03 July 2019

L. Alan Winters CB is Professor of Economics and Director of the Observatory.

Last week I was challenged twice for using the term ‘no deal’. There is no such thing, I was told, because, even if the UK does not ratify the Withdrawal Agreement of 25^th November 2018, there will still be plenty of deals. At the time I thought, for several reasons, that this was wrong in substance if not literally, but more recently I have concluded that it is also dangerous.  Like we saw in the referendum campaign, it undermines informed debate by deliberately confusing the terminology.

‘The deal’ is an agreement between the EU and the UK ‘setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union’ (Article 50 – Treaty on European Union). ‘No deal’ is the absence of such a deal. For business and the economy, ‘no deal’ has come to mean the absence of a trade agreement under which the UK and the EU trade with each other on terms better than those provided for under the World Trade Organization. The former ‘no deal’ implies the latter – as I argue below – but the reverse is not true.

Both candidates for the UK Prime Ministership have promised to implement a ‘no deal’ exit on 31 October, and have more or less locked themselves into that position. Both argue that it is extremely unlikely that ‘no deal’ will actually come about because, using either their wit or their trustworthiness, they will re-negotiate the Withdrawal Agreement to the UK’s advantage. This latter claim is not credible to most commentators and will come under increasing pressure as the hustings caravan proceeds through the kingdom. So what will the candidates do then? Row back? No, they will redefine ‘no deal’, and so I now fear my conversations of last week were a first step towards sanitising the idea of ‘no deal’.

The first argument against the ‘no deal’ terminology was that the European Commission has put in place a series of measures to mitigate its effects. At a formal level, these are ‘no deal’ measures – implemented unilaterally and solely in the interests of the European Union. But setting that aside, they cover only a small subset of the disruptions to UK-EU trade that ‘no deal’ will cause and are very short-lived. For example, for nine months UK lorries will be able to haul UK-EU trade, but not, as now, provide transport between EU destinations; thus UK transporters’ commercial scope will be severely limited.

The EU’s measures do reduce somewhat the chances of chaos immediately after a ‘no deal’ exit, for which one supposes we should be grateful, but they do not do much, and looking beyond a year, they offer no comfort at all. On international trade, one of the key issues on which UK business urgently desires a deal, all the Commission says is:

Member States have worked closely with the EU institutions to ensure that the integrity of the internal market is preserved by putting in place appropriate infrastructure and resources to apply custom formalities and controls as well as sanitary and phytosanitary checks of goods at the border. [emphasis added]

A second argument that ‘no deal’ does not exist is that many deals that cover both the UK and the EU will still pertain – for example, the requirements to respect WTO rules on trade or the European Court of Human Rights. True, but these international rules provide much weaker links than do EU institutions. ‘The deal’, like EU membership, is intended to go much further.

The third and most extraordinary claim was articulated by Martin Howe on Sky News 26 June. It is that even if the UK rejects the Withdrawal Agreement (and the accompanying Political Declaration), the EU will still sign a trade deal in time for 31 October, because doing so will be in its economic interest!  Even if the issue were just a trade negotiation the EU would not do this – it would not reward walking away from a previous agreement by offering a new more favourable one immediately.

While the UK and the EU might be able to reach an ad hoc reciprocal agreement on citizens’ rights, a UK rejection of the budget and the Irish backstop provisions in the Withdrawal Agreement will lead to the suspension of all cooperation. The Commission has stated that any agreement in the future will depend on the UK accepting these provisions, and even if this did not apply forevermore, it would certainly apply to the next few years. To claim to believe otherwise is just disingenuous.

‘No deal’ on trade will be immensely costly in economic terms but that is where the current debate is leading us. But let us at least enter it knowingly. Let us learn enough from the referendum campaign not to obfuscate with silky words and nit-picking definitions.

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