Today 61% of our trade is either with the EU or with a country who the EU has trade agreements with. To fall out of the EU with no trade agreement would be cataclysmic for the economy, wages and jobs. Falling back onto a WTO agreement would cripple auto production, pharmaceuticals and high-tech manufacturing in this country. For services, the consequences would be far less severe, as there is no true single market in services in the European Union. Nonetheless we need a credible plan in the event of failure in these negotiations.
Many people know the old adage that if you fail to plan, you plan to fail. In the case of negotiations, if you plan for failure, you massively boost your chance of success.
To elaborate, I will use the example of Greece and Syriza's failed negotiations with the Troika. Yanis Varafoukis, a well-educated economics professor, decided to use his expertise in Game Theory to outwit and play the Troika. Yanis knew that Greece had no credible means to threaten the EU; to unilaterally drop out of the Euro and leave the European Union would mean abandoning the regional development subsidies, one of the most important sources of investment in the Greek economy. Therefore, he tried to play the “madman”, he tried to convince the Troika that he was genuinely willing to pull Greece out of the Euro and European Union if he didn't get enough debt forgiveness from the Troika. Unfortunately, the straight-laced Troika, just saw this as folly and did not buckle to his demands; without a credible threat, he had to take whatever he was offered.
This is why David Davis is right to say we must be prepared to walk away if we are offered a bad deal. No deal must be better than a bad deal.
So what would a credible “no deal plan” look like?
Well the no deal plan must satisfy 2 clear criteria:
- It must be economically beneficial for the UK, or at least good enough that it would be an acceptable outcome.
- It must be significantly damaging to the EU, so that they see the true cost of refusing to negotiate in good faith.
Welcome to the concept of the Singapore West model. The EU is terrified by the prospect of a tax haven on or near their near border, particularly with footloose tech companies able to locate anywhere largely unaffected by trade barriers and other protectionist measures.
Rolling back regulatory red tape, abolishing air passenger duty & cutting corporation tax to 5% for all companies domiciled in the UK would lead to mass offshoring of professional services, financial services and technology firms. Introducing a new streamlined process for skilled migrant hires would remove any fears about access to talent in a newly independent Britain. This sort of model would cause a collapse in investment levels across the remainder of EU and deprive EU governments of much needed tax revenue. However, for the UK the divisions of the country would grow even wider, as London and the prosperous South East see a surge of inward investment, while the Midlands and North-East experience the second great deindustrialisation as newly imposed EU customs duties collapse Pan-European supply chains. Nonetheless, this would appear as a credible no deal plan for the UK to present in negotiations, if necessary.
Having established a credible back stop plan, we should now look to what we want to change post Brexit:
- Control of our borders
- Control of our laws (social, economic, environmental)
- Ability to sign free trade deals with other nations
- Pay less into the EU
And what we hope to keep post Brexit:
- Full access to the single market
- Customs free access to EU market
- Pan-European study opportunities
- Participation in Pan-European Research Programs
- Visa free tourist access
- British Citizens rights in Europe
Now of course it would be lovely to think that we could just achieve all of the above without compromise, however, we can't just have our cake and eat it. But we can get pretty close, if we begin to think what the EU wants:
- Minimal disruption to trade
- Ability to sell this deal as worse than EU membership
- No change to the 4 fundamental freedoms of the single market
- European Citizens rights in the UK
- Net financial contributions from the UK
Initially these objectives may seem completely incompatible with the goals of the British negotiators. After all, if we take back control of our borders and kept access to the single market, surely we would be violating the 4 fundamental freedoms of the single market?
We cannot stay in the single market in order to satisfy the "red lines" of both sides, however there is nothing whatsoever preventing some form of comprehensive market access agreement. Just for a recap, the following bullets explain the differences between the European Union Customs Union, the European Economic Area and the European Free Trade Association.
EUCU (European Union Customs Union):
- No taxes on goods traded across borders within the EUCU
- Standardised tax on goods sold into the EUCU from outside
EEA (European Economic Area, aka the "Single Market"):
- Freedom of movement of goods
- Freedom of movement of services (although only some services)
- Freedom of movement of labour
- Freedom of movement of capital
- EEA wide identical regulations (environment, goods, services, labour & capital)
- Gold plating/extra regulation allowed in countries (environment, services & labour)
EFTA (European Free Trade Association):
- Tax free trade of EFTA countries goods across borders within EFTA
- If outside of EUCU, need to prove origin of goods to prevent countries evading the Common External Tariff
Negotiations are always iterative. So, the structure of the negotiation affects the shape of the final deal and therefore whoever sets the structure of the negotiations will gain the upper hand. The EU have already done this by announcing that no negotiation on the future trade deal was possible until our outstanding financial obligations or "Brexit Bill" is agreed and the rights of EU citizens in Britain is accepted.
