No Deal is nothing to fear

Brexit could be our first step towards an economic revival.

Phil Mullan

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Topics Brexit Politics UK

Rocketing food prices, medicine shortages, gridlock on Kent’s motorways, administrative and economic chaos… No doubt we’ll hear many more of these scare stories about the potential consequences of Britain leaving the EU without a deal as the Article 50 talks continue to go nowhere fast.

People who are stuck on the status quo and disdainful of democracy are hoping to scare the rest of the population into staying in the European Union. Change, they scold, is too dangerous to countenance because, well, it’s about changing things. As a counterweight against all this hooey, there are three truths we need to set against all the alarmist prophecies.

We didn’t vote to leave based on economics

It seems some people need to be reminded that the British people voted to leave at the 2016 EU referendum despite all the catastrophist economic forecasts made by the government and by most of the media. If ever an electorate rejected the ‘It’s the economy, stupid’ cliché, it was when the British withstood the predictions about a Leave vote causing recession and mass unemployment, and voted Leave regardless.

Most Leave voters made up their minds not due to economics but due to their concerns about dwindling democracy and sovereignty. In the Ashcroft exit polls, nearly half of Leave voters said the biggest single reason they voted as they did was ‘the principle that decisions about the UK should be taken in the UK’. Another third said their main reason was that leaving ‘offered the best chance for the UK to regain control over immigration and its own borders’. And just over one in eight said remaining would mean having no choice ‘about how the EU expanded its membership or its powers in the years ahead’.

All of these reasons are to do with matters of sovereignty and control, not economics or financial wellbeing. Only one in 20 Leavers in the Ashcroft polls said that their main concern was economics, that ‘when it comes to trade and the economy, the UK would benefit more from being outside the EU than from being part of it’. This is why the economic scare stories failed in the lead-up to the referendum. That politicians are cranking them up again now reveals their continuing incomprehension of what people were saying in June 2016.

People voted Leave not because of their wallets, nor because they were fearful of change. Rather, they had had enough of the particular changes that have been undermining and denigrating them through recent decades – culturally, politically and economically. And most were realistic enough to know – certainly much better than the elites fantasise – that positive change cannot happen without some disruption, even some personal short-term financial repercussions.

Brexit isn’t the problem

The second thing we need to remind people of is that the direct economic effects of leaving the EU, Deal or No Deal, are a sideshow compared with the underlying performance of the British economy. The health of an economy is primarily a function of two things. First, the state of the domestic fundamentals, especially the level and growth rate of productivity. Second, the policies and actions taken by government and businesses that impact on those rates. Particularly important are measures and decisions taken to boost, or to stifle, investment in technology and innovation.

The source of Britain’s economic problems is its dismal long-term condition. Productivity – output per hour – is flatlining at levels well short of many of the other advanced economies, including France, Germany, Holland, the US, and even below fragile Italy. This economic malaise began long before the phrase ‘Brexit uncertainties’ became the latest excuse for anaemic business investment.

Set alongside dire productivity, a country’s external economic performance, expressed, for instance, in its overseas trade balance, is a snapshot of its relative economic strength. International economic relationships are not themselves a driver of economic betterment. Britain’s trade arrangements after Brexit, if we ever get there, will not determine how the economy will perform in the years to come.

The most important driver of economic growth, of international competitiveness, and of our future prosperity, is what is done, or not done, by government and business to crack Britain’s dire state of productivity. For Britain, and for every other country in the world, this is primarily a domestic challenge. Contrary to what protectionists think – from the EU commissioners to the White House team – economic progress is determined most by what happens within a country’s own borders, not by its external relationships.

Economic renewal to boost productivity is neither aided nor, to any significant extent, constrained by being inside or outside the EU Single Market. Sure, being outside the Single Market is likely to mean British exporters into Europe will have a few more bureaucratic and cost hurdles to clear. On the other hand, being free from Brussels controls will also offer more flexibility for rescinding anti-innovation regulations. What’s more, the lower pound since the referendum, whatever happens to the currency in a Deal or No Deal situation, has already given a cost bonus to British exporters. But these types of minuses and pluses are small compared with fixing the domestic sources of productivity stupor.

We can put this into figures. What follows is not based on alternative ‘forecasts’, or even guestimates, but simply offers an arithmetical illustration. If you are not a fan of figures, you can jump three paragraphs.

The IMF recently projected that a No Deal Brexit would cause a hit to UK gross domestic product of just below four per cent over the long-term. This is similar to the OECD’s earlier estimate, that No Deal would cost up to 5.1 per cent of GDP over 15 years. I think this is an unnecessarily high negative projection, but let’s take a hypothetical five per cent reduction in the size of the economy by the end of 12 years, in 2030, to work with.

Now let’s compare the size of annual output in 2030, on the basis of per-year economic growth of three per cent. (This was the average rate during the early 2000s before the financial crisis hit, instead of the post-crisis average of, to be generous, two per cent.) The difference between three per cent and two per cent each year to the size of the UK economy in 2030 is that it would be respectively either 43 per cent or 27 per cent bigger than it is today.

Under the most likely ‘status quo’ scenario – no Brexit and no productivity fix – the economy could be 27 per cent bigger by 2030. Under the less likely but economically achievable ‘change’ scenario – a No Deal Brexit and a productivity fix – it could be at least 36 per cent bigger (95 per cent of 143 per cent). So by this illustration, derived from gloomy IMF/OECD forecasts, a No Deal ‘change’ scenario would still trump a No Brexit ‘status quo’ scenario. The lesson: get Brexit out of the way as soon as possible, Deal or No Deal, and focus instead on fixing productivity.

