Henry Newman is Director of Open Europe.
Brexit negotiations are stalled. Only one issue matters – the Irish backstop. Despite all the drama and noises off about Chequers, “Norway for now”, and Super Canada, none of that matters if we cannot agree a divorce. And, unless the EU shifts tack, the only path to an orderly divorce is via the backstop. So we are facing down a growing risk of No Deal. No Deal could mean tariffs on trade with our largest partner – the EU. So, the Government should commit now to reduce our overall tariffs in the event of No Deal.
No Deal should be nobody’s preferred option. It would mean significant disruption. Aviation, haulage and transport, citizen’s rights, and many other areas would potentially be affected. Almost by definition it would suggest that relations across the Continent had broken down – the political and strategic effects could be profound.
But there might be little choice if the alternative would mean a backstop which threatens the long-term integrity of the United Kingdom. So what would it mean in economic terms? Open Europe’s analysis, published yesterday, reveals that in the medium term the static macroeconomic effects of No Deal would be material but relatively small. GDP growth would be affected – down an estimated 2.2 per cent by 2030.
Our model considers the cost of tariffs with the EU, as well as costs for customs and other non-tariff barriers. But despite these new costs, we found that No Deal would not be the biggest determinant of our prosperity over that period. Over the medium term up to 2030 the UK economy would continue to grow by around 30 per cent, even in the event of No Deal. Our research is in line with findings by the LSE, PwC and the OBR. Yes, other people have come up with bigger numbers, including the Treasury, but they have thrown in other effects which are much harder to model successfully.
What our research also shows is that the Government could take action to mitigate some of the medium-term effects of No Deal. If we left without a deal, there would be tariffs payable on our trade with the EU under WTO rules. (Britain can’t just choose not to levy tariffs on European trade). But we can change our overall tariff regime. Although our WTO commitments impose a maximum level on tariffs which can be charged with any member state, it’s open to the UK to charge less as long as they do this on a most-favoured nation basis. WTO commitments are a ceiling not a floor.
So in our No Deal report Open Europe looked at the effect of lowering all our tariffs on industrial and manufactured goods to zero (and we phased in reductions on agricultural goods). We then also improved our openness to services trade and foreign investment (we moved the UK to “best in class” levels). These steps – which the UK could do without any negotiation – would dramatically reduce the impact of No Deal. Our model suggests that the macroeconomic effect over the same period up to 2030 would be reduced from a 2.2 per cent to 0.5 per cent drag on growth.
Although the Government has published dozens of technical notices on No Deal, it has failed to clarify its policy on what it would do to tariffs in the event of No Deal. At the Conservative Party conference, the Prime Minister told Sky News’s Faisal Islam that in the event of No Deal WTO tariffs would kick in. Yes, but at what level?
Imposing tariffs on our biggest trading partner would effectively mean the Exchequer collecting more money from tariffs as a result of Brexit. It would be an unnecessary hit to the domestic economy. Even if the Government didn’t want politically to lower goods tariffs to zero they should commit to reducing them. They could apply a principle that there should be no change in revenue collected.
Some will be tempted to see No Deal as the start of a trade war with the EU. However, there’s nothing to be gained from raising tariffs on our biggest trading partner. It would be better to cut our overall tariff rates and to push through further steps to support the domestic economy. Hopefully the UK will be able to agree an orderly withdrawal, and none of this comes to pass. But we can’t guarantee that when the EU has proved so intransigent over Northern Ireland.
Negotiations are totally blocked over the backstop. And much of the attention around that backstop has focused around the requirement for Northern Ireland essentially to remain within a customs union with the EU. To resolve this the Government is reportedly considering a temporary (or is it a non-indefinite?) customs union for the whole UK. But this only resolves part of the issue. The backstop doesn’t just require alignment on customs but also on regulations – in particular regulations on goods.
Even if we could agree a customs union for the whole UK (which is not the right policy for a post-Brexit UK), how could we have different regulations for Northern Ireland, set by Brussels with no ability for citizens living there to shape those rules? That situation would be not just temporary but could last in perpetuity. As this slide from Michel Barnier’s team shows, a customs union would actually solve very little at the border.
With no clear way of resolving the backstop issue, No Deal is seemingly becoming ever more possible. Few in Parliament want to see the Prime Minister walk away from the table. But perhaps even fewer could live with the backstop as Brussels wants it. So it’s past time for the Government to take No Deal seriously and explain the steps they would take to mitigate its effects.