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.

 

Disclaimer:
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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  • Freeborn John

    Rediculous scare-mongering as usual from Remainers. If there is no deal we simply trade on WTO terms as we do already with the rest of the world, using the existing systems for collecting duties. Airplanes will fly just as they do between countries not in the EU. UK exporters will face £6bn on exports to the EU but we will collect £13bn in customs duties on their exports to the UK so will profit. There will be no ‘Brexit fee’ or ongoing payments to the EU budget so no deal is actually a very good deal and the EU cannot stop it. The EU will have to offer a very very good deal indeed to better it and there is no sign they are going to do that. One can also see how worried Remoaners are by this likely outcome when they write half-baked articles like this one trying to disguise how good a WTO trading regime will be for the UK.

    • BonaparteOCoonassa

      Ridiculous starry-eyed Micawberism from the rabidly anti-EU right, and from you. Time will teach you a lesson.

      • Freeborn John

        The passage of time teaches that everything predicted by Remainers is a lie:

        1. Brexit will lead to the end of western civilisation. LIE.
        2. Brexit will lead to War in Europe. LIE
        3. Brexit will leave each Briton £4300 a year worse off. LIE
        4. A Leave vote will trigger a recession throwing 500000 out of work immediately after the vote. LIE
        5. Three million people will eventually lose their jobs. LIE
        6. Inflation will soar. LIE
        7. The stock market will crash. LIE
        8. Interest rates will go up. LIE
        9. House prices will fall 18%. LIE
        10. A punishment budget will raise income tax 2% & cut the NHS & police. LIE
        11. Foreign investors like Nissan will pull out and FDI dry up. LIE
        12. The UK will be ‘at the back of the queue’ for a FTA with the USA. LIE.

  • BonaparteOCoonassa

    I think, on past evidence, that we can depend on this tory government to provide chaos, confusion, financial loss to the majority of UK citizens and general fear and loathing, no matter what kind of Brexit we get. The only positive thing which might come out of it all is Scottish independence, as the chasm becomes clearer and closer.

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