The Chequers deal is deeply flawed on both economic as well as political grounds – a “no deal” Brexit would be a far preferable solution, argues Ruth Lea. In her opinion, a Chequers-style deal would be economically sub-optimal, tying the UK to the EU’s rulebook, but without any influence. On the contrary, in the event of a “no deal” Brexit, trading under the WTO rules could give a major competitiveness boost to the British economy, providing liberalising, outward-looking policies were to be pursued. It is the forward-looking, global option, whereas Chequers would de facto keep us tied to the EU’s relatively slow-growing and saturated markets, she concludes.
The current state of the UK-EU negotiations on the Withdrawal Agreement and the framework for the future UK-EU relationship (including trade and security) seems to be shrouded in mystery. One day we are informed that a bespoke “deal” is highly probable, the next day we are informed that some of the Chequers proposals are totally unacceptable to the EU – thus seemingly undermining the possibility of a deal. But, I suspect, this is all carefully choreographed verbal “chaff” designed to confuse and intended to persuade us that the negotiations are (will be) tough and hard fought. And, lo and behold, at the eleventh hour there will be an agreement of sorts, with both sides claiming victory. Such is the nature of these negotiations.
Yes, I do believe that there is a high probability that will be some UK-EU agreement, some negotiated “deal”. Moreover, it will be loosely based on the Prime Minister’s Chequers proposals and the subsequent Government White Paper (see also here). (Incidentally, I now take the view that switching negotiations to a Canada-style outcome is now politically too late, though it cannot be ruled out entirely.) But, to put it kindly, such a Chequers-style deal would be economically sub-optimal, tying us to the EU’s rulebook, but without any influence. The scope for regulatory reform would be severely curtailed and the scope for negotiating free trade agreements with third countries would be significantly restricted. On economic as well as political grounds, I believe it is a poor outcome.
Would, however, this “deal” survive the Commons’ “meaningful vote”, the next step in the proceedings? At this point, it could be dealt a final, fatal blow. If the Labour party vote against it, as reported recently, then, combined with anti-Chequers Conservatives, the deal could indeed fail. At this point, the Government would, presumably, fall back on their Plan B, in other words leaving the EU without a trade deal (“no deal”) and trading under WTO rules. This backstop does not, apparently, require a vote in the Commons. Moreover, the Government has been preparing us for such an eventuality with a selection of “no deal” preparation papers, even though they continue to insist a “deal” is the most likely outcome.
By way of a slight digression, the problems with the Irish border issue seem to be perfectly solvable, even under a “no deal” scenario. In evidence to a Select Committee, Jon Thompson, Chief Executive of HMRC, stated “…we do not believe we require any infrastructure at the border between Northern Ireland and Ireland under any circumstances.” The border issue would be perfectly manageable, give current technology and cross-border cooperation.
Image credit: public domain.
What would the economic consequences of a “no deal” Brexit? For a start, I simply do not buy Whitehall’s recent projections, as outlined in the Chancellor’s letter of 23 August 2018 to Treasury Select Committee chairman Nicky Morgan, suggesting that GDP growth would be severely impaired. This is a prime example of “Project Fear Mark 2” and is likely to be as fundamentally flawed as the Treasury’s “Project Fear Mark 1” prior to the 2016 referendum. It is worth remembering that the Treasury told us back in May 2016 that a Brexit vote would send the economy into recession and increase unemployment by 500,000. Suffice to say, it did not happen.
On the contrary, trading under the WTO’s rules-based trading regime, which is comprehensive, tried and tested, and respected by the world’s trading nations, could give a major competitiveness boost to the economy, providing liberalising, outward-looking policies were to be pursued. It is not some dreadful “leap into the dark” and would clearly be preferable to a shackling Chequers-style agreement. This “no deal” WTO option would provide complete freedom for regulatory reform and trade negotiations with the fast-growing and favourably-inclined countries across the globe. It is the forward-looking, global option, whereas Chequers would de facto keep us tied to the EU’s relatively slow-growing and saturated markets. Note, moreover, the UK already conducts over 55% of its exports trade with non-EU members, primarily under WTO rules. Moreover, this non-EU trade is growing far quicker than trade with the EU.
This article gives the views of the author, and not the position of LSE Brexit, nor of the London School of Economics.
Ruth Lea CBE is Economic Adviser at the Arbuthnot Banking Group.
I agree with you.
Just to add. The penalties for transgressing the rules of the Irish border should be more severe than at present
and be more swiftly dealt with .NI/Eire residents frequently crossing could have permanent ID,s as should we. People crossing our borders should in future have prior permission eg visas similar to that of many other countries. We need to control movement in order to protect our British Isles. We have the technology our leaders seem to lack the will to do it. The price of Peace and Harmony.
