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Pros and cons of a no-deal Brexit

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Northern Irish Border, Ireland, brexit

Philip Hammond hits back over Jacob Rees-Mogg claim that chancellor’s gloomy economic forecast is ‘pure silliness’

In Depth Gabriel Power
Thursday, July 18, 2019 - 1:29pm

Leave or Remain. No-deal or single market. Second referendum or not. When it comes to dividing opinion and pitting friends, families and colleagues against each other, there’s nothing quite like Brexit.

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And few high-profile fallouts have demonstrated this as comprehensively as the ongoing war of words between Chancellor Philip Hammond and prominent Tory MP Jacob Rees-Mogg, which intensified dramatically this week. After months of digs at each another, Rees-Mogg has written a scathing article for The Daily Telegraph in which he calls Hammond’s warnings about the threat that a no-deal Brexit poses to the UK economy as “pure silliness”.

Last week, Hammond said that quitting the EU without a trade agreement in place could cost the country £90bn - a claim dismissed by Rees-Mogg as “Project Fear”.

“Put simply, the idea that we will be poorer in the long-term and even in the short-term after Brexit is a myth,” the staunch Brexiteer writes.

In reality, economic models show “the total positive impact of no deal could be in the region of about £80bn”, Rees-Mogg continues.

Hammond has hit back at his fellow Tory MP in a tweet in which he claims it is “terrifying” that “someone this close to a potential future government can think we'd actually be better off by adding barriers to access to our largest market” - referring to rumours that Rees-Mogg could be given a cabinet role should Boris Johnson become prime minster.

So who is right? Here are the potential pros and cons of a no-deal Brexit on a variety of issues:

Con: trade logistics set to suffer

The UK would revert to World Trade Organisation (WTO) rules on trade if no withdrawal deal is agreed before the country quits the bloc on 31 October, the current deadline agreed with the EU. 

This means UK exports to the eurozone would face the same customs checks and tariffs as other non-member states. Analysts agree that the overnight end of frictionless zero-tariff trade would be likely to lead to shortages and price increases for a number of goods, and cause significant delays on both sides of the Channel.

Leaked research carried out by Whitehall’s Brexit department suggests that without deals on customs and trade, parts of Britain would experiences shortages of food and even medicines within a fortnight of the present agreements lapsing. “And that is not the worst possible scenario: it is one that lies in the middle of the range of possibilities,” noted The Guardian in an editorial last year.

In a further blow, “some British-made products may be rejected by the EU as new authorisation and certification might be required”, says the i news site, which warns that some manufacturers may move their operations to the Continent in order to avoid delivery delays.

Pro: EU cannot impose new rules

Supporters of Brexit have cited the WTO’s Trade Facilitation Agreement (TFA), which came into force in 2017, arguing that it obliges the EU to treat the UK fairly.

Indeed, Rees-Mogg says in his article this week that Hammond “fails to acknowledge” that any changes by the EU to standards or border controls that effect the UK negatively “would be illegal under WTO anti-discrimination rules”.

This has long been a Brexiteer talking point. Speaking to the Debating Europe website in 2017, former Tory MP Peter Lilley insisted that in the event of a no-deal Brexit, “we’ll trade with the European Union on what’s called Most Favoured Nation terms, which means the same tariffs and no more than apply to America, Japan, and China, all of whom trade extremely successfully with Europe”.

However, the BBC argues that such claims do not “stand up to scrutiny”. Although the TFA prevents the EU from discriminating against the UK, it “does not mean the UK can expect to be treated in the same way that it is now”, says the broadcaster.

“The UK would be treated like any other third country - and in the absence of any trade agreement, that means tariffs and border checks,” the BBC adds.

Con: violates Good Friday Agreement

The Guardian suggests that the commitment by the British government to uphold the Good Friday Agreement “limits the kind of economic model the UK can pursue to just those models that are compatible with having an open land border with the EU on the island of Ireland”.

