A No-Deal Brexit has become the bogeyman in the public debate. The media is full of stories about food shortages, lack of medicine and mayhem at the borders. A majority of Parliament refuses to even contemplate it. But what does no-deal really mean?
Most proponents of a no-deal Brexit want to leave ‘on WTO terms’, meaning that the basis for trade with the EU in the aftermath of leaving would be World Trade Organisation rules. They would then seek to negotiate a free trade agreement to allow continued frictionless trade with the EU.
WTO’s General Agreement on Tariffs and Trade (GATT) governs trade in goods and merchandise. Under WTO rules, countries can enter into free trade agreements or customs unions to bypass the so-called non-discrimination rule known as most-favoured nation treatment (MFN). Under this rule, any advantage (meaning lower tariffs) extended to one country has to be extended to all WTO members. The UK would seek to agree a free trade agreement with the EU to allow frictionless trade to continue with the continent without having to unilaterally remove tariffs for all WTO members – but what would happen while such a deal was negotiated? Article 24 (A24) of GATT, allows an interim bilateral trade agreement while a free trade agreement is being negotiated, crucially without being subject to the MFN rule. The UK would be able to trade tariff free with the EU for a period of up to 10 years, while a trade agreement was being negotiated, without having to extend tariff free trade to other WTO members. But the obvious problem is that in the case of no deal, the UK does not have any interim trade agreement, it has no trading relationship at all. A24 would therefore not apply until an interim agreement including a timetable for negotiating a full trade agreement had been agreed.
The A24 argument then relies on the UK being able to quickly negotiate an interim agreement to allow trade to continue while the presumably protracted process of negotiating a full free trade agreement got underway. One obvious approach would be to agree to continue the current trade relationship, including membership of the single market and customs union, but the UK can obviously not decide this unilaterally. The EU would need to agree. If afterwards the parties failed to agree a comprehensive trade deal, the UK could withdraw from the temporary agreement, leave the customs union and continue trade under WTOrules. As a sidenote, it is not clear why an interim agreement wouldn’t qualify as a full trade agreement, to be replaced by another more comprehensive one at a later stage, and therefore why A24 is relevant at all.
What about services? Under WTO rules, trade in services is governed by the General Agreement on Trade in Services (GATS). This is a relatively non-comprehensive agreement which would not secure so-called passporting rights for financial services. It is clear that a key purpose of negotiating a free trade agreement would be to secure frictionless trade in services.
But the EU’s position has been that before any trade relationship can be discussed, several issues including citizen’s rights, a financial settlement and the Irish border question will have to be addressed first. This was the purpose of the notorious withdrawal agreement, which failed to pass through Parliament. Under the withdrawal agreement, the interim trade agreement was the UK’s continued membership of the internal market and customs union, but the so-called Irish backstop and the UK’s inability to unilaterally decide to leave this interim state was a crucial reason for its failure. Instead, no-deal Brexiteers rely on the mutual interest in sorting out trade relations and argue that the EU will be as incentivised as the UK to agree interim trade relations – a deal which the UK can unilaterally leave, should a comprehensive free trade agreement prove illusive.
A no-deal Brexit is not without risks and is certainly uncertain. It is clear that a free trade agreement is in the mutual interest of both the UK and the EU, and in the medium term there is little doubt that a deal would be done. The risk is for severe disruption in the short term, should the EU be obstinate and in an act of self harm refuse to agree to interim arrangements. Should trade revert to WTO rules, the impact would be significant, not least in the crucial service sector. What seems paramount is to avoid ‘crashing out’; for the UK to announce in ample time the intention to leave without a withdrawal agreement, thereby allowing for time to make arrangements for the short term. This is the strategy proposed by former Bank of England Governor Mervyn King. But a Parliament strongly opposed to any hard Brexit has so far refused to countenance a proactive approach, presumably exactly because it would facilitate no-deal. Being unprepared seems preferable as it allows the narrative of a no-deal disaster to continue.
The end state of Brexit is a new relationship with the EU under a free trade agreement – deal or no-deal. The difference is how to get there. A deal means a withdrawal agreement stipulating the relationship while the trade deal is negotiated. No-deal means relying on TWO rules. But claiming that no-deal means ‘crashing out’ in a ‘disorderly’ ‘cliff-edge’ scenario is clearly disingenuous. No-deal is challenging and means negotiating with the EU. But so does a deal – before any trade deal can be discussed a new withdrawal agreement will have to be negotiated, as the current one has failed to make it through Parliament. Some observers may say that the lack of good-will on display by the EU so far means that a more confrontational approach is more likely to produce results. A main criticisms of the withdrawal agreement was that given the EU’s effective veto on the UK pulling out of this interim state, there might be little incentive for the EU to agree to a free trade agreement, effectively trapping the UK in the EU without a seat at the table. At least it would provide the EU with leverage in the negotiations. Without a deal, the EU would have to negotiate in good faith to avoid a collapse of trade with the UK. So, ironically it is arguable that a no-deal Brexit could lead more quickly to a harmonious trading relationship. Passing a withdrawal agreement might arguably lead to a protracted negotiation with British politics continuing to be dominated by Brexit for years to come.
The language surrounding a no-deal Brexit has been hyperbolic and exaggerated. But it is true that there are risks. Only by announcing to the EU that the intention is to leave without a withdrawal agreement and thereby incentivizing them to agree an interim trading relationship can potentially severe short term disruption be avoided. The sad fact is that the a remain parliament’s refusal to contemplate no-deal is the very reason why it carries such risks. By embracing no-deal Parliament could honour the referendum result, minimize the inevitable disruption and set the UK on its way towards a future of free trade and prosperity. Sadly, it looks like it won’t.