1 April 2019
What’s so bad about No Deal?

by George Freeman

No-Deal is not a destination: it is a failure to reach a destination. And it would be perceived rightly – by our international partners and investors - as a signal failure of sense, statesmanship, and strategy. We would drop overnight into the margins of the world’s trading system. We would have left all the fundamental questions, about our future, unresolved and uncertain. And our reputation, prosperity and influence would be damaged for no benefit. A sensible Brexit deal, by contrast, would not only avoid the mess of no-deal. It would provide a constructive and predictable environment for our businesses, for government, and international trade - from which Britain can grow its influence and standing in the world.

  1. No-deal is not a destination – it is a holding place for negotiating future deals with Europe, or the US, or Japan, over some years, which would then need to be approved by Parliament.
  1. There is no transition under no-deal. We literally crash out on April 12th with nothing in place – with the Irish border issues, our payments to the EU, and citizens’ rights unresolved – and our entire web of relationships with the EU severed. All these things instead of being resolved are left suspended and unknown. All the arrangements business have carefully worked with Government to minimise disruption of trade would be abandoned.
  1. No-deal knocks us out of 83 existing trade deals overnight. All our current relationships with the EU and all the 83 EU customs partners (including Japan and Canada) would cease to be operable overnight and we would be forced to revert to the basic ‘schedules’ of the WTO defining tariffs and quotas
  1. WTO: These are by definition the highest tariff possible in every country on every good. Free trade agreements, such as the EU Customs Union exist precisely in order to secure more favourable terms than the WTO. (For example, cars and milk which are zero-tariff in our current EU arrangements would be under the WTO schedule 10 per cent for cars and more than 35 per cent for dairy products). Jacob Rees-Mogg has suggested that we could somehow rely on one of the WTO articles –  GATT 24, to give us tariff free access to Europe for ten years. Trade experts are unanimous that this is nonsense – inapplicable, unacceptable to the EU, and unenforceable
  1. And no-deal would still leave us with the same divisions in public and parliament – making it very difficult to get out of no-deal/WTO and make any future trade deal
  1. USA: The key US demand will be to accept their agricultural products and standards.  Would we want our farmers stuck between cheaper goods coming in from the US, and the tariffs of over 40 per cent that Europe would be forced to put up to protect their own farmers?
  1. India: Would we accept India’s demand in the last India-EU trade round that a trade deal is conditional on granting hundreds of thousands of visas to Indian citizens every year
  1. Europe: Negotiations with Europe – our largest trading partner – are likely to be even more difficult than they have been for the last two and a half years because they will be resentful about our messy and economically damaging departure and negotiating bitterly about the 39 Billion pound bill.
  1. External tariffs: Should we prioritise our motor industry (which employs 850,000 people and is entirely dependent on frictionless trade with Europe), or accept a negative impact on the car industry into order to secure free external tariffs?
  1. Our inability to answer those questions now suggests that no-deal may last far longer and be far messier than we like to think. And we will be negotiating from a weaker economic position than now.
  1. Every economist (the Bank of England, the OECD, the LSE, the Treasury etc etc) is confident the impact would be negative but they cannot put a precise number on this, because so much would depend on market and government reaction. If investors and consumers are confident that we know what we are doing, and have a clear vision for exactly what deals will follow no-deal, they could make a difficult situation better; whereas if they withhold investment and spending, while they wait and see, they could make a difficult situation much worse. Governments can also make this better and worse.) But we do know that in a no-deal Brexit:
  1. Key sectors will suffer significantly from tariffs – including the automobile industry and agricultural exports which have grown, protected by high tariff barriers from non-European competition while exporting tariff-free to Europe. No-deal also creates severe problems for international lawyers, accountants, architects, doctors and nurses. Passporting would end for the City – forcing them to establish EU branches to trade in the EU.

