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Prepare for A WTO Brexit and Liberation!

brexit liberty
Written by Robert Lee

Hard political facts, the ticking clock, and the now rapidly progressing preparations for a ‘No Deal’ WTO Brexit next March combine to make this the most likely – indeed, the only likely – outcome.

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Brexit is shrouded in a fog of confusion. The government seems adrift, the Tory Party is fighting itself, Parliament is hopelessly divided, and the Labour Party has more positions on it than you can shake a stick at. It is easy to become despondent, but isn’t this apparent chaos simply a sign of a robust democracy, grappling with complex challenges? And is the future really that unclear?   

There is an old adage that “A fox knows many little things, but a hedgehog knows one BIG thing”. There is one BIG thing about Brexit that gives perspective to current events: in the absence of a Withdrawal Agreement ratified by both the UK and EU Parliaments, the default legal position is that the UK will leave the EU without a deal at on March 29th 2019. Former Brexit Secretary, David Davis, insisted that the date was on the face of the EU Withdrawal Bill. Furthermore, Article 50 stipulates that all treaties of the EU cease to have effect in respect of a departing member state after two years.    

Examining all possible Brexit options in the light of this I conclude that the UK is now likely to exit the EU on WTO terms in March 2019. The main alternatives to a WTO Brexit seem to be:

  • Parliament ratifies Mrs May’s deal (The Deal) or a tweaked version of it.
  • Parliament votes for a second referendum.
  • Parliament votes for an alternative deal (e.g Norway, or Canada plus).    
  • The Government attempts to revoke (or extend) Article 50.
  • There is a general election.

The default position

Mrs May pulled the vote on The Deal to avoid massive defeat, and has since failed to obtain meaningful changes, so it is unlikely to be ratified. The Irish government’s “no deal” preparations show that they don’t plan to erect a hard border even in those circumstances. This exposes the Irish Backstop as a transparent – to all except the UK government apparently – attempt to tie the UK as closely as possible to the EU post-Brexit. This should further solidify Parliament’s opposition to The Deal. Ironically, its best hope now is if the EU is spooked by the UK’s ramped up WTO Brexit preparations, and offers major last minute concessions.

All options that involve Parliament taking back control (to coin a phrase) suffer from major drawbacks. Most critically, the default legal position of a WTO Brexit can only be averted by the passage of new primary legislation, a time consuming process that requires government support. A clear Parliamentary majority opposes a WTO Brexit, but lacks consensus about what replaces it or how to achieve that. To coin another phrase “the clock is ticking”. All alternatives to a WTO Brexit have the fatal defect that time is running out.

The second referendum fantasy

A second referendum would take up to a year to arrange and be highly divisive (how to agree even on the question?). British voters would probably give two fingers to the idea that they got it wrong the first time. The Norway route offered a workable compromise until it was hijacked by those who want it to be permanent and include customs union membership – in this form it is worse than The Deal.  Time has run out for that option as well, as it has for a negotiated Canada plus FTA before exit day. The ECJ has issued a ruling (the speed of this decision, and its timing, demonstrate just how political this Court really is) that the UK could unilaterally revoke Article 50 and thus remain in the EU. However, since Article 50 was invoked by the passing of UK primary legislation, revocation (or extension) must also require such legislation. Any attempt to do otherwise would be taken to appeal, and the government could hardly try revocation without holding a referendum first. 

Mrs May is stoutly resisting both the referendum and revocation options, but given her track record she cannot be relied upon. Thus the Cabinet has a collective responsibility to prevent outcomes that threaten the health and integrity of UK democracy, as well as the survival of the Tory Party. The government is therefore very unlikely to call a second referendum, or revoke Article 50, and without that they cannot happen. The Tory Party is riven with Brexit division but has few (if any) MP’s who would take the nuclear option of bringing the government down. The DUP would only try to do that in the unlikely event that The Deal was passed. The Labour Party is trying to engineer a General Election by bringing a no confidence motion before Parliament, but without DUP support it will almost certainly fail.

Managing a ‘no deal’

The default legal position is the most powerful motor behind a WTO Brexit, but it is not the only one. Largely unnoticed in the Brexit drama, preparations for leaving without a deal are reported to be advancing fast. According to The Spectator’s Fraser Nelson, one Cabinet member says that “the civil service might yet turn out to be the heroes of Brexit …. the preparations are amazing. I really think we can handle this. Last month, I didn’t”. One Downing Street official thinks it would be “more Millenium Bug than World War Three”. Businesses, civil servants, local authorities, and regional organisations are not interested in political grandstanding, but in making things work on the ground. 

The Cabinet is now meeting regularly to discuss no deal preparations. Some Ministers are focusing on a “managed no deal”. The term “managed” applies in two senses. Firstly there would be a series of “mini-deals”, some bilateral, on issues such as airline landing rights, supply of medicines, continuity of financial contracts etc. The UK has just won agreement to stay in the Common Transit Convention, ensuring simplified cross border trade for UK exporters. The EU’s “no deal” preparations largely mirror ours, so agreement can be swift and mutually beneficial (some Remainers paint a grim picture of “no deal” by arguing that the EU would withhold vital supplies – in violation of international AND EU law – in order to punish the UK. How they reconcile this brutalist view of the EU with their desire to stay in is beyond me). Secondly, “no deal” could be further managed by agreeing a transition period in which the UK pays the EU our existing annual fee (about 10bn pounds net) giving both parties more time to prepare for WTO trading. In either case the UK would unilaterally guarantee EU citizen’s rights as per the draft Withdrawal Agreement.

This has dramatic implications for the future course of Brexit. A rising flow of positive news about WTO Brexit preparations should increase public support (already much greater than for The Deal) and diminish Parliamentary resistance. Even with the best preparation there will be some disruption as the economy and business adjust to new trading systems and arrangements.  However these adjustment costs will be one off or temporary. Shifting to a new supply chain, paying higher tariffs (on average about 4%, much less than Sterling’s post-referendum 15% depreciation), or adding to stockpiles only adds to business costs once – while the many advantages to be gained are long term and permanent.

Positive policies

Though we would still have to pay some money to the EU, the bulk of the 39bn pounds agreed in The Deal could instead be used to offset any short term hit to the economy, by cutting taxes or supporting those sectors most affected. If no transition period is agreed we will raise more tariff revenue from the EU than we pay – given our large trade deficit with the EU – and these funds can further support the economy. Some tariffs could be abolished or reduced immediately. We will be free to negotiate free trade agreements, including of course in time with the EU itself – a negotiation in which our leverage will be greater than now. We will be free to set our own rules and regulations, and thus protect our world leading growth industries – bio-tech, renewable energy, digital, aerospace, fin-tech, and others – from restrictive future EU legislation.

We could boost selected coastal cities and towns by setting up free ports (not possible while in the EU). We will be immediately out of the Common Fisheries Policy and Common Agricultural Policy, with the growth opportunities provided by that freedom. An immigration policy designed for the needs of our economy and society can be introduced. Much of the Brexit uncertainty which has been holding back business investment, and souring our politics, will have gone. Conversely, The Deal merely prolongs the uncertainty into the indefinite future. We will also be out of the EU before the next and possibly terminal Eurozone crisis erupts – judging by recent economic data it has already begun.

The next few months will be stormy, but calmer waters may lie ahead as time, and the democratic legal process push us to a Clean and Global Brexit. As economist Ruth Lea puts it: “This would be a Liberation, not a crisis”. 

Robert Lee, Former Chief Economist, Board of Executors (South Africa), is an economic consultant in the UK, and a private investor

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About the author

Robert Lee

Robert Lee is an economic consultant and private investor.