Sunday, August 12, 2018
A no-deal Brexit - the silliest of silly season ideas
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

sillyseason.jpg

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

This is a time of year when it is customary to talk about the silly season for news, and one prominent example of it has been running for the past few days, Boris Johnson. When it comes to Brexit, meanwhile, it has not so much been the silly season this summer as the stupid one.

I refer, of course, to the idea that a no-deal, cliff-edge Brexit next March is something we should not fear. Indeed, you sense that some are slavering at the prospect.

With one bound we would apparently be free of the European Union; free of those sneery continentals Michel Barnier and Jean-Claude Juncker; free of the requirement to pay the so-called divorce bill of about £39bn, and ready to negotiate buccaneering trade deals with the rest of the world.

And, just in case anybody is worried about the disruption, the shortages of foods and medicines, the massive queues at Dover and other ports that would follow a disorderly Brexit, apparently the rules of the World Trade Organisation would prevent anything like that happening.

Liam Fox, the international trade secretary, told this newspaper in an interview last week that the chances of no deal were 60-40 and, in a separate interview, that no deal would be preferable to the prime minister seeking an extension of the Article 50 negotiating timetable. That suggests to me that the trade secretary needs to do some work on the effects on trade of a no-deal Brexit.

Sir Bernard Jenkin, the Brexit-supporting Tory MP, said fears that no-deal being hugely disruptive were like those of the millennium bug panic almost two decades ago. The analogy is a poor one. An enormous amount of time, money and effort went into testing and adapting systems, to deal with a technical change. A no-deal Brexit is no mere technical change, and few would say that a huge amount of time, money and effort has been expended on it.

The truth is, as business is rightly starting to warn, a no-deal Brexit would be dangerous, disruptive and expensive, with much of the cost being incurred by consumers. It is surprising to me that so many Brexiteers either enthusiastic or blasé about the prospect.

If anything were calculated to give Brexit a bad name it would be a chaotic Brexit hitting people’s day-to-day lives. Nor is the no-deal talk doing anything to strengthen the prime minister’s negotiating position. The EU recognises bluster when it sees it, and that no sane government would risk crashing out of the EU and subjecting its economy and its citizens to an unnecessary shock.

Let us take the different aspects of no-deal in turn. Could Britain escape the £39bn divorce bill or, as the new Brexit secretary Dominic Raab has suggested, make it conditional on the EU negotiating a trade deal? The answer to that, apart from the fact that the EU is willing to negotiate a trade deal, though not necessarily the one the government wants, is no.

The divorce bill represents Britain’s liabilities to the EU, incurred in the expectation of continued membership, less assets such as Britain’s share of the capital in the European Investment Bank. It has to be paid, unless this country wants to embark on its new era by defaulting on international obligations.

What about the argument, which has recently re-emerged, that WTO rules prevent the EU discriminating against British exports. If a product is good enough for the EU on March 29 2019, why should it not be good enough on April 1? Two WTO agreements, that on sanitary and phytosanitary measures, the SPS agreement, and the TBT (technical barriers to trade) agreement, have been cited by some Brexit supporters as reasons why the EU will have to stay open to British exports even in the event of a no-deal.

In fact, as many real-world trade negotiators have pointed out, these agreements do nothing of the sort. And, as Emily Lydgate, Peter Holmes and Michael Gasoriek of the respected UK Trade Policy Observatory pointed out in a recent blog, such claims are mistaken and “shows a lack of understanding of the WTO rules”.

“These rules impose an obligation to talk – but ultimately it is down to the importing country to determine whether the regulation meets its standards,” they wrote. “For the UK the issue is not whether or not the goods are produced to the same standard on Monday or Friday. On Monday the UK does not need to prove this, on Friday it may have to. And this would be WTO compatible.” Even if the UK challenged the EU in the WTO, a challenge that would be unlikely to succeed, the process would take years.

It goes further. For the EU to accept UK goods under EU rules in the event of no-deal, it would be required to extend the same privilege to all other third countries. As Malcom Barr of J.P. Morgan, a close Brexit-watcher puts it: “A basic principle of the WTO’s operation is equality of treatment where a preferential trade deal is not in place (the Most Favoured Nation Principle). That principle would compel the EU to extend the same regime to the UK as extended to others without a trade deal in a no-deal scenario. If the EU were not to do so, other WTO members would be able to sue the EU and UK on the basis that preferential treatment was injurious to them.”

There is another thing often claimed, which is that plenty of countries trade happily with the EU on the basis of WTO rules. No advanced country, however, trades with the EU on the basis of WTO rules alone. Britain would go from having a very close relationship with the EU to the most distant among advanced economies. More on that, if necessary, on another day.

Finally, could not Britain avoid disruption at the ports by simply announcing the abolition of all tariffs on imports from the EU on no-deal day? No. There are several problems with this idea. One is that non-tariff barriers are more important than tariffs. Another is that, as noted, WTO rules require equality of treatment. Abolishing tariffs on EU imports would require the abolition of tariffs on all imports, including cheap manufactured goods from China. The effect on British manufacturing would be devastating, even existential. Add that to the disruption and you are definitely making a drama out of a crisis.

And, while abolishing tariffs might – only might – ease the disruption in northern France, it would do nothing for the queues on this side of the Channel. Trade is a two-way street, and any unilateral gesture by Britain would not be reciprocated. Those who want to turn Kent into a giant lorry park would have their wish granted.

We must hope that this very silly phase of the silly season is short-lived, and that there are enough wise heads in parliament to keep us from the cliff-edge. The fact that we are still having this debate at this stage is both worrying and depressing.

J.P Morgan’s Barr puts it well: “By now it might have been thought that an informed consensus would have developed such that ‘no deal is better than a bad deal’ was recognized as political bluster. As tribal as Brexit has become, the implications of ‘no deal’ are not simply an issue of ‘remain’ versus ‘leave’. One can be pro-Brexit while regarding ‘no deal’ as potentially disastrous.” But not, it seems, if you are a certain kind of Brexiteer.