Food, Farming and the rural economy

  1. The pleas from the National Farmers Unions of England, Scotland, Wales and N Ireland could not be clearer.  With No Deal, we face a possible trade embargo on the export of UK animal-based products such as meat, eggs and dairy to the EU, and under WTO a flood of cheap food produced at hugely lower cost and welfare standards, that would hammer UK growers.  
  1. The UK sheep sector would be especially seriously hit. In 2017, we exported 31% of domestic sheep meat production – the equivalent of 4.5 million sheep!  94% of this goes to the EU. No wonder DEFRA is keeping the much-rumoured plan to slaughter 10 million lambs under lock and key.
  1.  NoDeal Brexit on WTO rules is likely to trigger export tariffs imposed on the food, feed and drink that go to the EU. That means export tariffs of 27% on chicken, 46% on lamb, 65% on beef, and range from €172 to €1,494 per tonne in pork. This isn’t a marginal change. This would render many UK farming and food businesses totally unviable. 
  1. That’s not all. Whilst the mutual interests of JLR, BMW and other automotive giants will probably mitigate the short term impact on the automative sector, the risk of internal domestic political pressure in France and Germany and the Benelux countries of a trade war in food and agricultural products is very high, with trade barriers going up between the UK and EU, exports of organic products to the EU being severely curtailed, and sudden labour shortages and/or cost increases resulting from the end of our free movement rules without an alternative arrangement. 
     
  2. Who would suffer the most? Not the big landowners who receive the EU payments and have the value of their land to fall back on.  Or the supermarkets with pan European businesses. No. It’ll be the small UK farms and small businesses: the tenant farmers, contract farmers and small family farms who will be clobbered, in both upland and lowland areas. And the commercial food and farming businesses running on tiny margins supplying ultra competitive supermarkets.  
  1. Delays at the European borders are inevitable – not least because companies and customs officers will be new to the paperwork, (Rod McKenzie, head of public affairs at the Road Haulage Association, said: “In no way are we ready for a no-deal Brexit.”) Friction at the border will seriously undermine automobile just-in-time supply chains (some of their automobile parts cross the channel multiple times in the course of making a car), and of course disrupt supplies of fresh food from Europe.

Macro-economics

  1. For these and many other issues, the situation would be ‘by clear orders of magnitude materially worse for Britain’s economic outlook’ than the bank of England’s current forecasts. We should expect:
    1. a sharp fall in output (particularly in the manufactured goods sector),
    2. a sharp fall in employment,
    3. a sharp fall in exports
    4. a sharp increase in prices (particularly in food)
  1. All of this is likely to contribute to a fall in the value of the pound, uncertainties over interest rates, a drop in household incomes, a reduction in government revenue and a rapid increase in deficit and debt. Estimates put the economic impact somewhere in the region of the impact of the 2008 financial crash. The consequences for the economies of Northern Ireland will be much worse. (In Ireland, the no-deal scenario would see us erect no tariffs against the EU, while the EU erect its tariffs against us – meaning that UK businesses could pay the standard EU tariff of over 40 per cent exporting cheese or lamb to the Republic, and they would pay nothing exporting to the UK).

Security and Ireland

  1. The hard border which would follow in Ireland would be a fundamental challenge to the principle of the Good Friday Agreement, which based the agreement on the absence of a border. We would lose access to all EU law enforcement and criminal justice tools – increasing pressure on UK security and law enforcement.

Conclusion

  1. No-deal is not the answer to anything – it is simply another way of kicking the can down the road but into a much more fragile economic situation. We would face more years of debts and austerity, undermine Britain’s reputation for competence and reliability, and take us no further forward in defining any future relationships with the EU or anyone else. It is eminently avoidable through getting a Withdrawal Agreement and a clear future relationship agreed.
  1. But for me the real dangers are political.  Whilst the level of frustration at all the broken promises on the side of the bus and in all the silly speeches and ill advised red lines is politically damaging, I fear this would be as nothing when compared to the deep damage that a “Tory Crash Brexit” would do to the Conservative Party’s historic reputation for economic and administrative competence, would become our “Black Friday” - the day that over half the country - the 48%, people in business, the professions and public services, moderate Leave voters and a whole new generation of young voters would forever remember as the day we put Party ideology before the national interest. 
  1. I fear a Crash Brexit would be the equivalent of the Bank Crash on Labours watch in 2008: another nail in the coffin of the Conservative Party’s reputation as the natural Party of Government, and another step towards making a dangerously ideological Labour front bench, led by Jeremy Corbyn, and John McDonnell, an avowed Marxist, look like a credible party of moderate pro- business Brexit.
  1. For all these reasons I think we would be better embracing a moderate Brexit Plan B based on our joining the European Free Trade Area (EFTA) “Common Market 2.0” which would end the Leave v Remain civil war, deliver an orderly and responsible Brexit, and allow us to move on to focus on our future relationship with the EU, the global trade deals and urgent domestic reforms we need to be implementing to make us “match fit” for a post-Brexit world, and to tackle the legitimate underlying grievances of Leave voters, which are largely domestic policy reforms.

