Brexit: ‘no deal’ would be the worst deal

David Davis and Michel Barnier © Getty Images

Last month, economic research consultancy Capital Economics released a report on the economic impact of Brexit, which they carried out for Woodford Investment Management. It looked at three scenarios: a “no deal” exit on WTO terms, a “compromise trade deal” with Brussels, and a compromise trade deal with Brussels combined with ambitious external trade and regulatory policies.

While the “no deal” scenario would be slightly worse than the status quo, the two latter scenarios would produce additional GDP growth over the next decade. Glyn Chambers, one of the report’s authors, kindly agreed to discuss some of the points arising from the report, especially in light of last week’s agreement.

Although the size of the ‘divorce bill’ is a big issue in the public and media consciousness, it’s a smaller deal when it comes to the economic impacts” argues Chambers. Capital Economics predicted an exit payment of £32.5bn, “equal to its share of EU assets and liabilities and a normal membership contribution for the whole of 2019 and 2020”.

This isn’t too far off the latest estimates, which could see the UK paying up to £40bn. However, even if the bill turns out the closer to the predictions of £50bn a fortnight ago, “the increase of £17.5bn would likely be spread over many years, reducing the perceptible economic impact”.

Free trade deals will mitigate the damage

Under all three scenarios, Britain will need to strike new trade deals with third countries, to mitigate the damage caused by the loss of access to European markets. In some cases this may involve the UK having to change its rules and regulations, says Chambers.

“There could be some cases where regulations could need to be modified in particular ways in order to meet mutual recognition provisions that can form important parts of the agreements”. However, it’s important not to exaggerate the extent to which this will happen as “free trade agreements with other countries and blocs will not require us, in general, to adopt their regulations”.

“If this was the case”, he says “it would be difficult for countries for conclude more than one free trade agreement, since adopting the regulations of one partner would preclude an agreement with another”. For example, “Singapore has free trade or economic partnership deals with the United States, China, India, Japan, many other countries and has concluded one with the European Union” (not yet ratified).

Overall, “the degree of regulatory control from overseas will almost certainly be lower than it currently is with European Union membership”.

Similarly, Chambers also feels that the UK won’t have to make too many concessions on immigration. While India has hinted that a UK-India free trade deal will be conditional on increasing the number of business and work visas, the fact is that “most free trade deals don’t contain provisions on the movement of people” so “it would be unusual for that to be part of the deal.

Even India “has concluded free trade agreements with Japan and ASEAN without such provisions”. Still it is possible that they “could obviously make such a request and it would then be a matter for the ensuing talks”.

Don’t count on “business friendly” deregulation just yet

The report also assumes that the British government should take advantage of the exit from the Single Market to adopt more business friendly laws and rules, boosting growth. However, “given the political climate at the moment, particularly the government’s small majority, we expect little in the way of deregulation” Chambers admits.

However, “it’s not unreasonable to think that a small number of European Union regulations may be repealed after Brexit and we give some examples in the report”. Even if it doesn’t repeal any existing European laws, “Britain will avoid future European Union regulations”. Although not actual deregulation, “this will be deregulation relative to the counterfactual of continued European Union membership”.

When the report was originally published, Chambers estimated that there was a 35% chance of a “no-deal” scenario, a 50% chance of a compromise and just a 15% chance of a more ambitious agreement. Since “the government has seemed a little bit more desperate to get a deal, the chances of the low case might have fallen a little and the chances of the base case increased a little”.

However, he still thinks that the chances of the third scenario, his preferred option, are “unchanged”, so this outcome is still much less likely, though not impossible.

  • Cynic_Rick

    Quote from this article:

    “… the “no deal” scenario would be slightly worse than the status quo…”

    Well, the following link leads to a compilation of ‘Impact Assessments’ for each of many UK economy sectors due to a “no deal” scenario:

    http://eureferendum.com/blogview.aspx?blogno=86697

    The “no-deal” scenario would be a catastrophe for the UK for many years to come; nor would it be without huge damage to the EU. IMHO it would more than likely trigger the Economic Depression which has been stealthily avoided for most of the past 10 years.

  • Cynic_Rick

    Quotes from this article:

    “… a “compromise trade deal” with Brussels, and a compromise trade deal with Brussels combined with ambitious external trade and regulatory policies.”
    “… the two latter scenarios would produce additional GDP growth over the next decade.”

    Any scenario which takes us out of the Single Market will spell economic (and probably political) disaster for the UK.

    The least worst scenario for leaving the EU is Flexcit:

    http://www.eureferendum.com/documents/flexcit.pdf

    By this means the UK could retain nearly all of its current trade with the EU27 AND be free to negotiate its own trade deals with the Rest of the World; a realistic recipe for GDP growth.

    Plus, by being under the Efta/EEA umbrella, the UK could unilaterally invoke Article 112 of the EEA agreement in order to control immigration from the EU.

  • Horiboyable .

    We should just walk away with no deal.
    Simply state they we do not want a border.
    The EU & the Euro will NOT last.

    • Roy

      I agree we should walk away but it would not be the economic catastrophe for the UK, I can also point to current so called expert thinking that refute it would be so. But you also have to think that a disaster was predicted if we voted no simply has not happened.

      The best option would be to get a deal but for no more that the 32.5 billion if not walk away.

      Roy

      • AAJ

        “so called expert thinking”
        As opposed to someone flipping burgers with no grasp of economics?

        “a disaster was predicted if we voted no ”
        No-one predicted a disaster if we voted no. Some people predicted a disaster if we leave the EU. For some leaving the EU will be a disaster (myself included) and of course there will be a minority that will be richer and happier. The majority will be slightly poorer, which is already the case.

        “The best option would be to get a deal but for no more that the 32.5 billion if not walk away.”

        Obviously this is not true. If the return on the 32.5 billion investment is greater than 32.5 billion, then it is a good deal.

        There are many people who are quite happy to cut of their nose to spite their face. For the rest of us we just have no choice but to rely on the EU and UK to get together and produce a deal that is mutually beneficial.

        • Cynic_Rick

          Quote:
          “…we just have no choice but to rely on the EU and UK to get together and produce a deal that is mutually beneficial.”

          In order to avert the Economic Depression in Europe (to include the UK) triggered by our Government placating those that consider the UK “should just walk away with no deal”, I’m hoping the EU will suggest the UK join the Efta/EEA umbrella (sometimes referred to as the ‘Norway Option”. Incidentally, the so-called ‘Canadian Option’ would be far inferior to the ‘Norway Option’).

          I’d be staggered if this initiative came from our shambolic Government.

      • Joffines

        Correct! Listen to Roger Bootle (of Capital Economics) and Patrick Minford!!