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It Makes No Sense To Throw Away Your Strongest Card

labour leave
Written by John Mills

This report was first published by Labour Leave in May 2019. It outlines the case for ‘No Deal’ and describes all of the major preparations already undertaken. The key argument is that it makes no sense to abandon the UK’s key bargaining chip in negotiations with the EU. No Deal should be kept in play – not because this is what we should be aiming for but because we need to be able to walk away from a bad deal to secure a good one.

Foreword

Everyone can see the Brexit dilemma we are facing. The Withdrawal Agreement is deeply unsatisfactory and unpopular and there are good reasons for thinking that it would be even worse if it included the UK remaining in a Customs Union with the EU. It can only be voted through by the House of Commons if Labour MPs are whipped to support it and enough Conservatives join them. It is clear that Labour is not minded to take the risk involved in supporting this strategy, in which case the Withdrawal Agreement will almost certainly never get parliamentary approval. It is possible that this outcome might be avoided if the EU negotiators could be persuaded to accept an invisible border in Ireland, run entirely electronically with no physical infrastructure, but at present they have no incentive to accept such an arrangement. The danger then is that we drift from one extension of Article 50 to the next, while nothing gets decided and the country becomes more and more polarised and divided.

There may, however, be a way out of this problem and this pamphlet suggests what it could be. It won’t satisfy everyone, and it involves some risks and some compromises, but it could do three things, these being:

  1. It could provide us with a way ahead which, judging by recent polls, would achieve a large measure of support among the electorate.
  2. It could produce a much better outcome for the UK than the Withdrawal Agreement.
  3. Hopefully, it would lead to a settlement between the UK and the EU which  was sufficiently satisfactory to most people for it to last, thus making the relationship between the UK and the EU one which was widely accepted and settled rather than one generating constant strife and division.

To do this, we need to get the EU to change some elements of the Withdrawal Agreement. In particular:

  1. We need to avoid Northern Ireland potentially being kept permanently within the EU regulatory framework. The Irish border issue needs to be solved with an invisible border, using existing administrative measures, requiring declarations to be submitted electronically (as with VAT) and with any checks being made at traders’ premises.
  2. While we should honour our obligations, we should not be committed in advance to paying the EU £39bn without full justification and knowing what we are going to get in return for this very large sum of money.
  3. We would need to be able to negotiate trade agreements with third countries.
  4. We would then be in a better bargaining position to use our huge balance of  payments deficit (about £100bn every year) with the EU27 to secure reasonable bi-lateral trading terms.

The EU negotiators are not going to agree new arrangements like this unless sufficient pressure is brought to bear on them to make them concede the necessary changes. The reality is that the only way of achieving this goal is for the UK to        be prepared leave the EU without a fully comprehensive deal being in place, if a reasonable comprehensive deal cannot be achieved. Could we negotiate a better deal along these lines? We believe we could, with the sequence of events required being along the following lines:

  1. The UK and the EU would both need to recognise that the Withdrawal Agreement, with or without the UK in a Customs Union, is not a viable way ahead and that some aspects need to be renegotiated.
  2. The UK should then accept the offer made by Donald Tusk and Michel Barnier of a free trade deal between the EU and the UK broadly along Canadian CETA lines. This would enable us to maintain tariff and quota-free trade in goods between the EU and the UK while providing the foundation for as comprehensive as possible a deal on trade in services and maximum cooperation on all other matters of common interest.
  3. To provide the EU with the incentive to make this deal fair and acceptable to the UK, we would need to be prepared to walk away from a deal which was not satisfactory and be willing to trade with the EU on WTO terms if a comprehensive agreement could not be reached. It would not be our intention to end up with this outcome, but, unless we were prepared for this eventuality, it seems likely that we would never secure terms from the EU which the UK electorate would regard as being satisfactory and stable.

At the moment, there is little prospect of this objective being achieved because the House of Commons contains a large majority of MPs who are against any kind of “No Deal” scenario. This was an understandable attitude while it appeared that planes would not fly, hauliers would not operate and congestion at the ports would lead to shortages of food and medicines. We believe that, in the light of recent preparations, these fears, and many other similar concerns, are based on substantially inaccurate assessments on what would now be entailed by trading with the EU27 on WTO terms, and that ruling out the option of doing so is deeply damaging to any prospect of the UK emerging from the Brexit negotiations with a generally acceptable and viable long-term outcome.      

It is vital, therefore, for both MPs and the public to be provided with as up-to-date, accurate and comprehensive an assessment as possible of what the UK trading with the EU27 on WTO terms would entail. To do this, an evaluation is required of the series of mini-deals and practical measures which have been put in place to ensure that the vast majority of the disruption which people fear will either not occur at all or will be much less and of shorter duration than they expect. This is what this pamphlet sets out to do. It is then for MPs to make a judgement as to whether the risks entailed by not having a comprehensive deal would really be greater than any of the alternatives.