This is little more than propaganda with almost nothing offered as evidence. The paragraph on the Irish border is typical. There is no need to have any infrastructure on the border because there is no need. QED. What is more, an important person told a Select committee that he believes this to be true, so it must be true.
The credibility of the LSE blog as an academic resource isn’t served well by allowing articles which are simply a list of assertions. If Ms Lea wants to use this blog to serve her own political agenda, she should at least be required to make coherent arguments and to provide some kind of supporting evidence for her views.
“What is more, an important person told a Select committee that he believes this to be true, so it must be true.”
Surely, you are not saying that Gove was right to suggest that we should be sceptical of experts?
I cannot see why Brexiteers are so fixated by a “no deal”.
The series of “no deal” preparation papers currently being released by the government show what a bureaucratic nightmare it would be.
Parliament would have to pass a large series of emergency bills in the period from January to March to adjust the UK legal system.
There is no guarantee about the carrying over of existing EU trade agreements at the WTO. International trade would undoubtedly become more bureaucratic, with documentation now required for imports and exports to the remaining EU27. There will now be tariffs for inter-EU trade. The UK will now be negotiating trade deals on it’s own, up against 163 experienced other WTO members.
UK citizens would immediately lose their citizen rights as members of the EU, to live, work, travel and study freely in the EU. Non-UK EU citizens living in the UK would feel abandoned. So too would UK citizens living in the other countries of the EU.
I could go on, but you get the general picture.
I wrote this in a rush to give an overview of the consequences of a “no deal ” Brexit.
I forgot to mention another important point. A “no deal” Brexit would of course turbo-charge the cases for a) a united Ireland b) an independent Scotland.
I just can’t understand what a frictionless NI border which stops smuggling would look like. As a simple non-expert it looks to me that the UK is about as likely to succeed in getting this to work in any reasonable time as it is to conclude a Free Trade deal with Narnia.
goes through some of the options. Nobody in the comments section there has any suggestions. Does anyone here?
Smuggling only occurs when there are price differentials. When Brown put up the prices of ciggies significantly in the budget, so that they were much dearer than on the continent, massive smuggling started cross channel. The south east of England was awash with smuggled ciggies.
You want to stop smuggling in NI/Ireland normalised the prices of the most smuggled goods.
“Smuggling only occurs when there are price differentials” In a sense this is true, but avoiding all “price differentials” means having the same policy in lots of areas as the EU, including trade. Suppose for example the UK post Brexit has a free trade deal with the EU and another free trade deal with China, but the EU has no free trade deal with China. So the EU will want to stop goods coming from China via Northern Ireland without paying tarifs. Now imagine two lorries approaching the Northern Ireland border from the UK side. One contains goods made in Birmingham, the other goods made in Beijing. How are the Irish going to know which lorry to stop, and how are they going to do that without any infrastructure?
Electronic customs manifests as are used for all third country trade into the EU. We have had a big debate about rules of origin, this is because they have to be stated on the manifest.
It is a trust based system now, i.e the customs authorities trust the people that submit the forms to be honest.
In case of wanting to inspect goods between NI and Ireland because they believe they are not correct that inspect the goods at the point after the border by sending the driver a text message to go to that place.
What do you do to discourage people from opting out of the system by not registering in the first place? Are there any existing examples of frictionless borders between the EU+EFTA and other countries, apart from very small ones like Vatican City?
I think the Irish would have to have border checks because the EU demand them. Maybe, because they want free flow of goods the Irish will disobey the EU regulations. That is for them to sort out with the EU. The UK would expect them to check our own goods anyway they wish.I certainly would expect them to do so.
From the British point of view we could make the law so tough ( removal of Human Rights etc) for breaking our regulations that anyone caught would be in fear of their freedom or more than just their freedom. If they know the penalty beforehand, let them try. With Freedom of movement comes a price.
Would my suggestion be a problem
Ian, I think stopping 1 lorry out of 1000 and then hanging the driver in chains by the wayside if any contraband were found might indeed have some deterrent effect on smugglers. I think it would also have deterrent effect on everyone else, who would not want to cross the border without first personally controlling that nobody has stashed something under the lorry. This would be even worse than normal border guards.
You have a valid point, but. I only mentioned Human Rights It seems NI/Eire want their cake to keep and eat at UK expense. The Good Friday Agreement will not be fit for purpose and is flawed in that it does not allow for change. All parties to it were in error in this respect. Ancestors cannot be bound by the past unless they agree.