The least painful issue in this negotiation is citizens' rights. Both sides seem willing to agree to a reciprocal deal on citizens' rights. Concluding this with speed will win some early goodwill with our EU allies, while conveniently boosting economic confidence among migrants already present in the UK.
Unfortunately, the negotiation about the "Brexit Bill" is likely to be contentious and tricky, therefore in response to the EU's demands it is vital that we strengthen our hand to temper the excessive demands of the EU.
Strengthening our hand
The reality is that the EU represents an economic block 5 times larger than the UK individually. The damage of a collapse in trade would be more severe for the UK than for the EU. Therefore, it is vital alongside the "Singapore West" model detailed above, that the UK prepares the mother of all stimulus efforts to let the UK economy ride over the uncertainty. Fortunately, the Treasury has already prepared the ground for this by pushing back the deadline for a balanced budget to 2022. So with so much uncertainty over tariffs, regulation and market access, how on Earth can the UK government provide companies certainty?
Through 3 simple policies:
- Guarantee to pay all EUCU tariffs for UK exporters until 2022 if we are forced into trading on WTO rules
- Match all EU research funding for UK projects unconditionally until 2025
- Announce a new regional infrastructure fund equal to the current EU regional aid budget available until 2025
This simple set of policies would cost the treasury at most £7.6bn annually for 6 years. However, the great thing about these policies is that they will, likely, never have to be implemented and combined with the threat of a "Singapore West" plan, they would push the EU back to the negotiating table.
Vitally these plans should be published to the British people. By publicly declaring the plan for a "no deal" Brexit, the threat would become credible, not just a neo liberals pipe dream. In response to the predicted outpouring of criticism from European leaders and the UK left and threats of UK financial services being banned from operating anywhere in the EEA. The government can simply respond that "We have no wish to implement these plans and hope to work with the EU constructively to find a plan which suits both sides, but it would be both irresponsible and foolish to not plan for such an outcome. Furthermore, we only make this public announcement in response to the EU's request for openness, this is no threat merely our openness.
Simultaneously the UK government can blunt the threat of a left wing rebellion by announcing a series of relaxations to fiscal policy for ordinary working people. For instance, announcing the provision of free school breakfasts for every child across the country would be a relatively inexpensive way of announcing to the people that the government was on the side of working families.
Onto the back foot
The EU has made a core assumption after the election that the UK government is fatally weakened by the recent election and that the threat of a Corbyn government will force the UK to play a safe game. Throwing caution to the wind with such an announcement will completely wrong foot the EU negotiators, while boosting investor and consumer confidence across the UK.
The UK can then deliver its opening gambit on the "Brexit Bill", we can agree to every pound of expenditure up to 2019 and the continued financing of the programs we wish to partake in: i.e. Horizon, Erasmus and EHIC. Simultaneously, we refuse to pay a penny towards the regional development fund, European institutional costs, the Common Agricultural Policy and the Common Fisheries Policy which combined make up 70% of the cost of EU membership.
The EU will certainly refuse this opening offer and respond that unless we improve our offer there will be no trade deal, no access. Thanks to the tariff guarantees announced by the UK government, UK investor confidence will shudder but face no collapse. Meanwhile, business confidence across Europe will begin to wane as the threat of tax competition from a Singapore West on Europe's borders becomes an increasingly realistic prospect. Splits will begin to emerge as Eastern European members argue with French farmers and Northern European net contributors about where the missing €10bn of UK net contributions will come from.
After a few months of brinkmanship, the UK should then offer a goodwill gesture to continue financing the regional development fund until the next European funding round. After the addition of a couple of additional sweeteners, it is entirely reasonable to believe that the EU will accept the deal as an attempt to shore up divisions among the constituent parties about who will pay for the bill.
But what about the "Brexit Bill" agreed with the EU already in the December round of negotiations? Surely that would sink any hope of playing hardball with the EU and achieving all of the above! Haven't we already agreed to pay them for leaving? Not really. No. At the moment, all we have suggested is that we will!