Assessment of the “No Comprehensive Deal” option

Here is our assessment, mostly in question and answer form, of where, with all the preparations which have been made, we would now be with “No Deal”, assuming that, even though this is still what we would like to achieve, we could not come to a satisfactory agreement with the EU27, and that, as a result, we decided to leave with no comprehensive deal in place.

1. Surely ‘No Deal’ would be a disaster?

Response

We believe that there would be some disruption but that its scale and duration have been greatly exaggerated. In particular:

  • There won’t be delays and congestion causing shortages of food, medicine or anything else because all the essential preparations are in place in Dover and Calais.
    • HMRC and DEFRA promise no additional checks on imports. Calais has installed a ‘Smart Border’ to guarantee smooth flow for fear of losing  UK  trade to Belgian or Dutch ports.
  • An array of mini-deals is in place to ensure planes will fly, hauliers have licences, safety certificates are recognised, etc.
  • We would be able to mitigate the impact of EU tariffs on exports to the EU since our savings on Britain’s net contribution to the EU budget would far outweigh the cost of compensating UK exporters facing high EU tariffs.
    • If the EU and UK agree to continue, or later resume, tariff free trade, which

would be mutually advantageous, they would only need to notify the WTO.

  • The UK has renegotiated agreements covering the majority of our

exports to countries with which the EU has free trade agreements.

  • Every DEXEU minister responsible for leave preparations has confirmed that the UK is ready to leave with or without a withdrawal agreement.

2. Surely the EU has ruled out any agreement other than the existing Withdrawal Agreement?

Response

Yes of course.

  • The Withdrawal Agreement is very much to the EU’s advantage.
  • They get £39 billion for nothing; they get control of our trade policy; and it will prevent us streamlining our regulations (there should be no question of deregulation) to make our industry more competitive.
  • They will continue to insist that it is the only way forward unless the UK is prepared to leave the table if the agreement is not significantly changed. At   that point the EU will be faced with either ‘no deal’ or some deal better for them that is not the draft WA/PD.

3. Isn’t remaining in a customs union a reasonable compromise?

Response

Absolutely not. Handing over our trade policy to a foreign government with no say in its rules is a deeply unsatisfactory way forward, which is why Parliament has decisively rejected a similar proposal three times.

  • Most of the world trades with the EU on WTO terms, and does so very satisfactorily.
  • The great economic prize of leaving the EU is regaining regulatory and fiscal autonomy, which is impossible if we remain in a customs union and subject      to single market laws.

4. Aren’t a customs union plus single market laws essential to avoid a hard border in Ireland?

Response

Not at all.

  • The Commission, Irish and British governments have all said that, if Britain leaves with no withdrawal agreement, they will create an invisible border with no checks or infrastructure at the border.
  • This is perfectly feasible, using existing administrative processes, without new technology. We already handle cross border differences in VAT, excise duties, etc by electronic declarations and checks at the premises of exporter and importer.
  • The Alternative Arrangements Working Group (set by the Malthouse Compromise MPs and No  10)  hammered  out  with  officials  how  this  could be done.

5. Has “No Deal” been treated fairly by the media?

Response

No, on the contrary “No Deal” has been demonised:

  • by government, to scare MPs to vote for the draft Withdrawal Agreement,
  • by Remainers, to deprive the UK of bargaining power so that we have to

choose between remaining in the EU and whatever deal the EU offers,

  • by the EU27, who would be big losers, with no compensating gains.

It is vital to convince people that Britain must be ready and willing to leave on WTO terms (with the mini-deals and border preparations now in place), because:

  • far from a disaster, the UK would be a net beneficiary under WTO rules  (though a Canada-style free trade agreement would be better still); whereas   the EU27 would be net losers,
  • ruling out ‘No Deal’ means we have to accept whatever deal the EU offers,
  • ‘No Deal’ is a route to an EU/UK free trade deal, which Donald Tusk, President of the European Council, and Michel Barnier, the EU’s Chief Negotiator have both offered us. This would be the ideal and final outcome for both the UK    and EU. The fears which people understandably had before preparations

were made or announced (about congestion at the ports; the EU refusing permits for planes, lorries and trains, and erecting non-tariff barriers; the impact of tariffs; and trade agreements with third countries lapsing), have now been resolved.

Because the original specific fears have largely been resolved, the  demonisers resort to asserting that ‘No Deal’ would be a ‘disaster’ or ‘catastrophe’ without citing specific problems. Unfortunately, the BBC1 and mainstream media rarely challenge them on this, whereas they aggressively challenge anyone arguing that  we should be prepared to leave on WTO terms.

