No deal is a normal trading scenario- it is manageable and creates opportunities
Without an FTA, the UK would become like other third countries to the EU, such as the US. They trade with the EU on WTO terms, adding other small agreements, which the UK and EU should be able to agree, without negotiating a full FTA, yet. Many deals other third countries have with the EU will be agreed, short of a full FTA. So there is no such thing as no deal of any kind. If the EU does not want to damage its own people, it will agree a greater level of these – if it wants to engage in self-harm, it will be obstructive.
- ‘Other deals’ will likely include things like aviation and specific mutual recognition of product safety testing – again, just like the EU has with the US – leading eventually to a full and really good deal, but without the artificial pressure of the ‘Article 50 timeline’.
- It would also mean we would not need to pay the unnecessary £39 billion ‘fine’ to leave, which depends on a deal being reached in the timetable.
- The additional ‘bolt-on’ deals reduce specific areas of trade friction for cooperation on other things, like research funding.
- Furthermore, in the event of no deal, an ‘off-the-shelf FTA’ could even be offered to the EU as a ‘no deal default’ mode, which could also be given these bolt-ons quickly.
- So in fact a no deal scenario can lead quickly to the preferred option all along, which is a ‘Canada+ deal: WTO rules but some additional preferences, in the context of an advanced free trade agreement.
- Vitally, this will allow us to set out own regulations and standards, instead of harmonising with EU laws and rules (which will mean we do not have to follow the approach in the Government’s White Paper). A no deal WTO scenario therefore turns out to have opportunities that would not be present in the event of a negotiation for an EU FTA.
In fact, 147 agreements are in force between the two parties. So no deal does not mean some kind of blockade. We would also sign many of these, which are generally uncontroversial (85 are actually international agreements, where many countries are signatories, so the UK can opt to sign up to them in its own right after Brexit).
The EU often reaches deals building on the foundation of WTO terms. This means no deal is – both politically and economically – far better than a bad deal such as the White Paper.
What will no deal let us do?
Leaving the EU with no deal and under WTO terms would mean the immediate ability to sign our own free trade agreements and join other pre-existing agreements with groups of countries. We could take these opportunities because the UK would be outside the single market’s harmonised regulation and the customs union’s Common External Tariff (CET).
In fact, over the 23 years of the single market, 15 countries trading with the EU under WTO rules have grown their exports to the EU four times as fast as the UK (when we exclude China, the figure is still almost double that of the UK).
What could we do for our economy?
With the EU no longer determining our regulation, the UK would use sovereign control to create better regulation for business and consumers, increasing our sluggish growth. This ‘regulatory autonomy’ will also mean the UK can sign deals with other countries – which the White Paper will prevent – as regulations need to be on the table in trade negotiations.
The ability to make our own regulation is now especially important. Growth in economic output and wealth creation have fallen since the financial crisis. In the five years before the crisis, developed economies’ average annual growth was 2.4%; this fell to 0.9% after 2010. A new course is needed, away from the EU regulation which hinders business growth. Growth is now at a premium, as ageing populations put pressure on the public purse. Without a return to high growth, our economies will be unable to create vital jobs or sustain public services.
But the UK also has the opportunity to be a force for trade liberalisation worldwide, through agreements with other countries and acting through the WTO generally. If the UK were to join the Trans-Pacific Partnership, for example, and work on regulatory reform with the TPP countries and the US to reduce ‘domestic distortions’ by 30 per cent over 15 years (such as regulations which favour big incumbent firms over innovative competitors), would increase GDP by up to 7.25 per cent by 2034. This is just one example of the opportunity WTO terms allow.
What have others achieved?
There are many examples of how the capacity to sign free trade deals benefits an economy. With control over its tariffs and regulation, the experience of New Zealand shows how capacity to lower tariffs and subsidies improves economic growth and productivity.
- In 1985, New Zealand’s government reduced agricultural subsidies and tariffs, against predictions this would drive down wages and regulatory standards. Today, New Zealand produces a similar weight of lamb from less than half the number of sheep, uses 23% less land, and has cut greenhouse gas emissions by 19%. New Zealand lamb is now marketed in 100 different countries (often on WTO terms), and productivity has improved 107%.