Beyond the Single Market

Finally, anxieties about leaving the EU without a deal ignore the fact that there are many (reasonably) prosperous countries outside the Single Market that interact economically with it. This is not to rely on a common point made by some Leavers – that economies outside the EU are growing faster than those inside it, true though this is: just compare recent growth rates in China or India to France or Italy. I simply want to note that a country doesn’t have to be inside the EU, or inside the Single Market and/or Customs Union, to trade and deal economically with EU member countries.

Many of the biggest non-EU countries have supply chains involving the EU. In fact, most of the world imports from and exports into the Single Market without any special trading arrangements. These include countries like the US, China, India, Brazil and Russia. Japan, too, still remains on that list, since the recently announced EU-Japan Economic Partnership Agreement still needs to be approved by EU member states and the European parliament. (This reminds us of the difficulties the EU-Canada Comprehensive Economic and Trade Agreement faced in getting EU approval in 2016. Three years later, it is still only provisionally in force.)

Without an exit deal, Britain will simply join this long list of ‘third countries’ which successfully trade and interact with the EU. Being a sovereign country doesn’t mean, metaphorically, having an impenetrable wall down the middle of the Channel and the North Sea. Sovereign nations have been economically engaging with one another for centuries mostly without trade agreements.

Moreover, if Britain ever does leave the EU, the relationship it will have with Europe would be far from unknown or unprecedented, either to most of its people or to most of its businesses. Today, many British people easily travel to and visit countries that are not in the EU. Airplanes fly, border controls are passed.

In the past, before the Single Market launched in 1993, and even before the UK joined the European Economic Community in 1973, people went to European countries on business or for a holiday. Why should non-membership of the EU club be reason to whip up fears about travel in the future?

For business, well over half of Britain’s foreign investment today is in countries outside the EU. What would be so much more complicated about businesses investing in a post-No Deal EU? Similarly, about half of Britain’s trade takes place with countries outside either the EU or the area covered by EU preferential trade agreements. So businesses that engage in this trade – importing supplies, or exporting intermediate or finished goods – already know how to operate under those supposedly fearsome World Trade Organisation (WTO) rules.

WTO rules don’t even mean having to apply fixed levels of tariffs and other non-tariff barriers. WTO members can reduce their restrictions on imports whenever they want, as long as any remaining tariffs are applied equally to all countries (or, to be more precise, equally to all countries without the benefit of an even more preferential, WTO-approved trade agreement). Britain, as an independent trading country, could decide to reduce UK tariffs below the current EU-wide levels, or even abolish some or all of them. Doing so would directly reduce, not increase, the cost of imports for British businesses and consumers, Deal or No Deal.

For example, claims that food imports from the EU would be hit with an average tariff of 22 per cent ignore the fact that it would be a British decision, not a WTO or EU one, to impose that tariff. It assumes Britain would stick to the default position of applying the existing highly protectionist EU tariffs. But the EU, or any other member of the WTO, cannot stop Britain reducing its average food product tariffs to 10 per cent or five per cent or to zero, as long as the same tariffs are applied equally to all importers.

Food prices in the shops would fall. In addition, WTO rules can’t stop countries easing or getting rid of non-tariff barriers. For example, post-Brexit Britain could scrap onerous EU regulatory standards, which at the moment preclude cheaper imported supplies and consumer goods from other parts of the world.

Also, a No Deal scenario doesn’t stop any business getting on now with securing ‘trusted trader’ status by registering with HM Revenue and Customs as an ‘authorised economic operator’ (AEO). This status allows traders to clear customs more quickly. To be fair, getting the full benefits in customs simplification with EU countries would depend on the EU not withholding ‘mutual recognition’ status from Britain. The EU already has this with other AEO programmes for the US, China and Japan, as well as Norway, Switzerland and Andorra. If the EU is really going to treat British traders worse than Chinese and American ones, it will be difficult for it to claim that it wants to be a ‘good neighbour’, never mind the increasingly ludicrous idea that it is a force for global cooperation and peace.

And if the EU were to prove punitive, if it decided to make UK-EU supply chains awkward, British companies could find, or expand trade with, existing suppliers in other parts of the world. In fact, businesses that aren’t already annually reviewing their worldwide supply chains are missing a trick. If No Deal prompts more companies to start regular procurement reviews, that in itself would be a bonus.

It is true some British firms have traded only with the EU, and have no experience of worldwide trading. But by the end of the Article 50 process, they will have had nearly three years to work out what to do. Moreover, to trade with the EU today from within the Single Market, businesses still require procurement processes, and tax and regulatory compliance procedures.

All they will have to do is modify these, which is not that different to what they have been doing while in the Single Market. Already businesses have to make modifications every six months when new British/EU regulations come in or are changed, or every 12 months when tax and other rules change in the chancellor’s annual budget. In fact, an inability to adapt in this way would be symptomatic of an obsolete business that has little security to offer its workers, customers or suppliers. Of course, most businesses will always say they would prefer no change at all in their operating environment. But if by next March a business was really unable to grasp how to operate outside Single Market structures, one wonders how it could survive today.

Deal or No Deal is a red-herring discussion. This was not the question on the referendum ballot paper. The choice was to remain in or to leave the EU. Britain voted to leave in what the government told everyone was our ‘once-in-a-generation decision’. The government’s pro-Remain leaflet, delivered to every home in the land, stated: ‘This is your decision. The government will implement what you decide.’ The government should stop dilly-dallying, and stop coming up with illusory excuses, and do what the people have told it to do.

Phil Mullan’s latest book, Creative Destruction: How to Start an Economic Renaissance, is published by Policy Press.

Picture by: Getty Images.

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Topics Brexit Politics UK