It is therefore important to challenge assertions that leaving with ‘No Deal’ would be a disaster and be well prepared to defend leaving on WTO terms and rebut specific scare stories.

6. Do we really want to leave the EU with ‘No Deal’?

Response

The ideal outcome would be to continue trading with the EU with zero tariffs, as  we could do if both sides agree. But WTO terms plus the mini-deals already put in place with the EU would be fine, much better than the Withdrawal Agreement, and a route to a free trade agreement with the EU.

  • We trade with the USA, our biggest national market, without any ‘deal’ on   WTO terms very successfully [see point 14]. We have a surplus with America but a huge deficit with the EU.
  • Our exports to countries we trade with on WTO terms has risen three times as fast as our trade with the EU single market over the last twenty years.
  • People now simply assert that leaving with no agreement would be a disaster without  specifying  how,  because  all  the  original  concerns   about   planes not flying, hauliers not getting licences, Airbus wings not getting safety certification etc have been resolved – and both Dover and Calais have put processes in place to prevent delays and congestion.
  • The people who now demonise leaving the EU with no withdrawal agreement previously claimed it would be a disaster not to join the ERM, a catastrophe to leave it, a calamity not to join the Euro, the 1981 budget would (as 364 economists asserted) cause a recession as would a vote for Leave. Why believe them now?
  • And they never mention the positive benefits of leaving without the proposed Withdrawal Agreement: we would keep £39 billion, end corrosive uncertainty, force all parties to implement an invisible border in Ireland; and thereby remove the only obstacle to the Canada style free trade deal which the EU has repeatedly offered us.

7. Then why do CBI, BoE, IMF, etc, say it would be damaging?

Response

They all have an appalling record of politically motivated forecasts which proved wrong. So why believe them now?

  • They all predicted a recession and unemployment if the UK voted to leave. Yet the UK has seen employment reach record levels and GDP has grown faster than Germany which is now teetering on the brink of recession.
  • When did the CBI, or even the Treasury, get this sort of forecast right? Not on

joining the ERM, leaving the ERM, the Euro or the 2008 financial crisis etc.

  • Firms giving their reasons on the CBI website  for  fearing  No  Deal  virtually all cite delays at the ports and appear not to know that this potential problem has been largely dealt with. The Ford motor company  also cites recession and currency depreciation  if  the  UK  voted  to  leave but does not explain the basis of this foray into economic forecasting.
  • Almost all ‘establishment’ predictions about ‘No Deal’:
    • ignore the measures taken at Dover and Calais to ensure no delays or congestion,
    • assume Britain applies the EU’s external tariffs,
    • assume we never negotiate or novate any free trade deals with third countries,
    • ignore the £39billion saving,
    • ignore the benefits of ending uncertainty,
    • assume the EU will never enter into a free-trade deal with the UK despite offering one.

1 The BBC has allowed the following and many others to assert ‘no deal will be a disaster’ without challenge: Heseltine, Patten, both Miliband’s, Starmer, Benn, Clegg, Greg Clarke, Ken Clarke, Hammond, Fairbairn, etc.

8. Won’t No Deal hurt the EU far less than the UK?

Response

No. On the contrary.

  • The UK’s savings on its net contribution (£10-12 billion pa) would far exceed the cost of all tariffs on UK exports to the EU (£5 billion pa). And that ignores revenue from tariffs on EU exports to the UK which would amount to £13 billion if we applied the existing common external tariff, less given that we intend to abolish many tariffs.
  • By contrast, the EU would be large net losers. They would lose the UK net contribution to their budget (£10-12 billion per annum) and, because they export highly protected goods to the UK market, their exporters would face large losses (£13 billion per annum) whether we apply existing high tariffs to their goods or abolish some of those tariffs forcing them to reduce their prices to world levels.

9. Won’t delays and congestion at Dover cause shortages of food, medicines, just-in-time supply chains, etc?

Response

No. Both Dover and Calais have put processes in place to ensure uninterrupted

flow of traffic even if there is no withdrawal agreement.

  • Dover.
    • HMRC have always said they will not carry out any more checks at Dover under WTO rules than they do at present. They only check where intelligence or profiling suggest that a lorry may be smuggling cigarettes, other dutiable goods, drugs or illegal immigrants. They do not expect any of those risks to  increase after Brexit – so no need for more checks.
    • New ‘Simplified Transitional Procedures’ mean that importers complete their customs declarations electronically if need be after they have passed customs. They will not have to ‘fill in paper work at the port’. The rare physical checks required will, as at present, be mainly carried out away from the port.
    • If tariffs apply to any goods, they will not be paid at the port but “computer to computer” like VAT on imports at present.
    • Likewise, DEFRA will not carry out additional checks on animals, food and plants from the EU27 since the risk of disease etc will not have changed. Britain will not be obliged to follow EU rules requiring unnecessary checks. If ever UK

and EU standards diverge, additional checks would relate just to areas where our standards are stricter.

