it comes to pharmaceuticals, drugs developed in the UK would not have their approval recognized in other member states, and clinical trials would be disrupted.

It gets worse. Air transport is not covered by the WTO, so there are no rules to fall back on. And airlines need to arrange their schedules a year in advance. It is perfectly conceivable that, immediately following a chaotic Brexit, planes to and from the UK would cease to fly, if only because the lawyers would caution them against doing so.

And the political implications of a hard border in Northern Ireland – which a chaotic Brexit would make inevitable – hardly need spelling out. Even talk of the possibility of no deal has destabilized the province, in the context of simmering tensions over the breakdown of power sharing. The economic implications for the region would also be severe, as the highly integrated agri-food business would be disrupted.

Indeed agriculture throughout the country would be affected. We expect major retailers to have contingency plans in place, so we wouldn’t actually experience food shortages. However, a chaotic Brexit would make the task of separating our WTO entitlements and obligations from those of the EU much harder, particularly if talks broke down acrimoniously. Trade would be badly hit. Meanwhile, our fishermen might benefit from being able to catch more fish, but they would face tariffs when exporting their catch to the EU, their major export market.

Individuals would be caught up in the storm. With no agreement, EU citizens in the UK would find themselves in legal and political limbo. The British government could unilaterally implement the proposals it has tabled in the Article 50 negotiations. But these are contingent on reciprocity from the EU, and this is unlikely to be forthcoming on the UK’s terms.

And the situation would be still worse for UK citizens in the EU. While the Withdrawal Bill will incorporate EU law into UK law, there will be no equivalent elsewhere: on Brexit day UK citizens will no longer be EU citizens, with potentially significant implications.

So a chaotic Brexit means significant personal and economic disruption. It is impossible to quantify the latter, and recent experience suggests it would be foolhardy to try. However, if a chaotic Brexit begins to appear either certain or likely then we can expect businesses to act in anticipation.

And, above and beyond this fall in business confidence, we could expect a further significant fall in the exchange rate and consequent rise in inflation. Under such circumstances, the much-maligned Treasury forecast of a significant economic shock might, belatedly, be vindicated.

The Foreign Secretary informed the Today programme that the current ‘SitRep’ is precisely what it was at the time of the Prime Minister’s Lancaster House speech in January. Theresa May at that time compared no deal favourably with a ‘bad deal.’ How little we seem to have learned. That claim was wrong then and it is wrong now. A chaotic Brexit – whether timed out or premature – would spawn a legal morass and an economic disaster.

Even with time to prepare, major sectors would face sudden and disruptive change. Legal uncertainty, regulatory limbo, the re-imposition of customs checks, and the ambiguous status of resident citizens will all be major issues, with no obvious solutions. What conceivable deal could this be worse than?

By Professor Anand Menon, director of The UK in a Changing Europe and Professor Jonathan Portes, associate fellow at The UK in a Changing Europe.


The views expressed in this analysis post are those of the authors and not necessarily those of the UK in a Changing Europe initiative.

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