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No-Deal Brexit And Fear

17/03/2017 12:05 GMT | Updated 17/03/2017 12:05 GMT

The successful progress of the Brexit Bill through Parliament opens the way for the delivery of the famous Article 50 notice. Rather strangely, however, the government has not carried out an assessment of what effect leaving the Union without a new trade deal would have on the economy. Brexit minister David Davis said "I can't quantify it for you in detail yet. I may well be able to do so in about a year's time. It is certainly the case that it is not as frightening frankly as some people think". The purpose of this article is to reflect on the likely consequences of a no-deal Brexit on businesses and consumers.

Let us consider the situation from the consumer's point of view first. Currently one can go online and order that nice desk lamp from a company shipping from France. Within the EU most goods are in free circulation, can be imported with minimal customs control and there is no import duty to pay. Customers will pay what the website offers as the final price plus (perhaps) postage. If on the other hand a lamp is coming from the USA and costs above a certain level, customs duties will need to be paid by the customer (5.7%) once the goods have arrived in the UK but before they are delivered. She will also be charged import VAT at 20% and there will be a £8 handling fee to pay. Post Brexit therefore, if no deal is reached with the EU on trade and the same rules apply as those currently in force with countries around the world, a French desk lamp will cost quite a bit more than it does now, sterling depreciation notwithstanding.

The consequence is that buyers may well seek a domestically manufactured lamp instead. Wouldn't this be a great thing for local manufacturers, offsetting economic losses suffered by importers? It might, but it is likely that the domestic lamp manufacturer does not source all their materials locally. They would also need to consider VAT and custom duty charges on the components they import to make their lamps. Further, they may well want to sell their lamps abroad. Currently, selling goods in Europe incurs no charges and requires little paperwork. Selling to other countries however necessitates having appropriate licences and making export declarations to customs. One must also make sure that VAT, import taxes and duties in the destination country are paid where necessary and follow transport procedures. The same factors that will make a British customer think twice about ordering a French lamp will deter a French customer from ordering a British one. Increased demand from local customers will be probably offset by increasing costs of manufacture and a loss of market share in Europe.

The overall effect would be a significant dampening of trade with Europe, for consumers and businesses alike. Could this unhappy situation be avoided if Britain unilaterally lowered its tariffs? If the aim of Brexit is to create a Global Britain, while maintaining current trade flows, why not offer zero tariffs to Europe? Without a successor EU agreement (the no-deal scenario), Britain could trade with everyone on a WTO approved schedule of tariffs. The WTO helps smooth global trade by allowing states to negotiate trade terms in a multilateral forum. British tariffs would probably be equivalent to the EU ones under which trade with third countries is already happening. To ensure that trade is fair and mutually beneficial, WTO members accept to afford each other certain protections, a key one being Most Favoured Nation or MFN treatment. This precludes a nation from offering preferential terms of trade to select partners, unless they belong to a free trade regional bloc (like the EU). Were Britain to unilaterally drop tariffs to zero for EU countries, it would be obliged to do the same for the rest of the world. Worryingly, the rest of the world would not reciprocate, as they could not offer preferential treatment to Britain, to the exclusion of everyone else.

What would be the result of zero tariffs for our British lamp manufacturer? They would be able to import their components with ease, but their exports would hit the same costs as one faces now when trading overseas. Meanwhile, the market would be flooded with imported lamps from all over the world at significantly cheaper prices than today. The government would have some hard choices to make. Significantly reduce trade with Europe; risk the elimination of domestic manufacturing by opening up fully to the entire world; or try to compensate affected manufacturers and consumers at massive costs to the Treasury. Perhaps we should ask Mr Davis what his government will do and whether he still thinks a no-deal scenario is not very frightening.