3 April 2019
Dr Michael Gasiorek is a Senior Lecturer in Economics at the University of Sussex and a fellow of the UK Trade Policy Observatory. L. Alan Winters CB is Professor of Economics and Director of the Observatory.
Understandably the politics surrounding the UK’s exit from the EU are dominating current discussions. But the economics of the options still matter, and it is not always evident how well the core economic issues are understood.
In the light of the Government’s ‘approach’ to Labour to find a consensus and in the light of the indicative votes, the aim of this blog is to clearly outline the economic issues and summarise the likely consequences associated with two of the current (indicative) options.
First, it is important to note that two of the UK Government’s red lines (having an independent trade policy and leaving the Single Market) are each incompatible with having no border checks on trade between Northern Ireland and the Republic of Ireland (see our video on this, and ‘UK-EU Trade Relations Post Brexit: Too Many Red Lines?’). This is because border checks are needed both where countries levy different tariffs, and where production standards and/or ways of assessing conformity to those standards are different.
Second, it is important to highlight that there are two documents under discussion – the Withdrawal Agreement (WA) and the Political Declaration (PD). The WA is a legally binding document which does not specify the nature of the future relationship with the EU. The PD does focus on the future relationship but is not legally binding and is therefore not much more than aspirational.
The three key proposals for the future relationship with the EU seem to be: (1) the Government’s facilitated customs arrangements, which is currently in the PD; (2) a permanent customs union with the EU; (3) Common Market 2.0.
All sensible analyses of Brexit have shown that leaving the EU will have a negative economic consequence for the UK, and this also applies to each of the options discussed above. It is harder to evaluate (1) as it is untried and virtually impossible to see how it could be achieved. Overall, Common Market 2.0 would almost certainly have a smaller negative impact. First, because it allows for continued access for UK services trade, which (we repeat) is so important. Second, because it maintains Single Market access for goods, and the loss of such access would have a bigger impact on the costs of trade than the introduction of tariffs. Third, because the greater mobility of labour implied by this proposal would be better for the UK economy.
Both options (2) and (3) are broadly consistent with the existing Withdrawal Agreement. This is because the WA does not, and was never intended to specify the precise nature of the future trading relationship with the EU. Hence, even if Parliament voted for either one of these options – this would not form part of the legally binding Withdrawal Agreement, and the Irish backstop would, in principle, still be needed, as neither of these proposals would resolve the border issue entirely.
This underlines the fundamental incompatibility between the original red lines (independent trade policy, leaving the Single Market, control over labour mobility with the EU, no longer under the jurisdiction of the European Court of Justice (ECJ)), and the Irish Border issue. If those advocating what has been termed a ‘hard Brexit’ continue to insist on all these red lines, then as we have previously argued (Briefing Paper 17) – the solution space is null, and ‘No deal’ becomes more likely.
Successful resolution will require compromise. As part of that compromise, solving part of the border conundrum may make it easier to find (future) solutions to the other elements of the conundrum. Each of the indicative proposals goes some way in that regard. Suppose, for example, the UK decided to go for Common Market 2.0. It could then try and agree with the EU that until such time as both parties could agree to an acceptable mechanism for behind the border customs controls (a.k.a. maxfac); or until such time as the UK could derive a set of alternative customs arrangement that are acceptable to the EU (something like the FCA), that the UK would apply the EU’s tariffs. This backstop, therefore, would not treat Northern Ireland any differently from the rest of the UK. It may be acceptable to the EU because it compromises with regard to the Single Market and with regard to labour mobility. Conversely, it is harder to see how the EU could compromise more with the Customs Union proposal unless the UK Government were prepared to offer something else such as accepting labour mobility, as the EU would still have concerns about cherry picking and the integrity of the Single Market.
The discussions between Theresa May and Jeremy Corbyn are therefore not just about what Parliament might be able to agree to, but also what would be acceptable to the EU. Remember, however, that any of these proposals will be recorded as part of the non-binding Political Declaration and thus not completely guaranteed even from the UK point of view.
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Thank you as always for the helpful summary of the options and trade-offs at play.
My main reflection is the two main options on the political table – Customs Union or Common Market 2.0 – differ primarily in the level of regulatory alignment, as the latter assumes continued customs arrangements, at least until some unspecified point in the future where technology enables an alternative.
Therefore the important thing to recognise is a ‘border’ is not a binary choice. There is a sliding scale of alignment across tariffs, customs, regulation, and wider commitments such as free movement of people which increasingly reduce trade frictions – with particular reductions in frictions at the (somewhat unclear) point at which you reach the alignment needed to abolish the fiscal border (CU), and regulatory border (CU + regulatory alignment + agree a role for EU institutions in overseeing the EUs border the UK would be applying).
This means neither the ‘Customs Union’ or ‘Common Market 2.0’ models are off-the-shelf. Within each of them there remain options which could drastically affect future trade – a customs union could mean no border, or a border which retains customs declarations, depending on the decisions taken within it.
Ultimately, a continued challenge for policy makers is putting across the art of the possible versus the plausible. Possible, does not mean negotiable or technologically feasible in the short-term. Your call to recognise the compromises inherant in all the options is exactly where the debate needs to be.
A persistent challenge for policy makers is building understanding of these trade-offs which the Government and Parliament will – at some point – need to take a decision on. And, crucially, as far as possible, those challenges need to be achknowledged upfront, before we’ve gone too far down any given path.
A prime example of this is the ability for the UK to have a “say” in any future EU trade policy in these relationships – which features in most options on the table. Axiomatically, the price we pay for more alignment – and less trade friction – is less influence on the development of the underlying rules than our current position. Or we could choose to maximise domestic control at the cost of the trade frictions that brings. But those choices need to be addressed upfront, before they run away from us.