- As well as domestic action, New Zealand has been able to sign ‘bilateral’ free trade agreements with countries like China. New Zealand’s trade growth with China following its FTA has exceeded their own Treasury’s predictions by five hundred per cent, put down to more market access but also a resulting change in the mentality of businesses. Representing itself on the WTO also gives New Zealand the ability to push for multilateral trade liberalisation.
- Within the EU, this kind of action is not yet possible for the UK, and would not be possible with the White Paper proposal.
Leaving the single market and customs union, regaining control of our borders and laws, freeing ourselves from the European Court of Justice, and having the freedom to establish our own terms of trade with the rest of the world will all produce important gains. Much of the UK’s provisionally agreed payment to the EU, estimated at around £39 billion would also be unnecessary, as there would be no withdrawal agreement. Meanwhile, without a withdrawal agreement the UK can give the same rights that have been agreed for citizens.
We have seen the benefits to be had from better regulation; but reducing tariffs is also beneficial not just to the countries exporting to us, but to UK consumers and businesses. Because tariffs increase the price of an imported product, this penalises foreign producers, prevents wealth creation in developing countries. In the importing country, they raise prices and reduce choice for consumers, while harming the importer country’s industry by insulating inefficient sectors from competition.
Of course, there are great gains from more competitive regulation and lower tariffs, but that is for the UK to decide democratically once it leaves the EU. The WTO rules simply state that, generally, one country should not be denied the ‘best’ treatment on tariffs that another country gets from us.
Will this cause problems for our trade or economy?
Many of the reports suggesting negative outcomes under the WTO include implausible and illegal border costs between the UK and EU. But to understand how the EU’s interests and commitments at the WTO protect the UK from any seriously negative consequences, we should start with tariffs.
- The EU has a WTO commitment not to increase tariffs, so the max. average industrial goods tariff they could impose on the UK would be 4.6% (with an average on manufactured goods of c.3%). This would be outweighed by the gains the UK could make for its economy by reducing its own tariffs, making imports cheaper and improving competition. But for the EU to impose tariffs on imports from the UK would also be strongly against its own interests – their trade surplus with the UK would see them considerably worse off should the UK reciprocate.
Should the UK reciprocate by applying its own tariffs at the same level, German automotive producers, for example, would lose €2.2 to €7.6bn, or 8,600 to 29,400 jobs. Ireland’s beef and dairy industries would see exports fall by 34% to 50% and 23% to 42%, respectively.
Meanwhile, it is often claimed that ‘border frictions’ such as delays at customs would occur, but there are two central reasons why this need not be as disruptive as some would suggest: the first is in regulations and standards, the second in customs (while we also discuss the issue of the Northern Ireland border).
In regulations and standards we have seen that the EU is committed not to impose discriminatory regulatory barriers on imports:
- Because the UK has been in the single market and intends, in the short term, to retain all single market regulation standards for goods, it would be discriminatory to treat UK products differently when we leave.
Goods from anywhere in the world that meet these regulatory requirements are permitted to enter the single market on a non-discriminatory basis.
Even within the EU, goods must be certified to meet applicable regulations. In most cases this can be done by the manufacturer self-assessing and certifying the goods by affixing a ‘CE’ mark. For other higher risk goods, an independent ‘notified body’ tests and certifies them. Unless the EU has a mutual recognition agreement in place with the country where the manufacturer is based, the notified body must be established in the EEA. But this does not mean that notified bodies in the UK won’t do this. As long as they are a group company or a sub-contractor of an EEA-based notified body (in practice most are), certifications issued in the UK will still be valid (for specialised sectors like chemicals and medicines, the position is more complicated, with more layers of licensing, but firms are undertaking the necessary work to ensure their products and EU importers have the licences continue trading). For food and agriculture, the EU will be able to check that goods meet required standards, even though goods will have been produced under EU-identical rules.
In customs goods will no longer be entitled to free circulation into the EU from the UK, as the UK will be a third country so will be subject to normal border checks at EU ports and at the Irish border:
- Agriculture and food products aside, very few goods imported from outside of the EU are subject to checks at the border. In line with WTO practice, consignments are checked on a risk-assessed basis – so very few imports are checked. Treating imports from the UK on more onerous basis than imports from other WTO members would be a violation.
