What is going to happen if the Prime Minister’s Brexit deal fails to secure parliamentary support? Are we really facing a catastrophic “no deal” scenario? Very probably not. “No deal” – at least in its extreme form – is so obviously in nobody’s interest that it is very unlikely to happen.
It is much more probable that Brexit will go ahead on 29th March 2019 but that – pending the outcome of further negotiations – common sense and practicality will prevail. Most existing arrangements for trade and other forms of co-operation will continue substantially as they are for the time being. Albeit with some disruption, negotiations to find workable solutions for the future will continue.
Parliament and the UK generally – and the EU27 – will nevertheless have to make up their minds what they are aiming for. So far, the main ways ahead – both for Parliament and maybe for the electorate, if we have either a general election or even a second referendum, have been portrayed as a choice between reapplying to re-join the EU, accepting some variant of Chequers, or “crashing out”.
Not nearly enough has been heard recently of Canada+++. This could be a big mistake because – especially in the new situation in which we may well find ourselves – Canada+++ has very substantial advantages over other options.
First, it has always been the most obvious way of fulfilling the result of the EU referendum and all the promises about honouring its result that were made at the time, thus abiding by the critical democratic decision taken in the June 2016. This approach is very much in line with the policy laid out in the Prime Minister’s Lancaster House speech, before the Brexit negotiations got side-tracked into Chequers by the outcome of the 2017 General Election.
Secondly, with caveats about the Irish border discussed below. Canada+++ is an option which the EU27 have repeatedly offered to us – not least by Donald Tusk in March this year and by Michel Barnier again just recently. It is easy to see why the EU27 should favour this approach. If the UK is out of the Single Market and the Customs Union, the integrity of these crucial components of the EU structure would not be compromised or destabilised. This has always been a primary – and understandable – aim of the EU27 negotiators.
Thirdly, Canada+++ would supply Leavers with pretty well all that they thought they were voting for in 2016, while also providing Remainers with an outcome with which at least the more reasonable among them ought to be able to accept, especially if trade between the UK and the EU27 was on the widest possible free trade basis.
Trade would not be quite as frictionless as “free movement”, but pretty close to it. Supply chains would not be disrupted. It is worth bearing in mind that although 36% of the bought in components for the UK car industry come from within the EU, 21% arrive from outside, imported into the UK on WTO terms.
Fourthly, Canada+++ has a better chance than any of the alternatives of providing the UK with a stable long-term relationship with the EU, reducing differences of opinion and approach to Europe from being a constant source of friction and disharmony, distracting our MPs and many other people from addressing the many problems faced by the UK other than our relations with the EU27.
Fifthly, Canada+++ may provide us with a way of dealing with the Irish border issue. In a new negotiating environment, we would no longer be under the obligation to go along with the concessions made by the UK in December 2017. The UK could then agree unilaterally not to have a hard border, to implement electronic pre-clearance as soon as practical for larger companies, to provide local traders with exemptions, and to recognise that there might be some slippage to start with. If there are no tariffs to collect, this seems a small price to pay to overcome an otherwise intransigent issue.
The reason why Canada+++ has slipped down the agenda is because the Parliament elected in 2017 had no majority for any arrangements which left us outside the Single Market and the Customs Union. Now that everyone can see that trying to leave the EU while staying in either one or both of these constraints simply does not work, the advantages of a free trade deal with the UK outside both of them are increasingly obvious.
Of course, Canada+++ is not absolutely ideal from every point of view. Nothing ever is. But from the perspective of both the heavily divided Conservative and Labour parties, it now looks like a much better option than anything else on the horizon.
The post It is time the Conservative and Labour parties united in support of a Canada+++ deal appeared first on BrexitCentral.
Since as far back as 2016, the Treasury and other elements of the UK Government have been pushing for the UK to remain in some form of customs union with the EU after Brexit. Recent weeks have seen this idea again coming to the fore, with talk of a ‘temporary’ customs union to be created after the ‘transition period’. Those proposing this idea put it forward as a solution to what they see as the problems of Brexit. In reality, it would be in no way a solution, and it would create a whole new raft of problems.