  • Calais.
    • French customs are introducing a “smart border” at Calais (see https://www. douane.gouv.fr/articles/a16171-the-smart-border) plus four new lorry lanes, a scanner for trains moving at 30kmph and a Border Inspection Post for animal products away from the port.
    • They are determined to maintain the free flow of lorries for fear of losing trade to Belgian and Dutch ports which are also well prepared for Brexit (especially as a new port alongside Calais is due on stream soon based on expectation of growing trade with UK).

10. What about the car industry?

Response

  • Their main concern has been that just-in-time supply chains could be interrupted by congestion and customs procedures at Dover/Calais.
    • But both ports have now put processes in place to ensure free flow of lorries through the ports. (see Point 9).
    • Moreover, 47% of imported components come from outside the EU2 so are subject to customs procedures without interrupting Just in Time schedules.
    • The Ford Motor Company says on the CBI website that measures are fully in place to protect its just-in-time operations.
  • Their other concern is that car exports to the EU would face 10% tariffs. These would be more serious if we took no action to mitigate them.
    • But we will be in a position financially and legally – to help the industry. We should do so especially as the car industry is suffering from the government’s volte face on diesel and the impending compulsory switch to electric vehicles.
    • In any case, firms are already benefitting from the 15% depreciation of sterling since the referendum and would additionally benefit from the abolition of the 4.5 % tariff on imports of car components including from outside the EU.
    • 10% tariff on the UK’s £11.1 billion car exports to the EU in 20183 would cost exporters £1.1 billion (£1.3billion including the 4.5% tariff on component exports to the EU). However, a 10% tariff on UK’s £28 billion car imports4 from the EU27 would amount to £2.8 billion.
    • So, under WTO rules, we could use part of that tariff revenue to compensate UK based manufacturers on R&D, manufacturing and training costs, as already pledged to Nissan.
    • N.B. Only 37% of UK car exports by value went to the EU27 in 2018. The often-quoted figure of “over 50%” of car exports going to the EU refers to the number of vehicles, but the average value of cars exported to non-EU markets is 75% higher than those exported to the EU275.

11. What about UK farmers who will face high tariffs to the EU, their biggest export market?

Response

Overall, the UK imports far more agri-food from the EU than we export to them.    If the UK applies the EU external tariff against EU imports, British farmers overall will benefit from increased protection.

But in sectors where a significant proportion of output is exported to the EU (particularly sheep) high EU tariffs would divert product to the domestic market, depressing UK prices.

  • So, the government should support farmers’ incomes (with something like the ‘deficiency payments’ used before we joined the EEC) while they adjust to the new situation.
  • That will be particularly important for Northern Ireland (where the decision to allow tariff free cross-border imports from Ireland could depress some local prices) and for hill farmers who perform a valuable environmental service in maintaining the local ecology.
  • However, a fraction of revenues from tariffs on agri-food imports will be sufficient to finance such support.
  • Most fears are based on the assumption that nothing will be done to assist this sector, which is not realistic.

2 Para 33 % of imported inputs measured by value added. Sectoral Analyses: Automotive Report www.parliament.uk/documents/ commons- committees/Exiting-the-European-Union/17-19/Sectoral%20Analyses/4-Sectoral-Analyses-Automotive- Report.pdf

3 European Automobile Manufacturers Association Brexit and the Automobile Industry 2019

4        Ibid

5        Ibid

12. But what about the impact of tariffs on food prices for UK consumers?

Response

  • The government proposes to abolish tariffs on foodstuffs the UK does not produce which will partly offset the application of tariffs to some food imports from the EU.
  • The Trade Policy Observatory estimated that if the UK applied full EU tariffs food prices would rise by 3.5% but that ignores the proposed abolition of tariffs on items the UK does not produce which would reduce that significantly. [They also estimated that delays, customs checks, and non-tariff barriers similar to those existing with non-EU states would arbitrarily double the impact on prices. However, DEFRA/HMRC propose no additional checks and the UK will have identical standards so the impact of these NTBs is likely to be a fraction of this amount, as is the case in Switzerland.]

13. But a leaked paragraph from the Cabinet Secretary’s letter said “in the short term” food prices could rise by “up to 10%”.

