No deal is better than the best deal we could strike with the EU (and they’re not even offering that)

No deal is better than the best deal we could strike with the EU (and they’re not even offering that)

No deal is actually the best deal. Is that a most ingenious paradox? No, this is hard-headed calculation from Cardiff models of trade and the economy, based on many years of research. Our ‘Remoaner’ opponents dislike our trade model, preferring the ‘gravity model’; but if they truly construct a gravity model as we have recently done for comparative purposes, then they (yes, including the Treasury) will find that it fits the UK facts less well but that in any case the policy calculations are broadly similar.

The starting point is estimates of the EU’s protectionism, the extent of its regulative intervention and the operation of free movement. That the EU is highly protectionist seems to have escaped the notice of many cognoscenti: best estimates from the OECD, ourselves and other independents is that the EU places average trade barriers of around 20% on both food and manufactures, so raising their prices by this percentage inside the EU. According to our trade model (of which you can read more in What shall we do if the EU will not play ball?) this raises the UK CPI by around 8%, so directly reducing consumer welfare; it also induces inefficiency across the economy, lowering productivity, so that overall GDP falls by about 4%. Outside the EU, if we remove this protection via free trade with the whole world, we reverse this.

Then our UK macro model suggests that the EU’s regulatory enthusiasm, in the labour market, energy, finance and elaborate industrial standards, has raised our costs and lost us another 6% of GDP, of which we could perhaps roll back a third on exit, making a further gain of 2% of GDP. On top of this innovation and growth would probably increase.

Finally, the EU forces us to give unskilled EU immigrants who pay little or no tax extensive welfare benefits, costing the taxpayer about £3,500 per worker, a 20% wage subsidy. This is particularly onerous for poorer people in whose areas immigrants settle, driving down wages and imposing proportionately a higher cost in support. Their living standards would rise around 15% if we stop this when we leave.

Add to these gains the return of our EU net contribution and the total gain from departure would be 7% of GDP, £135 billion.

The various options for leaving the EU can be costed from this work. A full ‘clean’ departure as above brings in 7% of GDP.

Now consider a ‘deal’ with the EU: it is very likely this would include continued protection in various areas of key producer interest to the EU: transport, agriculture, maybe clothing and footwear. It could be a long list in which we are forced to keep the same trade barriers against the rest of the world, so as to keep up the prices they could get in the UK market. They would also probably want continued regulation in most parts of the economy so as not to undercut their own producers’ costs. They would want continued free migration or at least an approximation to it. And as we know they want continued financial contributions from us. This would be very close to ‘soft Brexit’ i.e. the status quo. This is what Mr. Hammond and the Treasury seem to be rooting for. Effectively we would lose most of that 7% gain, maybe all of it.

What about no deal, under WTO rules? Here, in principle, we can achieve the full gains from the Clean Brexit above. We leave totally, set our own regulations, rationalise EU unskilled immigration rules, get all our money back, and as far as trade barriers are concerned we simply remove them unilaterally against all the world including the EU. We may then pursue free trade agreements in other areas like services and investment but we take our tariffs on goods off the table. Yes, some countries, including the EU, will keep some tariffs on our goods but we can cost the effects of this easily; and it is negligible. EU tariffs on our manufactures would average about 3.5%, which would have no effect on the prices at which we sell around the world; and they could not impose non-tariff barriers on us without being discriminatory and so violating EU rules. The EU would also under WTO law have to give us the same ‘virtual’ customs service and recognition of our standards as they give to all other countries.

In practice, our politicians might prefer the winding route to free trade via FTA negotiations with all and sundry using our existing goods tariffs as ‘extra bait’. With no EU deal we would then impose those same 3.5% tariffs on EU manufactured goods, so keeping some of our existing protection intact. This would reduce our net gain on leaving to around 5% of GDP, still a good win.

So, in short, we are indeed better off with no deal than with the best deal we are ever likely to strike with the EU. As they seem unwilling even to do that deal with us, no deal is a no brainer.