Dr Sheila Lawlor is a Director at Politeia, where she directs the economic, education, constitutional, and social policy programmes.
The Lords’ amendments to the EU Withdrawal Bill on which the Commons is voting this week are based on a false premise.
They assume that if Britain leaves the EU without replicating the Customs Union or does so without a ‘deal’, UK trade with the bloc and so its economy would suffer.
In fact, not only could UK-EU trade continue painlessly and with profit to both sides (either under current international trade law without an EU customs union, other arrangements, or association through the EEA) but a ‘no deal’ could also bring the economy a much needed Brexit boost as it reboots after March 2019.
Already the rules are in place for friction free UK trade with the EU. The WTO prohibits members from any discriminatory barriers or action against countries with regulatory convergence. As the UK is keeping its conformity assessment and testing procedures, conditions will remain the same after it leaves the EU.
More generally, most of the world’s trade (around 96 per cent) happens under the WTO umbrella with rules that require trade partners to offer most favoured nation (MFN) terms, oblige members to facilitate trade and customs arrangements, and simplify those for land borders.
The Lords’ amendments are therefore unnecessary. Instead of trying to obstruct the referendum decision, peers should brush up on basic international trade law – or drop in to the European Scrutiny Committee later this month to have a crash course from Professor David Collins, whose updated Negotiating Brexit: The Legal Basis for EU & Global Trade, explaining these basics, will be published around the same time.
Similarly, a ‘no deal’ scenario is not the economic dead end implied by another Lords’ amendment intended to avert the prospect. In fact Britain’s economy would be boosted by keeping the c.£40bn payment now on the table to pay for an EU-UK free trade deal. If the UK left the EU without a deal in March 2019, being enriched by £40bn would bring a significant economic boost.
That’s the conclusion of David B. Smith’s new analysis, published by Politeia: The Brexit Settlement and UK Taxes. Smith’s economic modelling reveals that were Britain to keep the £40bn in its own economy in the years after 2019, that boost would follow irrespective of whether the Chancellor decided to save the money or use it for tax cuts.
Though Smith, an academically-inclined former City economist who later taught in the University of Derby, refuses to stray into the political debate, these conclusions have a clear message for ministers. Instead of locking themselves into the mindset that a deal, no matter how bad or whatever the cost, is a must, that £40bn could be used in the UK economy.
Smith’s model explains what would happen in three likely £40bn scenarios, where the UK Chancellor:
- Keeps the money in savings
- Uses it for income tax cuts
- Uses it for VAT cuts
He shows that for each of these there would be good results for the UK on a number of counts. For instance, £40bn kept here and not paid to the EU would bring a real terms boost to UK GDP (by up to 1.4 per cent), its household consumption (by up to 3.5 per cent), and its private investment (by up to 3.6 per cent).
Meanwhile, the unemployment rate would fall (by up to 0.8 per cent), as would public sector borrowing (by one per cent). Given that enhanced micro-economic flexibility after Brexit is urgent, the first step could be to boost the wealth-creating private sector, particularly in those regions where government expenditure accounts for one half to three quarters of regional GDP.
The UK is no humble supplicant, but the world’s fifth-largest economy. Its future can be organised without going cap in hand for a deal to the EU and paying tens of billions for the privilege.
No such payment is obliged in law, and though politically it might be seen as oiling future relations with the bloc and show Britain to be a ‘good neighbour’ it could promote GDP growth and the wealth-creating sector, especially in parts of the country which rely on high levels of government spending. One doesn’t need to be a Nobel Prize winner to see that the £40bn cash bonus of a ‘no deal’ Brexit would give the UK economy a significant and quantifiable boost.