The main arguments for a customs union are that it will guarantee tariff- and quota-free access for UK exports to EU markets and that it will avoid UK firms having to bear customs and ‘rules of origin’ costs that they would face in a free trade agreement (the latter involve the costs of ensuring your product has enough ‘local’ content to qualify for zero tariffs). On top of this, it is claimed that a customs union solves the problem of the Irish border.
In my view, the purely economic arguments in favour of UK customs union membership with the EU are weak:
- There is not much evidence that a customs union would be more beneficial for UK-EU trade than a standard free trade agreement (FTA). The study by Cippolina and Salvactici (2006), based on a large number of estimates of the trade-creating effects of FTAs and customs unions, finds no evidence that customs unions outperform FTAs. The similarly large-scale study by Head and Mayer (2013) found membership of the EU customs union had modest trade-boosting impacts (15-20%) but that these were often smaller than the trade-creating effects of FTAs such as NAFTA.
- Rules of origin costs are often hugely overstated. Claims that rules of origin costs for UK businesses in case of a UK-EU FTA could be as high as 7-8% of trade values are far too high. A careful study by the WTO points to the cost of compliance with rules of origin being less than 1% of traded values, and often negligible.
- Costs of customs processing are also massively exaggerated. Claims by HMRC earlier this year that customs costs could total 1% of UK GDP or 6% of trade values are anything from five to twenty times too high, being based on a mixture of double-counting (now admitted) and dubious claims about the future costs and numbers of customs declarations.
- It is not even clear that a ‘new’ UK-EU customs union would entirely remove customs-related costs. The EU’s customs union with Turkey has not led to ‘frictionless’ border trade – queues at the border are often lengthy. Formal customs checks within the EU only ended in the early 1990s due to the Single Market Programme.
- The UK’s foreign trade structure is not suited to a customs union. Customs union arrangements have some logic where one economy does a very large share of its trade with another. But the EU now represents only around 45% of UK goods exports. And this share has been dropping rapidly as the EU grows slowly compared to the rest of the world. Twenty years from now it is likely that the EU will take only around a third of UK goods exports.
- The UK would remain locked into the EU’s highly protectionist agricultural trade system. While average EU tariffs are not very high, they are often steep on agricultural products. This represents a heavy effective ‘tax’ on UK consumers, especially given the UK’s status as a large net food importer. UK consumers are denied the choice of cheap food from outside the EU and pushed towards consuming expensive products from within it. This cost is high at 0.5-1% of GDP – almost certainly higher than possible rules of origin costs for manufacturers under an FTA.
Moreover, the strategic/political arguments in favour of a customs union are even less compelling:
- Entering a customs union would make meaningful trade deals with other economies impossible. While there might be scope for very limited deals on trade facilitation or deals on services the scope even for these would be very small. Why would India or the US be interested in a deal on services (potentially benefitting the UK) when the UK had nothing to offer on the goods side?
- The EU would be effectively able to ‘sell’ access to UK markets with no reciprocal benefits for the UK. The EU-Turkey customs union is a good example of this. When the EU does trade deals with third parties, these third countries gain tariff-free access to Turkish markets but Turkish exporters do not gain automatic reciprocal access to these third countries and Turkey has to try to negotiate parallel arrangements (not always successfully). Notably, Turkey came close to cancelling its customs with the EU when the EU was negotiating the TTIP trade deal with the US. Britain in a customs union would be in the same position as Turkey.
- A future customs union would jeopardise the UK rolling over existing EU FTAs. Under a Turkey-style arrangement, the UK would be reduced to trying to replicate any new EU FTAs with third countries to get access to the markets of the EU’s FTA partners – but these partner countries would have little incentive to agree having already got access to UK markets. For the same reason, the prospect of an open-ended future UK-EU customs union could undermine attempts the UK is currently making to transform existing EU FTAs with countries like Korea into UK-only FTAs. Current EU FTA partners would continue to benefit from free access to UK markets under a new UK-EU customs union – so they would have no incentive to negotiate new UK-only FTAs.
- Britain would have no voice at future WTO discussions about global tariffs. It would simply have to accept whatever the EU agreed.
