No need to fear the Turnip Bogle. Putting some flesh on a ‘Bare Bones’ Brexit.
David Davis is due to brief the Cabinet soon on the implications of a ‘no deal’ Brexit – perhaps on Halloween itself. But we should not be too scared.
Discussions about the prospect of ‘no deal’ frequently generate more heat than light. Often, this is because the participants are not talking about the same thing.
At one extreme, some people interpret ‘no deal’ to mean an outcome where the UK leaves the EU in 2019 without any agreement on the future relationship. In addition to dropping out of the Single Market and Customs Union, this implies the end of cooperation in a wide range of other areas, including aviation, trade in medical isotopes, and security. Planes wouldn’t fly, cancer patients would be denied drugs, and terrorists would find their ghastly work even easier.
This is the basis of the ‘chaotic’ or ‘cliff-edge’ Brexit dreaded by many. However, no-one is seriously claiming that this outcome would be desirable, nor, I will argue, is it remotely likely. In reality, it is a straw man which takes ‘Project Fear’ to a whole new level.
An alternative vision of ‘no deal’ would involve quitting the Single Market and Customs Union in 2019, but still allow for ongoing cooperation in areas which do not require EU membership. This has been called ‘no deal plus’, or, perhaps more appropriately for Halloween, a ‘bare bones’ Brexit.
Leaving the Single Market and the Customs Union would simply put the UK in the same position as the US or China, which both trade extensively with the EU under WTO rules. The EU would presumably impose tariffs on goods it imports from the UK. But these are likely to average out at around 5%, which would not be a game-changer, especially given the offsetting boost to competitiveness from a weaker pound.
UK exports to the EU would also face enhanced customs checks. These non-tariff barriers could be more costly, especially if they disrupt vital supply chains. Fortunately, both sides would have a strong economic interest in keeping trade running smoothly. The UK would need to invest more in its own customs infrastructure, but even a billion pounds here would be money well spent.
For its part, the UK could choose between imposing new tariffs on imports from the EU, or removing existing tariffs on imports from the rest of the world, or some mix of the two. Removing tariffs would be preferable and put the interests of consumers first.
The Resolution Foundation has helpfully crunched the numbers and estimated that the average UK household would be £260 a year worse off if the UK imposed tariffs on all imports from the EU, but £130 better off if the UK abolished tariffs across the board. Some argue that the former would be a ‘price worth paying’ to protect UK producers and maximise leverage in future trade negotiations. For me, though, the zero-tariff option is obviously the best.
A clean break in 2019 would also allow the UK to crack on with its own trade deals with the rest of the world, start to roll back EU regulations, and save straightaway on contributions to the EU budget.
There could be some tricks among the treats, especially in areas, including financial services and aviation, which are not covered by WTO rules. But the UK and the EU could simply agree to continue the current arrangements. This is not as fanciful as it might sound, for four main reasons.
First, the UK and EU would not be starting from scratch. Pessimists often point out that it takes the EU many years to conclude an agreement with a third country even on relatively straightforward issues, such as landing rights or mutual recognition of regulations. However, in most cases here it would simply be a question of agreeing that the existing arrangements are satisfactory and that they should be continued, with whatever technical tweaks are necessary following Brexit.
Second, the EU already cooperates closely with many countries that are not even in Europe. Just look at the overseas participants in programmes run by the EU nuclear agency, Euratom, or the wide variety of airlines from all over the world that somehow manage to fly to Paris or Frankfurt. Crucially, these arrangements are not dependent on EU membership.
Third, both sides will have a strong vested interest in making this all work. As it happens, Article 8 of the EU Treaty actually requires the Union to ‘develop a special relationship with neighbouring countries’ and encourages it to ‘conclude specific agreements with the countries concerned … which may contain reciprocal rights and obligations as well as the possibility of undertaking activities jointly’. Whatever the legal position, it is hard to see why the UK and the EU would not want to minimise disruption.
Take the supply of medical isotopes. Realistically the UK will have to rely on supplies from Belgium, France and the Netherlands for the foreseeable future. In principle, Euratom could block this trade once the UK leaves the EU. But does anyone believe for a single moment that this would actually happen? Similarly, would EU politicians be willing to forego the rights of their airlines to fly to the UK as some sort of punishment for Brexit?
Fourth, there are some crucial areas where a formal deal may not actually be necessary. In particular, the UK could simply implement its proposals on citizens’ rights unilaterally. This would put the onus on the EU to reciprocate, but why on earth wouldn’t they? Again, what would the alternative say about our European partners?
To be clear, the practical obstacles to implementing even a ‘bare bones’ Brexit in time for 2019 would be substantial. There is still a strong case for some form of (time-limited) transitional arrangements. What is more, moving to a comprehensive free trade deal with the EU at the end of this transition period may well be preferable to relying on WTO rules alone.
A two-year extension after March 2019, as suggested by the Prime Minister in her Florence speech, would give the UK and the EU nearly three and half years from now to work out the details. Measured against this alternative, a ‘bare bones’ Brexit could be relatively risky.
But we need not fear sleep-walking into a nightmare if the talks are still bogged down at Christmas. Announcing then that the UK is leaving both the Single Market and Customs Union in 2019 would at least give businesses the certainty they crave. It would also avoid the scenario where a ‘transition’ period mysteriously becomes ‘permanent’. Talks with the EU could refocus on continued cooperation in the remaining areas of common interest. Above all, the UK could finally prepare to make the most of the opportunities presented by Brexit.
Julian Jessop is Chief Economist at the Institute of Economic Affairs. The views expressed here are not necessarily those of the IEA, but might be.