Planning for the future
The UK should not try and stay in the single market. It would be impossible to regain control of our laws or borders under this scenario and would basically result in us being ruled under dictat from Brussels, certainly a worse option than just staying part of the club. Instead the UK should be unashamedly ambitious. Offering to leave the Customs Union and single market while remaining part of EFTA and gaining full access to the single market.
Initially, the EU will flat out refuse the demands, accusing the UK of cherry picking and being completely mad. The UK at this point should not budge an inch and simply say that we are offering a fair trade of full access to each other's markets, a continued partnership built on joint prosperity. We don't want to be part of the political project of the EU, but we want to be incredibly close partners to ensure each other's prosperity. Exploiting the strategy described above, we can achieve a deal outside of both the Customs Union and the single market, but with extensive access and no continuing payments to EU institutions.
What about Northern Ireland and Gibraltar?
Northern Ireland and Gibraltar do present unique problems in regard to the final settlement that we will come to with the EU. Unfortunately, these two regions are far more tied into the economic fabric of the European Economic Area and are far more dependent on other European nations for their economic livelihoods. However, the solution for each will need to be different due to the reality that the European Union has stated that the final deal will not apply to Gibraltar, unless Spain acquiesces. Which, in light of the police state crackdown in Cataluña, seems increasingly unlikely. Nonetheless, I will first confront the issue of Northern Ireland and the "invisible border" with the Republic of Ireland.
Since the Good Friday agreement of 1998, we have had almost 20 years of peace in Northern Ireland. No civilised person wants to go back to the dark days of the troubles and Remainers are completely fair to raise objection to a "clean Brexit" over concerns for the peace of Northern Ireland. It would be abhorrent to me if my vote for independence from Europe led to the explosion of instability in Northern Ireland. However, how do we keep an invisible border in Northern Ireland, unless we remain within the Customs Union? There are 2 options to achieve this, either we sign a trade deal with the EU allowing for free movement of goods across borders or Northern Ireland has to stay within the Customs Union with an internal tariff border with the rest of the UK. The 2nd option would probably lead to a collapse in the government with the DUP withdrawing support or even more worryingly could flare up tensions between the unionists and republicans.
The reality is that the Ireland border issue cannot be resolved until we have some idea about the ending trade deal. Anything else suggested by the EU is absolute rubbish. The sole reason the EU have chosen to frontload this at the beginning of the negotiation is to try and force the UK to stay in the single market and customs union in all but name. The negotiators rather cunningly have tried to trap the Brexit negotiating team into a position where any deal which doesn't threaten the peace in Northern Ireland, requires the UK to stay in the single market. The UK wisely refused to come to a "hard" deal on Northern Ireland before we have got on to trade talks and the EU accepted a "soft" indication of intent. If the EU insists again on an agreement about the border prior to conclusion of trade talks, we need to be ready to walk away from the negotiations and start piling the pressure on the EU. Unfortunately, sometimes a show of strength is the only way to make the other side understand we are being serious.
The case of Gibraltar is possibly a little simpler. Gibraltar overwhelmingly voted to stay in the EU with 96% of voters voting to Remain and in addition we need Spain's approval for the eventual deal for the UK to apply to Gibraltar. In light of these two dominant factors and how integrated Gibraltar is within the European Economic Area, we should look for a solution with Spain where Gibraltar remains part of the Single Market and Customs Union. Gibraltar, unlike the rest of the UK, is too dependent on trade with Spain to thrive outside of Europe. However, Gibraltar is a unique case in this regard. Pragmatism is the British way.
The Final Deal?
Now these negotiating steps laid out above should help the UK government take steps towards achieving a better deal for Britain. Yet nothing is ever guaranteed. The eventual deal will probably end up being settled only a month or so before the UK "crashes out" of Europe, as brinkmanship dominates these political negotiations. This will unfortunately lead to some slowing of the UK economy, as businesses put off investment decisions. Even with the economic stabilisers suggested above, growth will be tepid for the next year and a half as uncertainty over the deal hangs over the UK economy. However, once this uncertainty lifts, the UK will witness a rapid surge in growth as postponed investments are pushed forward, creating jobs, wage growth and boosting tax revenues. Over the next few years, we are in for an economic ride, but we could easily end up with a fantastic final deal.