- The EU would be able to damage UK business using anti-dumping actions. Under a new UK-EU customs union the EU would be likely to be in charge of the UK’s ‘trade defence’ measures such as ‘anti-dumping’ actions (where large tariffs are levied on countries deemed to be ‘dumping’ their goods on the EU market). Again, the EU would make anti-dumping decisions without a UK say and such decisions could damage UK business and consumers. So, engineering and vehicles manufacturers could be hurt if punitive tariffs were imposed on some steel imports, and consumers hurt if food or other imports were raised in price by anti-dumping duties. Worse still, the EU might well insist on being able to impose anti-dumping duties on the UK as well – as is the case with Turkey.
- A customs union would not simply cover tariffs and quotas, i.e. a ‘bare bones’ arrangement. The EU would also require the UK to follow EU rules in a broad swathe of policy areas including competition policy, environmental policy and social and labour standards – without any say at all in how these rules were set. This would not only be a huge loss of UK sovereignty but also dramatically narrow the UK government’s freedom of action in key economic policy areas.
- The ‘temporary’ customs union would be unlikely to be temporary. The EU has made it quite clear in recent days that it would require such an arrangement to be permanent. The proposed withdrawal agreement currently being negotiated between the UK and EU (and which would potentially contain proposals for a ‘temporary’ customs union) looks unlikely to have a unilateral exit clause, leaving the UK tied to the customs union indefinitely.
- A customs union does not solve the Irish border ‘problem’. Customs checks only represent a small element of potential border checks at EU borders today. A bigger issue is generally product conformity and other single market rules. This is another reason why any customs union would require either effective UK single market membership (see above) or border checks between Britain and Northern Ireland and/or Britain and the rest of the EU.
In sum, a customs union arrangement whereby the UK contracted out huge areas of trade and economic policy-making to the EU would be totally unsuitable for an economy like Britain’s.
Customs unions arrangements may work well for small economies that do an overwhelming share of their trade with a large neighbour (Liechtenstein and Switzerland for example). But the UK is the world’s fifth largest economy, with a diverse pattern of foreign trade and with business and consumer interests that will often diverge from those of the EU.
It is no accident that Canada and Mexico are not interested in joining a customs union with the US, despite their strong trade orientation towards the US. They know that the loss of economic independence involved would be far too great to justify what would probably be quite a modest reduction in border frictions. The calculation should be the same for the UK.
Supporters of a customs union have suggested the UK could somehow retain some influence over decision making in such a new UK-EU arrangement. But this looks like a fantasy. It would be legally and politically difficult for the EU to grant any significant decision-making power to the UK. The best the UK could hope for would be some kind of observer status (again as proposed for Turkey). But the arrangement would remain a thoroughly one-sided one where, at the end of the day, the UK would have no power either to veto potentially damaging agreements or push for deals that benefitted it.
Entering a new customs union with the EU would be a backward-looking step for the UK, with a massive loss of policy independence and flexibility and businesses and consumers at risk of having damaging decisions imposed on them with no say in how those decisions were taken. It would be a significant downgrade from the UK’s current position whereby it retains some authority over EU trade policy. It would also give the UK minimal additional policy freedom in the trade and economic policy area. Meanwhile the benefits would be small and mostly accrue to a handful of industries (the car industry, for instance, accounts for less than 1% of UK GDP). Overall, it is hard to imagine a more sub-optimal policy.
On Monday night I had an energising, heartening look at what Britain’s global future will be outside the European Union. That is to say, what our future will be if Theresa May is not allowed to betray Brexit and keep us tied to into a customs union – because if she does that, Britain will be blocked from negotiating its own international trade agreements.
But on Monday night, I put that fear aside and what I saw instead was a glimpse of the opportunities British trade and investment will have if we become free at last. This came when I had the honour and privilege to be host at a dinner for the President of Sierra Leone, His Excellency President Julius Maada Bio and his leading government ministers, at the European Parliament.
President Bio, who only recently took office, is determined to clear out the corruption which stained earlier governments in Sierra Leone. Indeed, at the dinner, President Bio’s Attorney General told me that those involved in corruption in previous administrations will be brought to justice for their shameful neglect of the people.
The dinner gave me and a delegation of MEPs – as well as the Ambassador from Britain to the EU and key business representatives – the chance to reach out to a nation which is undergoing immense change and looking outward – in line and in tune with Britain once it breaks free of the EU.