So the intelligence-led, risk-based checks would be highly unlikely to exceed the checks now carried out on UK-EU trade against things like counterfeiting and drug-smuggling (including in trade across the Irish border, where enforcement is done away from the border and still would be – see below). For agriculture and food, we import much more from the EU than we sell to it, so any EU attempt to impose restrictions would be highly counterproductive.
Meanwhile, the World Bank Logistics Report (2016) found that the median developed country border processed 97% of survey respondents’ trade without any border checks at all. Only an incompetent government would not prepare the upgrading of customs to be ready for no trade deal. The Chancellor has also already made £3bn available for Brexit preparations in the 2017 Budget, and a range of procedures already established in other countries can be implemented optimally by both sides, but by the UK unilaterally in the absence of agreement. These include streamlining the application and approval processes at customs; implementing self-assessment for companies’ customs declarations to reduce any added burden on their resources and on HMRC; and offering more training so businesses can achieve authorisations for reliefs and trusted trader status sooner.
Importantly, it is open to the UK to unilaterally recognise EU regulations and certifications, and allow for the continued importation of goods subject only to checks currently carried out on EU goods (this would not include veterinary checks for meat and animal products). Turnarounds at the cross-channel ports (and Eurotunnel terminal) are very short, but in the event of any non-cooperation, for example in the Channel ports in northern France, other UK ports are ready, and trade can be diverted through east coast ports like Teesport and Immingham, which benefit from highly efficient clearance operations with their partners in Rotterdam and Zeebrugge.
In Northern Ireland:
- The Northern Ireland border also continues to be raised as an apparent risk in a no deal scenario, but this has been considerably exaggerated: solutions are available. As Jon Thompson, Chief Executive of HMRC has pointed out, there is no reason why physical controls at the border will be needed.
Because neither the UK nor Republic of Ireland are members of Schengen (the passport-free zone), and due to the Common Travel Area between them, there is no need for immigration controls, so the question for the border is cross-border trade.
First, it is important to remember that a border already exists; for there to be no change at all would require the UK to remain in the customs union and single market, which would prevent any independent trade policy. It is also important that Northern Ireland’s economy is still highly integrated with the rest of the UK, rather than Ireland. Northern Ireland government figures show that 87 per cent of its turnover is sales within Northern Ireland or to Great Britain; just 5 per cent is sales to the Republic of Ireland.
Although customs checks are part of requirements at the EU external border now, in practice most of the formalities required are conducted electronically, with checks taking place before arrival,
The only goods that need to pass through specific entry points are animals or animal products, through crossings with border inspection posts (BIPS) where veterinary checks can be made (even now, trade within the single market in meat and animals is not completely without frictions).
However, the EU has already agreed ‘mutual recognition’ of sanitary measures for meat and animals with Switzerland, Canada and New Zealand, reducing the number of border inspections of meat products from those countries. There is no reason to suppose this will not be possible here. Animal health is already subject to an all-island regime, with checks on imports of live animals from Great Britain taking place on arrival at Northern Ireland. If it would facilitate agreement with the EU that border inspection posts for agriculture would be unnecessary, devolving powers over animal health and agricultural standards to Northern Ireland would surely be acceptable to the UK government and to all communities in Northern Ireland.
Generally though, border checks are not necessary to prevent unsafe products from entering a market. Compliance is maintained because responsible importers do not wish to commit a crime by placing non-compliant goods on the market, and because there is effective enforcement by trading standards officers behind the border. This is also the case for customs declarations, covering duties and rules of origin, where enforcement can be done by way of audits (as for VAT and excise duty).
Although both sides have committed to avoiding what has become known as a ‘hard border’ between Northern Ireland and Ireland, the EU’s demand that Northern Ireland be separated from the rest of the United Kingdom and remain in a customs union and single market with the EU goes far beyond what is necessary, and would risk Northern Ireland’s stability and economy.
If no backstop or other specific arrangement is agreed for the Irish border, the UK government can unilaterally enable goods to enter Northern Ireland from Ireland without border formalities. This does not mean not enforcing the border. It means enforcement will be carried out, as at present, away from the border, by way of documentary checks and on-site audits. The Irish government may be able to do the same, but, to the extent that this departs from the Union Customs Code and sanitary regulations, would likely need dispensation from the Commission to do so. Irish PM Leo Varadkar and Commission President Jean-Claude Juncker have both said that even in the event of no deal, they will not enforce a hard border in Ireland.