Syed Kamall is the Academic and Research Director at the Institute for Economic Affairs, and was an MEP for London from 2005-2019.
As the clock ticks down towards the end of the year, it’s still possible that there may be a No Deal Brexit. Both sides warn that they would prefer a deal and that no deal would be damaging.
While probably most people would prefer a deal, myself included, a No Deal scenario may not be as bad as predicted. In fact, from a purely political perspective, there may be some advantages to no-deal for both the EU and UK.
Let’s start with economics and trade. No Deal does not mean no trade. One of the myths of international trade is that countries trade with each other. In fact, it is people and businesses in one country that trade with people and businesses in other countries, for mutual benefit. Governments can either facilitate trade by getting out of the way or hinder trade by getting in the way, usually in the form of tariff and non-tariff barriers. UK companies already trade with businesses and consumers in many countries with which the UK has no trade agreement.
Often this is under WTO rules. Where a company faces tariff or non-tariff barriers on its exports it will continue to sell to customers in that country if it can do so profitably despite the barriers. Therefore, British companies will continue to sell to customers in EU countries and companies from EU countries will continue to sell to UK customers. Of course, there will be some disruption and where costs increase, companies will seek to reduce or absorb them, raise prices or seek alternative markets. As with any change, there will be short term winners and losers, but No Deal does not mean no trade.
Before the EU referendum in 2016, the Government published statistics warning of the dire impact of Brexit on UK trade. However, this was based on a gravity model of trade, which views international trade as an extension of internal trade. In other words, an economy such as the UK gravitates towards trading with its closest neighbours and economies which are similar in terms of size, cultural preferences and stage of development. It sees trade with more distant markets grow more weakly than ‘neighbourhood’ trade.
Gravity in trade creation can be thought of as a function of distance and size. But as Patrick Minford of Cardiff University demonstrates in his latest book After Brexit, What Next?, modelling UK trade using the gravity model leads to widely inaccurate results. The Treasury has since changed its models, but makes assumptions which come to similar conclusions.
In a recent Institute of Economic Affairs webinar, Minford explained that while he has challenged the Treasury’s assumptions, they had so far refused to engage. Sound familiar? He also contends that while there will be some disruption to trade, the Treasury has also underestimated the gains from trading with the rest of the world.
Brexit is also about more than about trade. As a Professor of Politics and international relations, I naturally also take a political view of the situation and from this perspective, there may be some advantages to No deal for both the UK and EU.
Many EU and UK observers, including colleagues at the IEA, have been exasperated by the emphasis that UK negotiators have placed on defending the UK-based fishing industry. But while this may seem puzzling from a macro-economic perspective, it makes sense when looking at both domestic politics, as well as the politics of the negotiations.
The UK adopted a tough stance on fishing, since it was the one of the few strong bargaining chips left after the EU had out-negotiated the UK over the Withdrawal Agreement. The EU had set the terms of the negotiations, insisting on a Withdrawal Agreement before a new trade deal instead of parallel negotiations, and the UK meekly followed
From the perspective of Michel Barnier, the EU’s chief negotiator, this made sense. He regularly told me that he saw the best future relationship as a customs union, and one or two of Theresa May’s negotiating team seemed to agree. He attempted to put as many elements of a customs union as possible into the Agreement, but this effectively gave the impression that the UK was only half-leaving.
So now, for the UK, No Deal would effectively tell the EU: “we are leaving and we want to make our own rules.” For the EU, it would tells eurosceptic political parties in EU countries: “don’t think leaving the EU is easy” – especially those countries for which the EU accounts for much more than 50 per cent of exports.
The UK leaving the EU without a trade deal may be less preferable for many, but it allows both sides to reset the relationship. So would what happen next?
One scenario is that we would negotiate sector-by-sector agreements, as in the EU-Switzerland relationship, while for other sectors we would trade on WTO terms.
Another scenario is that both sides would see the advantages of an EU-UK trade deal and begin negotiations almost as if the UK had never a member of the EU. This mind-set was probably difficult against a background of withdrawal, negotiated by a Prime Minister who didn’t really want to leave, but might becomes easier if No Deal is the result at the end of the year. No Deal would offer a fresh start.