Response

Note his weasel words:

    • “up to” i.e. it may well be much less,
    • “in the short term” i.e. this would at most be a temporary impact on the cost of living,
    • assuming “significant disruption in the short term” particularly effecting  “fresh produce prices”. There is no reason to suppose  we  will  experience  such disruption on imports even in the short term given that DEFRA/HMRC will impose no extra checks and will “prioritise flow over compliance”.
    • Civil Servants are past masters at arguing against any change and would do so even if they were not personally opposed to Brexit.

 

14. No country trades just on WTO terms there are scores of bilateral agreements e.g. between the EU and USA which we would have to replicate.

Response

  • There are 31 bilateral micro-deals between the EU and the US which relate to trade, mostly very minor. For example, three of these agreements relate to “cooperation and voluntary labelling of energy efficiency of office furniture”. Other micro-agreements simply formalise cooperation, e.g. on customs procedures, which was happening before the micro-agreement and will continue whether or not it is replicated.
  • The most important of these EU/USA agreements has already been replicated between the UK and USA. It allows each country’s standard certifying bodies to certify that goods meet the other country’s standards. So, UK bodies will continue to be able to certify that UK products meet US standards and vice versa eliminating the need to send samples across the Atlantic to get approval.
  • The air transport agreements between the UK and USA, which were made under the aegis of the EU, have also been renegotiated.

15. The UK will lose out on EU free trade deals with third countries of which few have been renegotiated.

Response

  • In fact, the UK has renegotiated deals with some of the most important of these partners (notably Switzerland which alone accounts for 27% of our exports under these deals) including the Canadian deal, which is imminent. They account for over half of UK exports to countries with which the EU has FTAs. Even more will be completed before Brexit now occurs.
  • Many of the FTAs not yet renegotiated are with very small countries and developing countries, many of which would, in practice, continue to trade on current terms before formal renegotiation since they would not want to face tariffs on their exports to the UK.
  • Some more significant countries with FTAs with the EU have been reluctant to waste time negotiating a FTA with the UK since they assume we will not leave without a Withdrawal Agreement and want to see what the final relationship with the EU is.
  • N.B. The one significant trading partner which cannot negotiate continuing tariff free trade with the UK is Turkey, because, as part of a customs union   with the EU, it is not free to set its own external tariffs. That illustrates what would happen to the UK if we remain linked by a customs union with the EU post Brexit!

16. WTO terms means applying EU tariffs to trade with the EU. See also Point 10 Cars and Points 11 and 12 Agriculture/Food prices)

Response

  • The average tariff on UK exports to the EU will be 4%, for all but the highest tariffs this has been offset by the 15% more competitive exchange rate since the referendum.
  • The total cost of those tariffs on UK exports to the EU will be £5 billion which is half the annual saving of our net contribution of £10-12 billion. So, UK plc are net gainers even before taking into account additional tariff revenues from tariffs on imports from the EU of up to £13 billion. We can therefore use part of that saving (or part of extra revenues from tariffs on imports from the EU) to compensate losers from the highest tariffs.
  • By contrast, the EU27 will be net losers. In addition to losing our net contribution of £10-12 billion, the tariffs on their imports to the UK would be £13 billion if we apply the common external tariff to all imports. The reason their tariff burden is so much higher is partly that the EU27 export far more to us than we do to them, but mainly because they export highly protected goods to us (like cars, agri-foods and luxury goods). By contrast, the UK exports goods which are competitive at world prices without needing protective tariffs.
  • Consequently, if we slash some tariffs (as we should and will to minimise the impact on UK consumers), EU exporters will still have to cut their prices to compete with goods from third countries.

17. Won’t Non-Tariff Barriers add to the costs facing UK exporters? (See Point 18 for cost of customs declarations)

Response

Estimates of these costs are largely plucked from the air and hugely exaggerated.

  • They are often based on estimates (themselves largely theoretical) of the impact of different regulations on trade between third countries. But the UK and EU27 will start with identical rules and regulations so such costs will be minimal.
  • The main extra cost will be getting or renewing certification that products meet EU rules. This is a one-off cost which is usually negligible spread over total sales.
  • UK exporters will not have to produce a specific range of products for the EU market whereas they may do so e.g. for the USA, Japan or China.

18. The government claim that the cost of completing customs declarations will be £13 billion pa.

Response

This figure is totally discredited.

  • Even the government admit that this figure involves double counting. Only half of the cost of these declarations will fall on UK producers or consumers (the  rest will be borne by EU27 producers or consumers).
  • Moreover, their estimate assumes that there are no savings from repetition and digitalisation. In fact once a declaration has been made, changing the date and amount in future declarations is almost costless. Actual importers like JML, Next, Tate and Lyle all say the transactions cost them less than 1% of trade.
  • That may be why the Swiss calculate that the cost of customs declarations and other border processes adds less than 0.1% to the cost of trade with the EU, equivalent to less than £200 million for the UK. And the Swiss are measuring actual costs not making theoretical estimates.
  • £13 billion implies 370,000 people costing £35,000 each working full time

filling in customs declarations, which is ludicrous!

