If Britain Leaves With No Deal, The EU Will Be In For A Great Shock

It is sad that we have to discuss leaving without a pact when a ‘win-win’ deal is so obviously available

With this week marking one year until Britain officially leaves the EU, HuffPost is running a series of blogs answering big questions still left unanswered about our Brexit future. Today, economist Prof Patrick Minford writes on what would happen if we went through a ‘no deal Brexit’. Follow the series on #BrexitFuture

It is interesting that the solid current progress of the economy is proceeding against the background of Brexit negotiations that have now been given new life by Theresa May’s recent Mansion House speech. In it she committed to definite exit from the protectionist EU Customs Union and the intrusive Single Market, into a situation where the UK sets its regulative agenda and also its mission for free trade, besides resuming normal civilised-country control of immigration.

The EU Commission response to May’s proposals has been predictably aggressive, with much talk of ‘cherries and cake’. What this means in translation is that the EU’s protectionist ‘cake’ and the ‘cherries’ on it in the form of protection for specific sectors like cars and chemicals cannot be ‘shared’. But the UK is not asking to share in any protectionism. It will abolish it with respect to the outside world, for the benefit of its own consumers, thus itself, and indeed of the outside world. All it is doing is offering to have free trade between the UK and the EU, solely; any trade passing through the UK to the EU would be unaffected.

This new agreement would be made under WTO laws; it is not generally realised that the WTO will from now on be the only source of international law on the EU and our mutual trade and general commercial relations. Under WTO rules we must both observe strict non-discrimination on goods and services; this specifically includes discrimination in favour of our own residents. Thus we cannot deny recognition of each other’s standards when they transparently achieve the same objects or indeed as now are actually the same. This applies as much to chemicals as it does to financial services.

The EU Commission still seems to be blissfully unaware of this, thinking that on day one of Brexit it can suddenly pull out of recognising UK standards. Yet this will be quite illegal as well as absurd. For an organisation as dependent on international law as the EU this is a surprising development.

“If the EU goes the route of tariffs on UK trade it will be a spectacular own goal”

Should there be no deal and so no transition, the EU Commission will get a great shock. First its money will not arrive for the transition period, leaving a big 10% hole in two years of the budget. Second, EU producers will be paying around £13billion a year in tariffs into the UK Treasury. Third, the same EU producers will suddenly find that their UK prices are dropping fast under the impact of world competition in the UK market.

In our costings of the ‘no deal’ scenario we find that the UK makes gains while the EU makes losses as above. The UK gains are the mirror image of the losses above; but on top of these gains it gets to the Brexit end game faster, which is a substantial advantage.

It is sad that we have to discuss these things when a ‘win-win’ deal is so obviously available. But the reason is simple: the EU does not and never has understood the gains from free trade. It is built on the principles of mercantilist protectionism where the aim is to reduce the exports of your trade partners and maximise your own exports. Never mind that the losers are your own consumers and your own economy, as well as less powerful foreign suppliers, such as those from developing countries. The aims of such ‘realpolitik’ theft from citizens at home and abroad have always, from Bismarck to Juncker, been to build up the power of the federal state.

However the difference today is that there is a world trade and commercial order under the WTO; and the EU’s policies are illegal if enacted to create non-tariff barriers against the UK by the use of discriminative standards. Hence ‘no deal’ cannot include such illegal behaviour. It can solely extend to tariffs. But if the EU goes the route of tariffs on UK trade it will be a spectacular own goal. As this realisation dawns on the EU mercantilists, a Canada-plus deal will inevitably emerge from the Channel fog.

Prof Patrick Minford is chairman of Economist for Free Trade