However,consistent smuggling into NI by EU citizens would mean we could not trust the EU who cannot control them. Giving us cause to say the border arrangement is not fit for purpose and the EU was not honoring its obligations to GB and the DUP. This situation would be very similar to what is happening at other border connections with the EU at the moment. Would you trust this situation not to happen without some form of punishment? What should we do to smugglers when they are found out? What should be done about the soon to be out of date GFA? Perhaps we should ask the two main beneficiaries.
I certainly agree that smugglers, if caught, should be punished. But how do you catch them? It’s not the EU’s fault that they can’t do magic. The only way to control a border is to control it. And I don’t see how a border can be controlled with current technology except with checkpoints and people manning them.
Of couirse it’s quite possible to argue that the benefits of cutting the UK loose from any compatibility with the EU’s market will outweigh the inconveniences of the NI border. After many Canadians and US citizens live close to the border. They cope with it and there doesn’t seem to be great demand to solve this by getting Canada to join the United States. But I see no reason to believe that you can cut the UK loose and keep the NI border as it is.
Introduction of new tariffs will be the least of our problems if the appalling decision to leave with “no deal” is made. Ruth Lea has been around in senior economic posts for long enough to know the degree to which major UK companies have over the years organised their activities on a European basis, often passing goods and components to and fro across borders on a “just in time” basis. Also the renaissance of the formerly moribund motor vehicle manufacture industry in the UK only occurred because the burgeoning far eastern manufacturers wanted a base for their European activities and (to the credit of locations like Sunderland) chose the UK. As the Japanese PM said just before the 2016 referendum “Many of the Japanese companies set up their operations in the UK precisely because the UK is a gateway to the EU. A vote to leave would make UK less attractive as a destination for Japanese investment.”
If Ruth Lea wants to set out her real philosophy she should follow the path trodden by her guru Professor Patrick Minford who has said these things –
“Over time, if we left the EU, it seems likely that we would mostly eliminate manufacturing, leaving mainly industries such as design, marketing and hi-tech. But this shouldn’t scare us.
“Around half of young adults now go to university, ending up in professions such as finance or law, while the making of things such as car parts or carpentry has hugely shrunk — but there will always be jobs for people without sophisticated skills.
“Of course leaving the EU will be difficult, and something that needs careful negotiation, but we must completely withdraw to gain these benefits.”
“It is perfectly true that if you remove protection of the sort that has been given particularly to the car industry and other manufacturing industries inside the protective wall, you will have a change in the situation facing that industry, and you are going to have to run it down. It will be in your interests to do it, just as in the same way we ran down the coal and steel industries. These things happen as evolution takes place in your economy.”
Brexit would allow the UK to join the global market as a free trading nation,able to buy goods from across the world — and at cheaper world prices, too.”
At least Prof.Minford is setting out his honest views!
I agree with “lisbon” some way back in this thread – this tendentious piece of propaganda has no place in what is intended to be a series of academic studies.
As with other of Ruth Lea’s articles, this one is high on rhetoric and low on content.
(1) Why does she think the forecasts of HM Treasury and most economists are wrong? It is not enough to say that she does not buy them. We know why Economists for Brexit come up with different answers to most others. They use a different model, one that ignores distance and quality. Is that the basis of Ruth Leas’s dissent?
(2) what are the “liberalising, outward-looking policies” which are to be pursued? Is there a consensus for them? By now, Leave campaigners should have a list of all the EU laws they wish to get rid of and all the UK laws that we were not allowed to pass but that can be passed after Brexit. Occasionally some entries on the list are let slip – to general horror as an attack on workers/ women’s/ environmental rights. So what is on Ruth Lea’s list?
(3) Why would the UK be able to sign a beneficial trade deal with 3rd countries when the EU has not? It is said that the EU deal with India was scuppered because the Indians are anyway not keen on trade deals but what would have tempted them was more UK visas – rejected by the UK. If that is an accurate description then why would the UK have more success in signing a trade deal with India after Brexit?
(4) why does the UK need to leave the EU to trade effectively with 3d countries, when Germany exports far more than we do to China & India from within the EU? That should tell us that it is not EU membership that is the problem, but something about domestic economic and social structures.
There have been sufficient robust research and analyses that clearly demonstrate that the WTO framework is considerably sub-optimal for Britain and be subject to rules of origin and the fact that fair terms have to be offered to all trade partners in an equal manner that does not discriminate any. The EU FTAs negotiated and those in the negotiation process already conform to the WTO framework as a minimum, while being improved upon.
It should also be noted that with a No-Deal situation, the transition agreement, upon which many industries had set the exit strategies, will not be there – this is why we will not have to pay the £39 billion. That 39 billion gave use a transition. The international market reaction – which is a barometer to what out potential partners see us as – will result in the abrupt fall in the value of sterling. Indeed the pattern ince after the Referendum is very much the pattern in the Sept 1992 Black Wednesday. Additionally the current shape of our yield curve also supports this view.