Sierra Leone is exactly the sort of new, young and growing market to which the UK must turn. It is home to the oldest African university, based in Freetown. Those who have access are among the most educated people on the African continent, yet 70 percent of children in Sierra Leone cannot read or write. President Bio will not tolerate this. Just a few days ago he was at the African Industry Transparency Initiative Conference in Dakar, Senegal. He emphasised the plans of his government to educate two million of his country’s children. He calls this “human capital investment.”
The country is rich in natural resources but the people have not yet benefited from them. Rather, the riches have lined the pockets of rogue investors with no loyalty or interest in the future of the country or its people.
President Bio, an American-educated, Western-looking leader, made it clear to all of us he met in Brussels that he will end this injustice. He wants investors who mean business – not corruption, and not political influence, but business. In particular, he intends to stop attempts by China to gain influence in his country. Recently a £500m airport deal signed between the previous administration and Chinese investors was cancelled. President Bio’s Government has no further plans to negotiate with the Chinese. He would rather talk to us.
Opportunities for partnerships with British business are huge. For example, the main power station for Freetown suffers intermittent power loss, leaving everyone entirely off-grid. Someone from the UK ought to be in Freetown right now to see what needs to be done and just how a British company can do it.
The same goes for tourism along the country’s magnificent beaches, manufacturing possibilities, mining for minerals and diamonds, and agriculture and fisheries. All can gain in particular from inward British investment. That should be no surprise: Sierra Leone is a Commonwealth country and an English-speaking country whose laws are in large part based on our own Common Law.
We succeeded on Monday in bringing together people who want the same things for their countries. Diplomatic and business ties are crucial now for both Britain and Sierra Leone; this event was not just an ordinary dinner. That is why I will be following through and acting quickly. President Bio has now invited me to visit Sierra Leone later this month and I look forward immensely both to being a part of this adventure and developing the business and investment opportunities of our countries further.
On Monday I saw our future, and it’s global.
The British people’s historic vote to leave the EU – the largest democratic result ever in our country – is not something to be feared.
It wasn’t a vote to leave Europe or to pursue an isolationist future. It was a vote for us to become a strong, independent nation once again – a country that is not afraid of standing on its own two feet.
The British people recognise, as I do, that around 90 per cent of global economic growth will come from outside the EU in the years ahead, and that the EU now accounts for less than half of our overall trade. Over 90% of all trade travels by sea – and we are inextricably linked to this global network. As we leave the EU, the one thing which remains fixed is our geography. We will remain, as we always have been, an island maritime nation, outward-facing and trading across the globe. British goods and services are recognised as the best in the world and sought after by global customers. This will not change.
So we must look beyond the shores of our European continent and be prepared to walk away from negotiations if the deal offered by the EU does not deliver a real Brexit – and be unafraid of doing so. We only need to be ready to trade under World Trade Organisation (WTO) rules: international laws that regulate the trading relationships of 164 member states and around 98% of global trade.
We will be leaving on 29th March next year and only a good deal for the UK should be agreed to. Otherwise we will be insulting the democratic request given to Parliament.
It is starting to be more than a little boring to have to listen to the almost daily ritual of doom, gloom and scaremongering. We are told there will be border chaos, food and medicine shortages, hikes in prices, states of emergency, gridlocked motorways, catastrophe – even an end to peace in Northern Ireland and civil unrest.
Beyond the Westminster village, and certainly at the top of England in my constituency, 350 miles from London, people listen to all this with incredulity. Last week’s Budget implemented our-tax cutting manifesto promises early, lifting more of the lowest paid out of tax altogether. It announced an unexpected tax windfall that we’ve been able to spend on our vital public services. UK salary growth has now risen to 3.1%, the fastest growth in wages in almost a decade, employment levels are at their highest since the 1970s and we’re growing steadily as an economy. Our future has never looked brighter.
Voters comprehensively rejected establishment scare stories during the 2016 referendum debate – and it turns out that they were absolutely right to do so. Let’s not bore and patronise them further; let’s get to the heart of how beyond March 2019 should look.
My long-held view is that we can deliver a great future trading relationship – and more – after our departure from the EU club, by agreeing a mutually beneficial trade deal for the whole of the UK, similar to Canada’s. This arrangement would allow us to boost our global competitiveness and innovation, as well as help the world’s poorest countries by enhancing trade and investment opportunities that contribute to the economic growth of their less-developed economies.