19. Wouldn’t the impact on Northern Ireland of leaving with no Withdrawal Agreement be disastrous for border trade and the peace process, and would require Direct Rule?

a. “No Deal would mean a hard border.” Response

On the contrary.

  • Both the Irish government and the Commission have repeated previous assurances that in the event of ‘No Deal’ they will operate an invisible border. The UK government always maintained (as did the previous Irish government before Varadkar became Taoiseach) that it is possible to deal with cross border trade without checks or infrastructure at the border.
    • Varadkar: “In terms of a No Deal scenario we won’t be installing a border between Northern Ireland and Ireland, and everyone knows that.”
    • Tusk: “If negotiations fail with the Tory government on the exit agreement the European Union will not impose a border, customs posts or any other kind of infrastructure on the frontier in order to protect the European borders?”
    • Jon Thompson, CEO of HMRC:  “we do not … require  any infrastructure border  between  Northern  Ireland and Ireland under any circumstances”.
  • So ‘No Deal’ would call the bluff on the Irish border issue, forcing all three parties

to implement an invisible border.

  • An invisible border does not require “new technology”, other than filing customs declarations and making duty payments electronically, as is done presently with duty and VAT returns (which already require companies to list trade across the border separately).
  • If the EU requires 100% checks on animals and animal products, despite the whole island of Ireland being a single phytosanitary area, they can be carried out away from the border.
    • Although EU customs’ rules state that Border Inspection Posts must be in the immediate vicinity of the border, at Rotterdam that is interpreted as 40km away from the actual port, and the new facility at Calais is 12km from the port.
  • 100% visual checks on animals arriving from GB are currently carried out at Larne. This is because the sea provides protection against transmission of disease so it has been pragmatically accepted that the island of Ireland should be treated as a single phytosanitary area distinct from Great Britain.
  • WTO Articles state that: “The provisions of this Agreement shall not be construed to prevent advantages accorded by any contracting party to adjacent countries in order to facilitate frontier traffic”. (WTO Article 24 para 3a).

b. Direct Rule.

A leaked paragraph from the Sedwill letter to the Cabinet says: “The current powers granted to the Northern Irish Secretary would not be adequate for the pace, breadth or controversy of the decisions needed to be taken through a No Deal exit. Therefore we would have to introduce Direct Rule.”

Response

  • It is not clear what measures he considers would be necessary. It has already been announced that no tariffs would be collected on imports across the border, itself a radical decision. That may make it necessary to introduce measures to maintain farm incomes if local prices are depressed. But such measures would be likely to have widespread support.
  • Conceivably, the pressures might prompt the major parties to overcome their differences and restore devolved government, though it would not be sensible to rely on that.

c. Threat to the Good Friday Agreement (GFA).

Response

  • On the contrary, the Withdrawal Agreement’s Irish Protocol is an affront to the GFA. It would change the status of Northern Ireland without the consent of the people of Northern Ireland, making NI subject to the same laws and tariffs as southern Ireland and the EU27, different from those of the rest of the UK and without the approval of either the NI Assembly or the UK parliament.
  • That is why David Trimble, Nobel Peace Prize winner and architect of the GFA, argues that the draft Withdrawal Agreement undermines the GFA.
  • Lord Bew, another architect of the GFA says the Withdrawal Agreement, far from protecting the GFA, “turns the Belfast Agreement on its head”.

20. The EU27 will not agree to a Free Trade Agreement with UK unless we agree to Irish Protocol.

Response

  • Tusk twice offered the UK a Canada +++ free trade agreement. In fact, his offer was explicitly made to the UK.
  • In any case, if we leave with No Deal, Barnier, Tusk and Varadkar have acknowledged that they will in practice establish an invisible border. Once this is in place it removes the only obstacle to a UK/EU free trade agreement.
  • The only proposal which won the majority of support in Parliament was the Brady amendment and Malthouse compromise to replace the Irish protocol by alternative procedures to ensure an invisible Irish border. Astonishingly, the government has not put that to the EU because HMT and other elements in the government machine have used the Irish border issue as an excuse to press for a customs union.
  • Annegret Kramp-Karrenbauer, the anointed successor to Angel Merkel, has said that ‘no-one in Europe would stand in the way of a few days talks’ to negotiate an invisible border. It is absurd for UK commentators to suggest they know better what the EU will accept than the person who will be Europe’s most powerful leader.
  • If both the UK and EU27 are willing to agree to continue, or after we have left and tempers have subsided, we should resume trading with zero tariffs that could be agreed by a simple exchange of letters and notification to the WTO. WTO rules only require free trade in goods to establish a free trade area. Negotiations on trade in services, and cooperation on security, data sharing, competition policy, research and education could then take place.
  • The UK is the EU27’s largest export market. Even though they want to make an example of the UK to discourage voters in other member states from supporting Eurosceptic parties, the EU27 will not want to permanently make their goods subject to tariffs.