It has now become even clearer that the UK Brexit negotiating strategy is:
1. An incorrect belief that it is in a strong position even when the total UK exports to the EU represents 8% of total exports to the EU and this includes cars from the EU being assembled and finished in the UK before being sent back. YTD: UK exports to EU increased by 44%, UK imports from the EU increased by 53% amid the lower value of sterling against the euro. Germany exports 4x more than UK to China in spite of having the same restrictions. It has forgotten that the UK was the ‘sick-man of Europe’ until after it joined the EU. It would not have a car industry or sophisticated pharmaceutical industry without the EU and the banking industry, which is about 8% of GDP and offsets the average annual trade deficit from goods of £110bn with a net trade surplus of about £60bn.
2. Attempting a ‘divide-and-conquer’ tactic not appreciating that the EU negotiates to have the most optimal deal for all members and not one or a few – see Prisoners Dilemma and Cournot-Nash Equilibrium.
3. A lack of understanding of the Cournot-Nash Equilibrium (CNE): The UK argument for its position that it will achieve better results outside of the EU is centred on the basis that with the CNE that price will not in most cases equal marginal costs (see costs) and Pareto efficiency (when it is impossible to make one party better off without making someone worse off) is not achieved. However, the UK forgets that while Pareto Optimality is an efficiency concept where no state will be Pareto Optimal if, at least one of the players can get more payoff without decreasing the payoff of any other player, the Nash Equilibrium is a situation state where any player does not want to deviate from the strategy she is playing because she cannot do so profitably. So, no player wants to deviate from the strategy that they are playing given that others don’t change their strategy – i.e. no player can benefit in the long run from unilaterally changing his choice because the others would adjust to improve their individual position – e.g. leading to a price war. Thus, it is a mutually enforcing kind of strategy profile. Moreover, the degree to which each firm’s price exceeds marginal cost is directly proportional to the firm’s market share and inversely proportional to the market elasticity of demand. Actually, as the number of member states increases, the equilibrium approaches what it would be under perfect competition.
4. A belief that if taken to the brink the EU will acquiesce. This does not take into account the fact that the EU is at least a step ahead and has contingency plan, part of which has already been set in motion independently of and prior to the plan; and that it will be much more painful for the UK than the EU. David Davies’ statement reported on 20 Sep 2018 that the EU has compromised by Michel Barnier’s offer regarding Northern Ireland that checks be done by EU officials when outside the UK and UK officials when within the UK and then reconciling with the use of technology that currently exists is not a compromise but a pragmatic one that is offering to assist.
5. That only the UK can have a red-line and ignoring the EU statement that the UK will not be able to cherry-pick. This is because it will be unfair to members and be a threat to the stability of the EU – this seems not to be comprehended by the UK.
We had the recent report that shows that Britain is now the ninth largest industrial nation with an annual output worth $247bn. However, on reading the full report made to Parliament –
– • The UK has fallen down the world rank of manufacturing nations in the last decade. Having been the 5th or 6th biggest manufacturer in terms of total output between 1970 and 2004, the UK is now 9th.
This means it has lost competitive advantage to others as they industrialised and became more efficient. It also reflects the under-investment in industry in Britain. It puts us behind the US,China, Japan, Canada, Russia, Germany, France and even Italy.
14% of industry in Britain is from transport and another 14% in chemicals and pharmaceuticals. The car industry will be decimated upon leaving the EU as the advantage the direct industry investors enjoyed when Britain was in the EU would have evaporated. In addition to Jaguar, BMW, Japanese cars giants setting up in the EU, Ford has been quietly setting up in Germany while letting its UK facilities run down.
The story is the same for pharmceuticals as the EU advantage evaporates.
Since the NI Exec is not functionig I think it is time to take the bull by the horns and end the open border as no one is looking after it.As the vote was for Brexit it follosw that it is for the Government to decide .In my opinion
We should have a hard border either at Ni/Eire or at NI ports. NI can be made a Dependent Terrioty and still be part of the Uk. The EU might wish them to join the EU at some date and that is for them (NI) to decide. What loss to the UK would there be if they do depart the UK?. The EU could finance the whole of the island of Ireland.
Sorry about the spelling errors.
As someone born and brought up in Northern Ireland I think, Ian, that your poor spelling is outdone by the fatuity of your comments.
I thank you for your comment Dennis. You obviously have greater knowledge than I.
Apart from staying under the control of the EU. What are your thoughts on how to solve the unhappiness within the UK? For instance do you think NI/Eire should combine?