Flip Chart Fairy Tales

Brexit: deals and no deals

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What is a ‘No Deal’ Brexit? Part of the (sometimes deliberate) confusion around this is that there are, essentially, three deals to be done between the UK and the EU. The decision tree looks something like this:

Chart made with SmartDraw

Deal 1: Article 50 Agreement

This is an agreement on the terms of separation. It includes things like:

As Anand Menon says, a failure to agree on these basic terms could happen in two ways; the UK walking away from the negotiations or a timeout where no agreement is reached by  the March 2019 deadline. This is what Professor Menon called the Chaotic Brexit:

There is no Article 50 agreement within the two year period, and no extension. The talks fail, because of disagreement over citizens’ rights, the role of the ECJ, money, or perhaps some other issue we haven’t yet focused on. On Brexit Day, the UK ceases to be a member of the EU – but, politically and legally, all the outstanding issues remain unresolved.

At this point, as Anne Robinson used to say to defeated Weakest Link contestants, we would leave with nothing. The arrangements which apply to 60 percent of our goods trade and the regulatory framework which has governed our economy for the last 25 years would disappear. This would have the effect of increasing, rather than removing, barriers to trade. Rather like a football match or a road traffic system, rules are what enable international trade to take place. The morning after Brexit would not see a new freedom but a new chaos. It would be like waking up on a busy weekday morning and finding that all the road signs, traffic lights and road markings had disappeared. That would leave motorists free to do whatever they liked but good luck with your journey to work. If you ever made it that far.

Would the planes stop flying? Probably, says Professor Menon. Aviation agreements have the status of full diplomatic treaties and they are highly restrictive. Airlines are already warning customers buying tickets beyond March 2019 that they may not be able to fly. Once you put yourself outside the legal framework, life doesn’t get easier, it gets a lot more complicated.

Chaotic Brexit would also leave us in dispute with the EU, potentially leading to court cases and certainly creating an acrimonious atmosphere which would poison the UK’s diplomatic and trade relationships with the EU for decades. It’s really not something either side would want.

Deal 2: Transition Period

Assuming no-one walks away from the table and we do reach a deal on Article 50, we then turn to the terms of our future relationship with the EU.

No serious observers believe that it is possible to hammer out a post-Brexit trade deal with the EU that can be implemented on 30 March 2019. Even if both sides agree the Article 50 settlement, they will need a transition period to work out the detail on tariffs, regulations and dozens of other agreements that currently govern the UK’s relationship with the EU.

This might take the form of a specially negotiated transition period or simply an extension of Article 50. There are potential problems with both options.

Some say that a transition agreement would be as nearly as complicated to agree as a final trade deal, so doing it in the next 18 months would be nigh on impossible. Far better, they say, to extend Article 50 and stay in the EU until the deal is done.

The problem with extending Article 50 is that the UK would remain in the EU beyond March 2019. That would be unacceptable to many of the Leave supporting MPs and their backers in the media who would kick up no end of fuss about it. There would also the embarrassing question of the elections to the European Parliament in 2019. The UK would have to elect MEPs to a parliament from which they were due to resign half-way through the period.

I was at a Resolution Foundation event on Tuesday where both options were debated by the learned panel. The conclusion they came to was that it will be damned difficult either way.

Whatever the complexities, though, if we don’t agree a transition period, it is highly likely that we will leave the EU without trade agreements.

This would lead to what Professor Menon calls the Cliff Edge Brexit:

The Article 50 deal is agreed, but the trade discussions go nowhere: either they break down, or they have made little progress.

So there is nothing to transition to. Meanwhile continuing the UK’s Single Market membership and/or free movement is unacceptable to one or both sides. So on March 29, 2019 the UK becomes a “third country”, with no special relationship of any kind with the EU. WTO rules will apply to the UK’s trade with the EU.

This is better than the Chaotic Brexit because having reached an agreement on Article 50 it at least leaves the door open to a more constructive future relationship. In the meantime, though, the UK’s trade situation would still be difficult.

According to Jo Maugham, a leaked Treasury report on Brexit contains these paragraphs:

There is much talk of trading under World Trade Organisation rules but very few countries trade with the EU under WTO rules alone. As the Institute for Government points out, the EU has bilateral agreements with most of its trading partners:

Do other countries trade with the EU on ‘WTO-only’ terms?

Not many. In 2016, of the top 10 trading partners with the EU by total trade, the US, China, Russia, Japan and India have a substantial number of bilateral agreements that go well beyond the terms of WTO trade. Of the top 20, there are no countries that trade on WTO rules alone with no bilateral agreements and no free trade deals.

If the UK left the EU with no agreements of any kind, then technically its relationship with the EU would be weaker than any of the EU’s main trading partners.

Trading under WTO rules would leave us in a slightly better position than those countries like Iran and Belarus, against which the EU has sanctions, but would have worse trading conditions with the EU than most other major economies. One step up from pariah state isn’t really where we’d want our relationship with our biggest trading partner to start.

Of course, a transition period doesn’t mean that we will definitely achieve a trade deal but it certainly makes it more likely.  It is possible that we might simply delay the Cliff Edge Brexit for a few more years but, having gone to the effort of agreeing a transition it seems unlikely that talks on the final deal would then falter,

Let’s be optimistic and assume we agree a long enough transition to move on to Deal 3.

Deal 3: Trade and Future Relationships

While it might be possible to agree the outline of the future trade agreement before March 2019, it is only with the Article 50 Agreement settled and a transition period in place that we can finally get down to the job of negotiating the detail of what the future relationship between the UK and EU will look like.

The options range from almost no change, where the UK stays in the single market and customs union, to varying degrees of free trade agreement. This table by the Institute for Government gives a succinct summary.

Essentially, the further you go to the right, the more independence the UK would have over things like immigration and trade deals with other countries but the less preferential the trade terms with the EU would be. This is the range of ‘soft’ to ‘hard’ Brexit options, though it is more of a continuum than a binary choice.

If the government is absolutely determined to be outside the EU customs union, something like the agreements made with the Ukraine or Canada look like the most likely options but these have been years in the making. Most of the discussion in the British media about the deal with the EU has focused on Deal 3 but there is a way to go before we are likely to reach an agreement on our future relationship with the EU. We need to do Deals 1 and 2 first.

There are, then, several stages to go through before we agree our future relationship with the EU and a number of points at which it could come to grief. A Cliff Edge Brexit is in no-one’s interest and a Chaotic Brexit would be a disaster. The former ministers who have urged the prime minister to walk away from the talks really should know better. ‘No deal is better than a bad deal’ is the silliest soundbite to come out of the Brexit process. ‘No Deal’ is a bad deal. About as bad as it gets. It’s not something that anyone should be wishing on this country.

 

 

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