21. Aren’t services far more important to the UK than goods trade, and a barebones Free Trade Deal could only cover tariffs on goods?

Response

Services do constitute more than half UK exports by value added (the important measure since it equals the income actually generated in the UK).

  • Most UK service companies, particularly in the financial sector, have taken steps to ensure that they can continue to trade with continental customers without passporting or enhanced equivalence. This has proved far less costly and involves moving far fewer people than early estimates suggested.
  • The PM accepted in her Florence speech that passporting would not continue even with an agreement and the Political Declaration makes no promise of ‘enhanced equivalence’. So ‘No Deal’ is not much different from ‘the only deal on offer’.
  • Most financial firms and the Bank of England have concluded that it would be far more damaging in the long term to be a rule taker rather than being a rule maker in London and accepting the costs of doing business on the continent via subsidiaries or other ways of operating within EU rules.

22. Won’t a ‘No Deal’ Brexit cause all sorts of disruption?

Response

There won’t really be a ‘No Deal’ Brexit since an array of mini-deals have been done by the EU, resolving the issues earlier fears about planes not flying, etc.

The EU has legislated that planes will fly, lorries get licences, airbus can export its wings, and live animals and animal products be “swiftly” allowed entry, all subject to the UK reciprocating. It could be described as a ‘managed No Deal’!

  • Planes.
    • The EU agreed to allow UK airlines to fly over, to and back from the EU, provided the UK reciprocates, which it has.
    • This precludes ‘cabotage’, i.e. landing in one EU airport, picking up passengers and continuing to another EU airport. However, very few UK based airlines do this. [IAG, the Spanish based group which owns BA, could be affected but is seeking ways of complying with EU rules.]
    • The UK has 111 bilateral agreements in its own right which will continue unchanged. Of the 17 negotiated via the EU, virtually all (including with the US, covering 98% of the passengers carried), have been successfully novated to the UK.
  • Lorries.
    • After concerns that insufficient permits would be available, the EU has now agreed to make permits available for this year. For future years, the UK and EU will work together within the European Conference of Transport Ministers, covering 48 states to issue sufficient licences for all UK and EU hauliers.
    • The UK, with EU support, has become a member of the Common Transit Convention, so hauliers only have to make customs declarations and pay import duties when they arrive at their final destination.
  • Trains.
    • Fears that Eurotunnel trains would not run were never credible and it has now been confirmed that they will continue to run with both freight and passengers.
  • Fears that the EU will withhold product approvals.
    • Airbus warned last year that: “In the absence of a Brexit agreement, UK aerospace companies will not be covered anymore under existing regulatory approvals … including EASA Design, Production and Maintenance Organisation Approvals.” However, the EU has extended these licences temporarily, giving time for a permanent solution whereby EASA recognises the UK’s safety certification systems as it does for other non-EU countries.
    • Car “type approvals” previously granted by a UK body may no longer be valid, so car manufacturers have simply transferred their approvals over to the equivalent Swedish body.
    • Other industries are taking similar steps.
    • The EU does not capriciously withhold approvals. To do so would contravene WTO rules as well as EU law.
  • Fears about checks delaying food, etc.
    • Stories that the UK will run out of food, particularly fresh food, seem to have originated in the belief that the UK would have to check 100% of animal, plant and food products entering the UK. This assumed that the UK would still operate the EU Customs Code (misinterpreted and rigidly applied) – whereas we will be free to set and interpret our own rules on imports.
    • The EU recognised that: “In a No Deal scenario the entry of many goods and animals subject to sanitary and phytosanitary (SPS) rules will be prohibited unless the United Kingdom is listed in EU  law  as an authorised third country”. The EU therefore announced that the Commission will: “swiftly list the United Kingdom … so as to allow the entry of live animals and animal products from the United Kingdom into the European Union”.
    • The EU will, at least initially, apply the same checks on UK exports on agri- foods to the EU27 as they apply to agri-foods from most third countries. Animals and animal products will have to enter via a Border Inspection Post (BIP). Calais did not have a BIP but one has been established at Calais some 12km from the main port and with parking space to avoid congestion.
    • The EU only checks a proportion of, e.g. New Zealand lamb, because it recognises their standards are as high as the EU’s. Under WTO rules the EU should, and in due course presumably will, afford UK produce similar exemption from 100% checks (as long as our standards remain identical to those of the EU).