Appendix: Key Facts

The car industry

  • According to SMMT, a single car consists of around 30,000 parts, crossing the Channel multiple times. The industry would face an up to £1.5 billion in export costs annually.[i]
  • Under no-deal cars imported from Europe would cost about 1,500 pounds more for a typical family car.
  • MINI are exploring transferring their production to the EU in the event of a no-deal.

Agrifood

  • 90% of our lettuces, 80% of our tomatoes and 70% of our soft fruit is sourced from the EU.[ii]
  • In Wales, 90% of lamb exports are to the EU. In the face of a no-deal all this product would face an EU tariff of over 40 per cent - devastating farming communities. [iii]
  • In Northern Ireland, Strathroy Dairy Ltd in Omagh, employs 220 people with a turnover of £80m. The family-owned company has a fleet of trucks that crosses the border dozens of times a day. The milk will be subject to a 30% WTO dairy tariff. Ruairi Cunningham, MD said, “no way we could absorb that. It’d be lights out.”[iv]
  • The National Farmers’ Union Scotland said, “The default of trading with the EU under WTO rules alone is unacceptable and would decimate our industry.”[v]
  • The Scotch Whisky Association said, “A no-deal Brexit would cause the Scotch Whisky industry considerable difficulties and would force cost and complexity into production, distribution and exporting.”[vi]

Chemicals

  • 63% of companies in the Chemicals sector export what they make to the world, the highest proportion of any goods manufacturing sector in the UK economy. 60% of the exports go to the EU and 75% of our imports and raw materials come from the EU. [vii]The Chemical Industries Association estimated the cost of regulatory changes to the UK and EU chemical industry would be roughly £450 million

Services

  • Services accounting for 80% of our economy and 45% of our exports. WTO rules would not provide the legal basis to export services including financial services and broadcasting to the EU

Aerospace

  • The UK aerospace industry is the second-largest aerospace industry in the world, and is a world-leader in aerospace technology. ADS has estimated that increased checks at the future UK-EU border could add £1.5bn a year to costs for the UK’s aerospace sector. The Airbus factory in North Wales would be at risk.

Macro

  • No Deal would lead to significant reductions of GDP:  The Government’s long-term economic analysis estimates that a No Deal scenario (trading on WTO terms and including new trade deals and the continuation of existing trade deals with no change to EEA migration) would reduce long-run GDP by 6.3% to 9.0% compared to today’s arrangements.
  • In No Deal, the Bank of England’s EU withdrawal scenarios report projects that the UK unemployment rate would peak at 5.75% to 7.5% in 2020. 
  • Inflation could rise to a peak of between 4.25% and 6.5% by 2020.
  • In the Bank of England’s short-term EU withdrawal scenarios report, disorderly no deal exit is projected to increase the cost of government borrowing by one percentage point in the short term (2018-2023).
  • This would cost £7 billion in additional debt interest costs between FY 18/19 and 21/22 according to the OBR’s tax and spend ready reckoner.  This is equivalent to 4.6% of government spend on healthcare in the UK in 2016 (the latest year for which data is available)
  • In no deal, the Government’s long-term economic analysis (over a 15 yr period) estimates government borrowing to be 2.4 to 3.2 of GDP per cent higher, with additional debt interest costs of £12.8 to 16.9 billion over the long-term period of the estimate.

 

[i] CBI, ‘Top 5 consequences of "no deal" Brexit’, link.

[ii] British Retail Consortium, 28 January 2019, link. 

[iii] “No-deal Brexit would stop British farming exports for six months”, link.

[iv] Guardian, 22 January 2019, link. 

[v] NFU online, 20 November, 2018, link. 

[vi] Scotch Whisky Association, 15 November 2018, link.

[vii] CIA, ‘UK and EU chemical industry welcome draft Brexit agreement’, link