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Who’s Afraid of Martin Wolf?

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Written by Graham Gudgin

Graham Gudgin takes to task the influential Financial Times economic commentator Martin Wolf who he argues has a lurid and excessive view of what would be involved in a no deal scenario. He argues that the immediate impact of no deal will be much less dramatic than Remainers suggest.

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One of the fixed points of what passes for a national debate on Brexit is the claim that a ‘no deal’ Brexit will be either catastrophic or disastrous. I have heard or read this claim hundreds of times and yet have never seen the claim backed up by evidence.

A similar pattern was evident in the Financial Times this week (Friday 15th December). The highly influential economic commentator, Martin Wolf, described a no deal Brexit as ‘a disaster for the UK’ and ‘insane’. The costs of a no deal Brexit would be ‘huge, politically as well as economically’.  The UK would become an outlaw, a country that had discarded its legal commitments. The ability of the UK to exercise any influence in the affairs of the continent would be destroyed’. He views advocates of no deal as ‘fanatics masquerading as Conservatives’.

Warming to his theme he continued, the UK’s ‘reputation for reliability and reason would perish. The lives of millions of EU citizens in the UK, and UK citizens in the EU, would be plunged into painful turmoil as would the operations of countless businesses.  Co-operation in vital areas, such as policing and counter-terrorism would be impaired. A hard border would surely return to Ireland’. Brexiteers he asserts ‘regard all of this with blithe insouciance. Their irresponsibility is breath-taking’.

It is difficult to know what to make of these outlandish descriptions of no deal but at least they give a clue as what is going through the minds of those wo believe ‘no deal’ to be a catastrophe.  First, we can notice that all of the blame for a potential no deal is heaped only on UK Brexiteers. Although any negotiation has two sides, in this case only one is at fault. The implication is either that the EU is completely reasonable or that the UK should take what it is offered no matter how unpalatable.

Second, we can see that what Wolf believes is being advocated by Brexiteers is nearer to cutting off all co-operation with the EU than a mere lack of a trade deal. He seems to believe that no deal involves tearing up a range of existing commitments including those on the on the rights of EU citizens and co-operation on counter-terrorism.

It is difficult to see why any UK government would follow such an extreme course. Brexiteers may support a variety of approaches but most of them involve leaving the EU customs union in order to enable the UK to set its own tariffs and to strike free-trade deals outside the EU. They also involve removing the UK from the single market and hence from the direct influence of the EU and the ECJ on regulations governing products, services, labour markets, the environment, competition policy and subsidies for commercial firms.

Beyond this there is general support for co-operation with the EU, on policing and intelligence. Continental intelligence services depend heavily on information from GCHQ and it is not obvious why either side would wish to impede the flow of intelligence.  Nor is it easy to imagine that the UK would remove rights from EU citizens in any future circumstance. Similarly, the UK would presumably wish to continue co-operation with the EU R&D arrangement which already include non-EU countries such as Israel. It would be in the interests of both the UK and EU to make arrangements, however temporary, to cover aircraft landing rights and safety certificates for aircraft, vehicles, pharmaceuticals and medicines. Several French regional airports depend heavily on UK tourists and it is difficult to imagine why France would wish to endanger this. Indeed, President Macron has taken on new powers to ensure that working to rule will not get in the way of French commercial interests.  Briefings for Brexit has recently shown in some detail the arrangements that have already been made on both sides of the Channel to minimize the disruption of No Deal.

Co-operation across a wide range of commercial activity is likely to continue, even if it involves new arrangements and some extra costs for registration or the UK setting up new regulatory bodies. Nor is it obvious what treaty obligations the UK would tear up. Some Brexiteers advocate not paying to the EU the £39 billion already indicated, but more suggest tying it to progress on trade agreements. The House of Lords Financial Affairs Sub-Committee reported last March that the UK had no legal obligation to pay anything, but many view it as reasonable to ensure that the EU is not out of pocket for commitments already undertaken with UK support. Although a court case could rule on what is a reasonable payment, it seems more sensible to honour the existing offer in order to maintain goodwill. However, that goodwill must be reciprocal.

What is preventing an agreement at present is the Irish backstop. The UK has promised no hard border and has proposed keeping the UK in a customs union perhaps indefinitely, to realise this aim. The EU accepted this as part of the border guarantee but then added another 175 pages of regulatory alignment for Northern Ireland into the Withdrawal Agreement.

Even without a deal there is no reason to imagine any new border infrastructure on the British side and no real need for it on the EU side either. Martin Wolf has not been paying attention to the hours of evidence given by customs experts to Commons Select Committees. All of this supports the view that modern arrangements require no border infrastructure. We will need to leave it to historians to work why the UK government has not listened to these experts or indeed to its own head of HMRC.

The real costs of no deal are those that companies will have to bear in facing new EU tariffs if there is no trade deal. A third of UK exports to the EU would face no tariffs or quotas,and a further half would face tariffs of only a few percent. The main costs are the 10% tariff for cars and higher tariffs for some food products. In the context of a post-referendum currency depreciation of 15% it is not difficult to see that most tariff costs can be borne without undue difficulty. Moreover all UK firms are already fully compliant with EU regulations. Some new registration fees may be payable, but again nothing that cannot be managed. This leaves new customs costs.  Traders like the JML importing company say such costs are around 1% of the value of goods, well below HMRC estimates. New electronic procedures should result in lower costs for all exporters and importers and not just the EU.

So where is the catastrophe? After expending all of his emotion even Martin Wolf calms down and suggests a solution that we have also advocated. This is simply to take the argument on the Irish backstop out of the Withdrawal Agreement and move it into the future trade talks. With this simple change the UK can sign the Withdrawal Agreement, agreeing to pay up and protect citizen’s rights and move onto what should be the rather easy task of negotiating a free trade agreement with partners with which it already has free trade. Martin suggests that this might be possible if the EU acts as the grown up. Brexiteers might alternatively just say ‘if the EU grows up’.

Dr Graham Gudgin is an economist attached to the Centre for Business Research, Judge Business School, University of Cambridge.

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Graham Gudgin