23. Many companies are unprepared for Brexit since they have not yet applied for EORI numbers needed to make customs declarations.

Response

  • The companies that have made preparations undoubtedly account for the vast majority of UK/EU trade. (In most economic sectors the 80:20 rule applies, so the biggest 20% of traders probably account for roughly 80% of trade).
  • Most companies which have yet to apply for EORI numbers are presumably less frequent traders and intend to apply ahead of making any cross-channel transactions should a No Deal Brexit occur. It takes less than 10 minutes to obtain an EORI number (unless HMRC need to make checks, taking up to 3 days).
  • Any lorry headed for the UK which has not completed the necessary electronic export procedure would be diverted away from the channel ports to avoid congestion. Conversely, lorries heading to the continent will need to complete necessary declarations to obtain tickets/boarding passes for tunnel or ferries.

24. EU legislation built up over 45 years won’t be transferred before we leave.

Response

It is all in place.

  • Although the government originally thought nearly 1,000 statutory instruments would need to be laid, in the end only 570 were needed.
  • They have now all been laid and, where appropriate, scrutinised, debated and approved by both Houses of Parliament.

25. Surely Britain owes, or is committed to pay, the EU £39 billion even if we leave without a withdrawal agreement?

Response

Not so. The Lords’ (heavily pro-Remain) EU Financial Affairs Sub-committee concluded that “Article 50 TEU allows the UK to leave the EU without being liable for outstanding financial obligations under the EU budget or other financial instruments, unless a withdrawal agreement is concluded.” City lawyers reached the same conclusion.

  • Britain should of course pay any sums it legally owes the EU, if any. To smooth the EU’s ruffled feathers, we might agree to submit the EU’s claims to arbitration by an appropriate international tribunal, with every confidence of winning.
  • The amounts indicated in the draft agreement were offered on the basis that ‘nothing is agreed unless everything is agreed’ in the expectation of a positive trade deal, but the EU refuses to negotiate a trade deal until the WA is signed off.

According to the National Audit Office (NAO), there are four main components

of the £39 billion:

  • Annual net contributions. Nearly half the expected £39 billion would have represented the UK’s net annual contributions to the EU during the 21-month transition period, which will not arise without a Withdrawal Agreement. No-one contests that we would keep this if we left with no transition period.
  • Reste à liquider. The EU authorises some spending commitments on programmes extending several years ahead. Britain’s net share of these outstanding commitments is put at about £18billion. There is no precedent for a country leaving an international organisation being expected to contribute to ongoing programmes initiated when it was a member. Organisations whose income declines, whether as a result of their membership base shrinking or some other reason, have to readjust their budgets.
  • Pensions. The remainder is largely a contribution to the accrued pension liabilities of civil servants (12% of all  staff  not  specifically  UK nationals). But the EU has always chosen to finance its pension liabilities on a pay-as-you-go basis when staff retire, not by putting money into a fund as entitlements accrue over employees’ working lives. New member states therefore pay for the actual pensions of civil servants who retired before the new country joined. Indeed, the UK has been paying towards pensions earned before we became members. To apply the pay-as-you-go principle while the UK was a member state but then to apply the accruals basis in respect of pensions payable after we leave, is manifestly unjust. Again, there is no precedent for an organisation which funds its pensions on a pay-as-you-go to charge a leaving member on an accruals basis.
  • EIB capital. The only significant positive item is the return of the UK’s initial capital contribution to the European Investment Bank. However, the EU proposes to withhold the UK’s share of the bank’s accumulated capital which logically only built up because of the UK’s initial investment.

Conclusion

In the light of the assessments set out above on all the major consequences involved in the UK leaving the EU without a comprehensive deal in place, a major judgement has to be made as to whether the overall risk entailed by the UK leaving the UK on this basis is greater than the consequences of further stalemate on the UK’s Brexit negotiations, or the UK agreeing a really poor deal along the lines of the Withdrawal Agreement. No course of action can avoid some downsides and it is not the intention behind what is recommended in this pamphlet that we should aim to leave the EU without a comprehensive deal. It would be much better if one could be concluded.

Our conclusion, however, is that we are not likely to get there without a “no comprehensive deal” outcome being seen as a credible out-turn for the UK when viewed from the EU’s perspective, to stop them insisting on an unsatisfactory deal with us.

Our judgement is therefore that, if we are going to conclude a satisfactory comprehensive deal, we have to be able and willing to walk away without one if we cannot negotiate reasonable terms. The aim of this pamphlet is therefore not to advocate “No Deal” but to show that, if no satisfactory agreement can be achieved, “No Deal” would not only be better than the Withdrawal Agreement, but that being willing to accept this outcome is the only way to achieve the deal we really need with the EU.

About the author

John Mills