This isn’t a “hard” or “extreme” version of Brexit. This would be, as Canada’s Prime Minister, Justin Trudeau, said of his free trade deal, about creating “good, well-paying jobs”, putting “food on the table for families”, helping to “grow and strengthen our communities” and ensuring that each generation is “better off” and has a “higher standard of living, than the one that preceded it”. Why would this sort of deal be so bad for us?
If the EU doesn’t want to negotiate this sort of free trade deal with us immediately, we won’t crash out of the EU over some invisible cliff edge. Far from it: there are protections in place for the UK under international law under a set of terms overseen by the World Trade Organisation. The US, China and India are among the EU’s biggest trading partners – and they do not have a trade deal with the EU. They trade on WTO terms.
No deal would be better than a bad deal because being tied into EU regulations without a voice would only mean their controlling our future success by anti-competitive actions.
Under WTO rules – putting the bluff, bluster and meaningless threats aside – the EU won’t be allowed to discriminate against UK businesses. It won’t be able to set tariffs on our goods that are higher than those they impose on other countries; and it will be forbidden from using other regulations or standards (non-tariff barriers) to discriminate against our goods and services.
Arbitrary health and safety inspections at borders would not be lawful and the WTO’s new “Trade Facilitation Agreement” would require the EU to maintain borders, which are as frictionless as possible, using all the modern technologies at its disposal.
The WTO has taken great strides in promoting global trade since its inception in 1995. And at its roots lie values we all share: an end to discrimination, more openness and transparency, increased competition, discouraging unfair practices, protecting the environment and ensuring less developed countries have extra time to adjust to WTO provisions.
We need to be having our own voice at the WTO, speaking up for the interests of British consumers and businesses. We don’t need the European Commission to do this for us.
The WTO option is an entirely acceptable, workable alternative to a free trade deal as we leave the EU and Roberto Azevedo, the Director General of the WTO, has said that he is looking forward to having the UK back as an independent champion of free trade.
The UK is strong enough to walk away from these negotiations. Future generations won’t forgive us if we agree a bad deal with the EU that means we have not left the controls of others over our decisions.
There is no cliff-edge, just a stepping-stone to the future that our extraordinary democratic voice shouted at us – let us become, once again, a self-governing, free-trading nation.
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In 2016 the greatest democratic event in this country’s history took place. 17.4 million people voted to leave the EU. They wanted us to become a strong, independent trading nation once again – a country unafraid of standing on its own two feet. That is why we’ve got to stop allowing ourselves to be bullied by our EU counterparts and start believing in Britain.
It’s only by accepting that we’re strong enough to walk away from the negotiating table – and thoroughly preparing to do so – that we will secure a trade deal with the EU that is good for our consumers and businesses.
We’ve heard some ridiculous suggestions from France recently. Apparently it will grind the Port of Calais to a halt unless we hand over £39 billion of taxpayers’ money, even if we don’t finalise any deal at all.
There are around 60 sailings to my constituency port of Dover from Dunkirk and Calais every day. The cross-Channel trading route is a huge success story. More than £120 billion of trade moves through Dover’s docks every year and when you add Eurotunnel to the mix, the Channel Ports account for about a third of the UK’s trade in goods.
Clearly the French and the Europeans want to keep this flowing after Brexit day next year. Indeed, a desire for any other outcome would be irrational economic self-harm. EU nations sell twice as much to us as we do to them, so any extra tariffs or traffic slowdowns would hit French farmers and German car-makers twice as hard.
Yet the public continue to be spoon-fed doom and gloom about border chaos, food shortages, price hikes, gridlocked motorways and even civil unrest from within this country – the latest manifestation of Project Fear. These vacuous threats from across the Channel represent a serving of Projet Peur 3.
To find the source, look no further than the Élysée Palace in Paris. President Macron and the EU want to bully us into accepting a bad deal. They think Britain’s greatest days are behind us and that we must be punished for daring to leave.
They are wrong about the British people. We know what it takes to stand up to bullies.
Fortunately, Xavier Bertrand – the forward-thinking boss of the Calais and Dunkirk region – takes the opposite view to President Macron. M. Bertrand knows the Port of Dover is an economic powerhouse that benefits the people of Calais and Kent. He wants to do the right thing, keep trade flowing and look after the people he serves.
