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A Halloween no-deal Brexit is no longer a scary prospect

7 July 2019

8:00 AM

7 July 2019

8:00 AM

Project Fear is back after a seasonal break. Far from resolving anything, Theresa May’s decision to delay Brexit back in the spring simply kicked the can down the road, frustrating companies who invested scarce resources into getting ready for a 31st March departure.

Damaging as the decision to delay Brexit was, the silver lining is that seven months’ on, the UK is likely to be in a much better position to cope with the no-deal fall out.

You wouldn’t know if it you listened to the CBI who continue to churn out “no-deal” scare stories. Or if you read the civil service memo apparently “leaked” to the media, explaining that the UK needs at least another five months to be ready for “no deal”. Funnily enough, that takes us beyond the 31st October deadline. You might almost think Mark Sedwill and co. are trying once again to rule out the possibility of a clean break with the EU.

It doesn’t seem to matter that the civil service have already had over three years to prepare for Brexit – they always need a bit more time. I wonder if the new occupant of Number 10 will interpret the latest memo as demonstrating that someone high up in the civil service has not been doing their job and needs to be held accountable.

Of one thing we can be sure: “no deal” will continue to be presented as a disastrous prospect over the next few months. Certainly, leaving the customs union and single market will be a challenge for some parts of the UK economy.

For example, high EU tariffs on key agricultural products such as lamb will affect the export market for farmers, while manufacturing sectors involving complex cross-border supply chains will be vulnerable in the event of border delays.  Almost certainly, these sectors will require government intervention and support to minimise disruption, particularly in the short run.

But it is also important to take into account that aspects of a “no deal” outcome are likely to actually boost the economy.

The immediate benefit will be an end to uncertainty which will help to release investment plans held up by firms waiting to see how Brexit plays out. Even if leaving the EU is not their first preference, most UK businesses are robust and will adapt to any future scenario. But they do want to know where they stand. Indeed, a key problem with Theresa May’s withdrawal agreement is that the future trading relationship would remain unresolved. This would mean years of further divisive debate and damaging uncertainty.

There are other advantages to leaving without a formal agreement. In the first place, the UK is unlikely to hand over £39 billion, a sum for which there seems to be no basis in international law. The consequent fiscal boost can help ease business and government into the new reality. The UK will also gain the benefit of being able to set economic policy on matters such as VAT, import tariffs and product regulation to suit the UK economy rather than the EU as a whole.

But there is another reason why we should no longer buy into scare stories about “no deal”: quietly, behind the scenes, all parties have continued working on different aspects of preparations, meaning the cost of a clean break on 31st October will be less significant than it would have been back in March.

The UK government can rightly be criticised for the slow pace of its “no deal” preparations but progress continues to be made. We have now agreed to roll over the most important of the existing EU trade deals with other countries including, most recently, South Korea. Trade continuation deals have been agreed with the US, our single most important trading partner; while plans to prioritise flow over tariff compliance in the immediate post-Brexit period will help to ensure free-flowing borders into the UK.

Similar measures to keep goods flowing across the Channel are in place on the French side of the border. And the EU parliament has now voted in favour of at least 16 “mini-deals” or measures relating to areas such as flight connectivity, financial market regulations and visas. Some of these are temporary but they will be of critical help to both sides in the immediate no-deal period.

The last piece of the jigsaw is business. Companies have not had the luxury of waiting to see whether “no deal” actually happens. Rather, they have had to spend money on preparations just in case. Of course an early agreement on a Canada-style free trade deal would have avoided a lot of that expenditure. But the plans already in place mean the additional costs if “no deal” actually happens will be relatively less significant.

Concerns that many business have still not registered for the new, simplified customs procedures are overstated. In most cases, this is a simple process so it is no surprise that many smaller firms who trade infrequently with the EU are just waiting for greater certainty before making their application.

What is undoubtedly true is that businesses are frustrated at having spent resources getting ready for “no deal” back in March, only for MPs to delay the process. As a result, holiday companies such as Thomas Cook had to endure further uncertainty while car companies switched production shutdowns for no reason. A further delay to the process after the 31st October will just cause yet more wasted expenditure.

There has been a lot of talk about whether we could go further and agree to carry on trading tariff free even in the event of no deal. This is certainly possible under WTO rules if both sides agree. The EU’s public position is that this will not happen and my guess is that they will hold out on this “pour encourager les autres”. However, given the EU runs a trade surplus in goods with the UK of nearly £100bn per year, if “no deal” starts to appear inevitable, there may be some interesting conversations between EU governments and the Commission in the run up to the 31st October.

Leaving with “no deal” still won’t be a bed of roses for the UK economy but the number of side deals and unilateral measures in place, along with the resources already invested by businesses themselves, mean the immediate consequences are unlikely to be as serious as groups like the CBI make out.

Whatever one’s view on “no deal”, we have to face the reality that the only choice available to the UK at this point is either to revoke Article 50 completely or to leave with a deal. MPs can try to delay things even further with an election or another referendum, but that just pushes this ultimate choice further down the line.

By persuading Theresa May to rule out “no deal” as an option, remainers helped to ensure that the only deal on the table was so bad for the UK that Parliament would reject it.

Presumably the hope was that, once the withdrawal agreement was dead, MPs would choose to stop Brexit completely. That may still happen. But what an irony it will be if Project Fear about “no deal” ends up being the reason no deal happens.

David Paton is professor of Industrial Economics at Nottingham University Business SchoolHe tweets at @cricketwyvern


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