Indeed, both the UK and Ireland maintain that a hard border must not return to Northern Ireland, even in the event of a no-deal Brexit. But if the UK were to leave without an agreement in place, the Republic would come under huge pressure from Brussels to exert EU customs and immigration controls.

In April, Irish leader Leo Varadkar said the Republic and the EU would do everything possible to avoid the emergence of a hard border, but added that avoiding a violation of the peace-keeping deal in the wake of a no-deal would be “difficult”.

Experts have warned that a perceived violation of the spirit of the Good Friday Agreement - which does not explicitly mention border arrangements - could trigger a resurgence of the sectarian violence that blighted Northern Ireland for decades.

Pro: technology may save the Irish peace deal

Prime ministerial hopeful Boris Johnson insisted earlier this month that the withdrawal agreement - which includes the controversial Irish backstop provision - was dead “as it stands”. Speaking at a hustings in Belfast, both he and leadership rival Jeremy Hunt said that technology was the only way to avoid a return to a hard border in Ireland while enabling the UK to fully quit the EU.

The Daily Telegraph notes that the EU is open to “alternative arrangements” at the border, as long as they “maintain the integrity of the EU single market” and fulfill the British government’s commitment to avoid a “hard border” and “any physical infrastructure or related checks and controls”.

But how this could be achieved in practise is unclear. The EU’s deputy chief negotiator, Sabine Weyand, has already ruled out all existing technology as insufficiently advanced.

The BBC says that “one potential, but expensive, way of avoiding physical checks” at the Irish border could be to develop a satellite system.

Lars Karlsson, a former Swedish customs officer, told the broadcaster: “The driver could have a phone in their pocket, linked to a satellite. And when the truck passes the border, a computer would automatically register it.”

However, this still wouldn’t eliminate the need for checks at the Irish border, according to Karlsson. He notes that despite a significant amount of technology on the border between Sweden, which is in the EU, and Norway, which is not, customs checks there take around 20 minutes per lorry.

Con: economic growth may stagnate...

A newly published report from the Office for Budget Responsibility (OBR) estimates that economic growth would fall by 2% by the end of 2020 if the UK left the bloc without an agreement, and that this would push up public sector borrowing by £30bn.

“Together, these [would] push the economy into recession, with asset prices and the pound falling sharply,” the report warns.

According to other experts, even this gloomy outlook is a best-case scenario. The Bank of England and the Treasury have both published separate forecasts that indicate that the economic downturn would be far more damaging than the OBR suggests.

Hammond claimed in early July that a “disruptive” no-deal Brexit could cost £90bn, telling the Commons: “That will also have to be factored in to future spending and tax decisions.

Pro: ... or it could accelerate

In a fairly unconvincing game of connect-the-dots, Rees-Mogg suggested that Hammond’s forecast for the UK economy in the event of a no-deal Brexit was “based on less than half a page of argument” in a report by the Treasury.

The chancellor’s figures are based on the assumption that “all sorts of new product standards will face our exporters and importers, despite over 20 years of shared rules and standards”, writes Rees-Mogg in his Telegraph article. This worst-case scenario would “lead to new compliance costs so high they would depress GDP by a staggering 4.2%, accounting for around half of the £90bn negative impact cited by Mr Hammond”, he continues.

Rees-Mogg insists the idea that there would be “essentially no positive contribution... to the UK’s economy from agreeing free-trade deals with non-EU countries” is “silly”, and points to an earlier claim by the Treasury that a UK Free Trade Agreement with the EU alone could give the UK economy a 3% boost.

The MP also highlights a World Trade Model developed by Cardiff University that suggests deals with non-EU countries could yield a 4% boost in GDP. “The total positive impact of no-deal could be in the region of about £80bn,” he writes.

His claims about the potential economic benefits of a no-deal withdrawal echo those of former Brexit secretary David Davis, who has said that even a steep drop in the value of the pound could be advantageous.

 “The pound’s always been too high from the point of view of industry because of the effect of the City. So our competitive position with vis-a-vis Europe would be dramatically better even if there are tariffs,” Davis told parliamentary magazine The House.

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