But while calling out empty threats from across the Channel, we’ve got to strengthen our hand in the negotiations as well. We need to turbocharge preparations to leave the EU on World Trade terms and get serious about preparing to strike a World Trade deal. Unfortunately this week’s Budget did no such thing.
The truth is this work should have started the day after the 2016 referendum. I have long argued we need to be ready on day one for every eventuality – deal or no deal. No-deal preparations seem to have been held up by Whitehall officials who never believed Brexit would happen, and certainly don’t want it to now.
This week was crunch time and the Chancellor had the perfect opportunity in his Budget to prepare, ambitiously and positively, for a no-deal outcome. Instead he chose to set aside an extra £500 million – a drop in the ocean in terms of both government spending terms and what is actually needed.
He should be announcing an expansion of off-road lorry parking and committing to significant investment in our borders. The M2/A2 to Dover needs to be upgraded and widened. And we must start modernising our border systems, joining the likes of Singapore as world leaders in frictionless trade and security.
I state again that 17.4 million people voted to leave the EU – well over three million more than have ever voted for a political party in an election. They all believed in creating a better country for our children and grandchildren, where everyone has the chance to get on and succeed, where we are free to run our own nation and economy in a way that works best for us – not Brussels. Remainers are right when they say Brexit is the most important challenge our nation has faced since the Second World War. But they are wrong when they ignore its exciting opportunities, and dismiss what we must do to take them.
We need our leaders to start demonstrating a full commitment to making it work – no matter what happens in the negotiations. By continuing to talk our country down, allowing us to be bullied by idle threats from abroad and failing to prepare for any eventuality, all we’ll achieve for our country is a bad deal.
A bad deal would shackle us forever. EU rules are bad for hard-working taxpayers, as they allow giant corporations to dodge taxes. EU regulations are bad for business, as they protect those firms from honest competition. EU tariffs are bad for consumers, as they increase the cost of food and clothing. And all of it is bad for the rest of the world, as we cut off developing nations, as well as allies who not so long ago fought beside us for our freedom.
That’s why it is so important to agree a deal with the EU that works for us. And if we can’t agree one, we will walk away. Many countries are waiting in the wings, ready to strike free trade deals with their old friends. We cannot let the opportunity slip.
We must believe in Britain. We are strong enough to go our own way. Future generations won’t forgive us if we become so desperate to secure a trade deal with the EU that we do so at the expense of Brexit’s great opportunities.
Let’s stop being defeatist. Let’s become a truly free-trading, global nation again. We have had some great days. But if we hold firm, the greatest yet lie ahead.
The post We must not allow ourselves to be bullied by idle threats from politicians in Paris appeared first on BrexitCentral.
Much of the current narrative regarding the Brexit negotiations goes something like this:
“Brexit is likely to damage the economy in the short term. Even its advocates accept that. They said that even if there is a good free trade deal with the EU we should expect the economy to take a few years to adjust, sacrificing perhaps two or three percent of GDP growth in the process. Now, they hope to get that back over the medium to longer term — Gerard Lyons talked during the Referendum campaign of a ‘Nike tick’ effect. But only a small set of economists, even amongst those that favoured Brexit, denied there would be short-term losses even if we do a good free trade deal with the EU.
“Well, then, if even a deal leads to short-term losses, how much worse must it be going to be in the short-term if there is no deal? That surely must be very bad indeed! Perhaps it could be so bad that it would undermine the Conservatives’ reputation for macroeconomic management, ushering in a Corbyn government in 2022?”
I think it is fair to say that some version of this narrative is near-universal. Even those keenest on no-deal are largely arguing that although no-deal is worse than the best sort of free trade agreement, at least in the short-term, that is worth doing through some combination of political gains and not sending the EU £40-odd billion we don’t owe them.
I think everyone’s wrong here, and I want to explain to you why. A good free trade agreement (something like a Canada+ deal) would be the best outcome for the UK economy over the longer-term — indeed, I cannot believe anything other than a Canada+ type Free Trade Agreement is sustainable for more than a few years. And if we do do a Canada+ deal, then I agree with those that say they expect the short-term impacts on GDP to be negative — we’ll sacrifice 2 percent or so of GDP growth by around 2022.
