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9 January 2019

No-deal is a dangerous fantasy – it is time for the Brexiteers to come clean

The no-deal Brexiteers are selling snake oil, says Peter Hain.

By Peter Hain

The New Year has seen a succession of hard Brexiteers – from Iain Duncan Smith to Boris Johnson – re-branding their Little Englander fantasies by advocating a “managed no deal”, as if this prospect might be an achievable, let alone desirable outcome.

They assume that, as 29 March approaches, the EU27 will concede their demands for the United Kingdom to benefit from a transition period, without a backstop. This is a dangerous delusion. Michel Barnier and other EU leaders have made it clear that, without a deal, the EU intends to treat the UK as a third country from day one, and that the side-deals the Brexiteers envisage are simply not available.

The joint European Research Group/Global Britain paper, Fact Not Friction airily claims dire warnings about No Deal are mere myths. They say the EU have promised us tariff-free trade, so we can have cake and eat it. 

They cite in their support the President of the European Council, Donald Tusk. But although he has indeed proposed that the parties should “aim for a trade agreement covering all sectors and with zero tariffs on goods”, that was a clear reference to the long-term aspiration of a UK/EU Free Trading Agreement (FTA) under WTO rules, which will inevitably take years to negotiate. 

And as Tusk also made clear, such an agreement “will not make trade between the UK and the EU frictionless or smoother. It will make it more complicated and costly than today, for all of us. This is the essence of Brexit.”  These Brexiteers are simply in denial.

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If we leave the EU without a deal, WTO non-discrimination rules mean the EU will in fact, be obliged to treat the UK as it treats other non-EU WTO members (not, as has been implied, like the remaining 27 EU countries) unless and until an FTA with Europe is in place. 

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As an EU member, the UK currently gains from around 70 additional FTAs with non-EU countries like Japan and Canada which, in a “no deal” Brexit, will also be lost.  Despite attempts by the Department of International Trade to persuade each of these countries to agree a “roll-over” of the UK’s current deals as part of the EU, two-and-a-half years after the Brexit referendum the government has made no real progress in this area. 

For potential foreign inward investment, a prior UK/EU agreement will need to be in place, so that “third countries” will know what EU market access they can achieve via the UK.

The CETA agreement between the EU and Canada, signed in 2017, offers some valuable lessons. Despite being the EU’s deepest FTA yet, covering most goods, it has little to offer on services – which make up 80 per cent of the UK economy and 45 per cent of our exports. It also took over seven years to negotiate and is still not fully in force. 

The EU (with which we have a trade surplus in services) would have no obvious incentive to grant significant openings on services to us in a FTA, not least because, under WTO rules, the EU would then be obliged to make similar offers to other countries with which it already has bi-lateral FTAs. For example, CETA explicitly states that Canada will benefit from any new services concessions by the EU to other third countries. This is therefore a major disincentive for the EU to make a preferential deal with us.

Even under a CETA-type deal, to minimise the friction of trading with the EU single market, the UK would need to maintain European regulations in all the relevant sectors (as, for example, do EEA members Norway and Iceland). We would need to replace over 30 EU regulatory bodies and arrange legally workable memorandums of understanding between them and their EU counterparts – a process which, again, would take years, and yet the No-Deal Brexiteers press along merrily regardless.

The European Commission’s own package of 14 “contingency measures” (which are allowed by the WTO) in the event of “no deal”, specifically warns of delays to the transport of goods.  This is because of the need for checks on all UK livestock exports and the application of customs duties and taxes on goods moving between the UK and EU. 

Despite these temporary, minimalist EU measures, relating for example to financial services, aviation and haulage, these and other sectors such as pharmaceuticals, food and drink, data flows and the car industry, to name but a few, would still face significant disruption and legal uncertainty. 

This would have severe implications for competitiveness, GDP, trade and foreign investment in the UK, as forecast by the Treasury, the OECD and the CBI.  Tragically, Brexit-related trade shocks will most adversely affect Leave-voting regions, and especially those areas whose advanced manufacturing activities are operating “just-in-time” systems.

Brexiteers also claim that the UK already trades with non-EU members on WTO terms alone.  On the contrary, because of its membership of the EU, the UK benefits from numerous side agreements with countries like the US and China, that go well beyond WTO provisions.  In fact, no EU member trades on WTO terms only – all have at least one bilateral or regional trade agreement with other countries – especially their nearest neighbours.

If the UK leaves the EU with no deal on 29th March, therefore, only WTO terms will apply.  This will mean for example a hard border between Northern Ireland and the Republic of Ireland with all the political risks that implies. 

The UK will also lose the leverage of the EU bloc (the richest, biggest in the world) and will be weaker, not stronger, in future global trade negotiations.  From being a leading member of the EU, a diminished UK will then face the unenviable choice of becoming a satellite state of Donald Trump’s “America First” United States or the repressive and expansionist dictatorship of China.

The consequences for citizens, consumers and businesses will be nothing short of catastrophic.  In some Leave-voting areas, lives will be blighted for generations.  The No Deal Brexiteers should come clean and stop peddling myths that all will be fine.  It will not.