So, a deal is better than no-deal over the longer-term, and a deal will mean a short-term loss of GDP growth. But where the discussion goes wrong is in assuming that no-deal means bigger losses of GDP in the short-term. What would actually happen is (after we got through the first few weeks, say one quarter, of disruption, which might well include a non-trivial dip in GDP), GDP would grow faster in the short-term (say, the following 12-18 months) than if there had been a deal. Just because no-deal is undesirable for the economy in the longer term, it does not follow that that means we make bigger short-term losses.
Let me explain why. Let’s step through some of what will happen in the economy, once we leave the EU, and compare how that plays out in the event of a deal versus no-deal. First, let’s list some of the effects there will be, as per the following table.
We can see various ways UK imports will be affected, but it should be pretty uncontroversial that increased barriers to imports from the EU post-Brexit will mean fewer imports into the UK, at least in the short-term, as more of UK demand will be met by UK firms and less by EU-based firms exporting into the UK. Over the longer term, perhaps we will do more trade deals with non-EU countries or unilaterally strip away barriers to non-EU trade, and imports will end up unchanged or even higher. But in the short-term, it’s pretty clear we should expect imports to drop. It should also be pretty clear that in the event of no-deal, we’d expect imports to drop by more than if there is a deal.
Again, it should be pretty uncontroversial that Brexit will mean fewer exports to the EU, and probably fewer exports overall in the short-term, and that the impact will be larger if there is no deal than if there is a deal.
So, fewer imports and fewer exports, in the short term. Which effect will be bigger? Well, the UK is a larger net importer from the EU. We import about €4 worth of goods and services for every €3 we export. So if barriers to exporting and importing are fairly similar (as UK policy-makers would surely ensure they would be in most areas), the expected net impact will surely be a larger drop in imports than exports. So from this source, we’d expect a short-term boost to GDP, as net imports fell and the UK’s trade deficit improved.
Next, let’s consider capital flows. There is a great deal of press discussion of UK finance firms or car manufacturers relocating some activity into the EU to avoid barriers to trade. Perhaps there will be some of that (though so far it seems to be mainly talk), but even so, that is part of that €3 of exports going out. What we do not hear about are all the EU-based firms that would relocate activities into the UK to avoid barriers. Since there are €4 of those for every €3 coming in, we should expect that more EU-based activity has an incentive to relocate into the UK than in the opposite direction.
This is not quite so unambiguous as the imports/exports effect. Some firms exporting to the UK will also export to other EU markets and may face economies of scale losses in relocating into the UK, and it is arguable that economies of scale impacts may more often tend to affect EU-based than UK-based producers’ relocation decisions. So there is some interplay between inward flows, reduced imports and domestic investment. But the difference between €4 of exports and €3 of imports is so large that we should probably expect the effect to be positive nonetheless. And we should expect net inflows to be bigger if there is no deal than otherwise.
Next, effects on consumption. These depend upon whether consumers expect the long-term impacts to be positive or negative for GDP, and the extent to which they react to that in the short term. This one is difficult to call. I would guess there would be little change in the event of a deal and a slight drop in the event of a deal.
Last, domestic investment. This includes firms whose investment plans have depended upon our relationship with the EU that will do less investment or even liquidate investment. It also includes firms whose plans depend upon expansions in UK or non-EU activity. I believe it is natural to imagine that, even if the net impact on domestic investment is fairly balanced over the medium term, that will consist of a drop in domestic investment initially, as EU-dependent projects are cut back or liquidated, and the capital then only later being re-allocated to new UK-based or non-EU projects.
That drop in EU-dependent domestic investment is the main reason I expect there to be slower GDP growth in the event of a deal being done. If there is a deal, I’d expect fairly modest impacts on imports and exports in the short-term, and relatively modest short-term changes to capital flows, so the drop-off in domestic investment will probably be the dominant short-term impact, meaning slower GDP growth.
But if there is no deal, these other short-term impacts will be larger. Net imports will fall much more and there will be much larger inward and outward capital flows. So if there is no deal, I would expect those effects to dominate, outweighing the drop in domestic investment in the short run.
Overall, what does that mean? It means that, even though we should expect slower GDP growth in the event of a deal, and even though a deal is better for the economy over the medium term than no deal, if there is no deal then in the short-term we should expect GDP to grow faster, not slower.
I emphasise again that this would be after the first few weeks of drop-off in GDP associated with no-deal disruption. But it would be more than simple catch-up from disruption. It is a reflection of the basic dilemma that net importing countries always face. Free trade is good for economies over the medium to long term, but if a country is a net importer then it tends to gain output, in the short-term, in protectionist scenarios with greater trade barriers. There is no good reason to believe that this long-established basic economic truth should not be expected to apply to the UK in the case of Brexit as well.
The post Why the UK economy should grow faster in the short term if there is no Brexit deal appeared first on BrexitCentral.
The Chequers Plan has to be withdrawn if we are to achieve a meaningful Brexit. Discussions between the EU and UK about allowing an extension to the transition period in return for dropping the unnecessary Irish backstop are only of relevance if it means a Canada-style deal can then go ahead – it should not be a precursor to accepting a Chequers-based agreement.
The reason for this is simple: in a new report published today by Global Britain we show the Chequers Plan is the Single Market by another name – and remaining in it (rather than accessing it) would be damaging to British economic interests.
The key myth propagated in favour of the Single Market is that it is central to UK prosperity. It is not. Our report demonstrates that the UK trades well with the world but poorly with the EU. This is odd as the UK has no special trade arrangements with the US, China or Australia yet runs a small trade surplus with the rest of the world, but a very large deficit with the very region with which we have a customs union – the EU.
For example, our report exposes the contradiction that the UK enjoys a trade surplus with the US – arguably the most competitive market in the world – without having a trade deal, but suffers a huge trade deficit of £96bn with the EU where Single Market membership is the equivalent of a trade deal.
Due to its bureaucratic approach, the EU is in structural decline. It has underperformed every other region in the world for a generation. This is not a coincidence as other advanced economies including the US, Canada and Australia have powered ahead. It is the institutional arrangements of the EU – and the single currency in particular – that have resulted in rapid economic decline and socially unacceptable levels of unemployment in much of the EU.
The EU’s trend towards centralised regulation undermines competition and increases regulatory burden. Within the Single Market framework provided by adoption of a common rule book, the UK would continue to be beholden to needless regulation and legal creep as EU lawyers interpret a definition of EU competence well beyond merely trading standards and into to many other areas of national life.
The EU has also failed to sign global free trade deals with many of the world’s most important partners including the US, China and Australia. Inside the EU, the UK cannot strike its own deals with the many much faster growing nations. Because the EU is a diverse group of 28 nations, agreement is highly problematic and cumbersome, hence the failure to reach agreement. Outside the EU, the UK can much more readily strike free trade deals.
It is now apparent from comments from the US, China, Australia, India and others that far from being ’at the back of the queue’, other countries are very keen to strike mutually beneficial free trade deals with the UK. This will allow the UK to rebuild its historic mission of encouraging global free trade that has gone off track over the last 40 years as the UK has surrendered its trade policy, so unsuccessfully, to the EU.
It is also a myth that the UK needs to be part of the Single Market to trade with it. This is clearly not the case. All nations have access, outside a tiny number under sanction (North Korea and Syria for example) so long as they comply with local regulations. One does not need to join China to trade with it any more than one needs to join the EU.
It is clearly in the EU’s interests to agree a zero tariff deal with the UK – such as a Canada-style agreement. There are many reasons for this but the primary one is simply because the EU sells more to the UK than the UK sells to the EU. It would be nonsensical to undermine its own trade particularly at a time when EU growth is so weak.
If, however, the EU refuses to do so within a reasonable timeframe, the UK should leave the EU without a formal agreement on 29th March 2019, relying on WTO rules and striking free trade deals with our global partners. This outcome would be far better than what the Chequers Plan offers because the UK would otherwise be saddled with no say on Single Market regulation.
To remain under the jurisdiction of the common rule book, effectively still under EU jurisdiction, having left the EU, is a Remain option that delivers a sovereignty illusion – with no say, low growth and a high regulatory burden that would lock in perpetual trade deficits. That is why Chequers must be chucked and a Canada-style deal for the whole UK used as the template for a new relationship.
The post The EU is in structural decline – which is why we must not remain tied to its Single Market appeared first on BrexitCentral.
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