30 November 2018

The Government’s economic assessment of Brexit paints a rosy picture of Theresa May’s proposed deal, says Alex Stojanovic.

The Government’s analysis of four Brexit options – Chequers, membership of the European Economic Area (EEA), no deal and no Brexit – passed our transparency tests. Because the document is transparent, it is clear that the assumptions chosen present the Prime Minister’s Chequers proposal as the best available Brexit.

Chequers looks better economically than EEA membership

Chequers envisaged leaving the EU Single Market and Customs Union but establishing a ‘facilitated customs arrangement’ to eliminate customs barriers and agreeing a ‘common rule book’ for goods to allow frictionless trade. Services access would be negotiated – but with greater barriers than now. 

EEA membership would mean both goods and services were inside the Single Market – but leave the UK outside the Customs Union, meaning additional costs for goods trade. 

The Government estimates that, compared to remaining in the EU, the Chequers proposal would only reduce GDP by 0.6% in the long run, while there would be a 1.4% hit from moving to EEA membership.

The Government’s analysis assumes that low barriers to goods trade under the Chequers proposal have a knock-on benefit for UK service providers because manufacturers purchase services. They predict that these benefits would more than outweigh the costs of reduced access to EU markets that service providers would face by being outside the Single Market.

As a result, services output is projected to be 1% lower if the UK were a member of the EEA rather than the EU, but only 0.9% lower under the Chequers proposals, despite greater non-tariff barriers to services trade in the latter case.

But the Government acknowledges that the EU has not fully bought its Chequers proposal. The report provides a sensitivity analysis, which shows what would happen if non-tariff barriers were closer to those faced under a standard free trade agreement. In that case, the report suggests that there would be a larger reduction in GDP than if the UK were an EEA member.

Loosening ties with Europe offers only limited opportunities for closer trade links with non-EU countries

One of the possible benefits of loosening ties with the EU is that it might open new opportunities for trade deals with other countries. If UK regulations are no longer tied to those in the EU, the UK may be able to strike new agreements with countries like the USA, which take a different approach to regulation. Those who favour loosening ties with the EU argue that this benefit could help to offset any additional costs that would be imposed on trade with Europe.

But the Government analysis assumes that future benefits from new free trade agreements with the rest of the world would be the same under the Chequers proposal as under a looser free trade agreement or under no deal. This means that – according to the Government’s modelling – opting for a free trade agreement offers no additional benefits that would help offset the costs of looser EU ties compared to Theresa May’s Chequers proposal.

The assumptions magnify the gap between Chequers and no deal

The Government’s analysis assumes that additional trade barriers will have a dynamic impact on the UK economy, permanently hampering productivity growth. There are good theoretical reasons for this, though empirical evidence on the exact size of this effect is imprecise. 

This has the effect of making all the impacts of moving away from EU membership bigger and magnifies the impact of the assumed additional trade barriers. That increases the gap between Chequers and the other scenarios – particularly no deal.

The Government has produced its analysis and been clear about the assumptions it makes. Not surprisingly, it has put the best possible gloss on Theresa May’s deal – the option it wants to promote. It is now up to MPs to scrutinise the analysis carefully in the run-up to the ‘meaningful vote’, when they must decide whether or not to back the Prime Minister’s deal.

Comments

One thing I found odd about the analysis was the suggestion that new UK - third country trade deals would reduce the negative impact of leaving the EU. Compared to not doing such deals but still leaving the EU then I suppose that must be true, if irrelevant. Yet presumably the EU will also continue to move forward with its own lengthy pipeline of trade deals (see the separate IfG note by Jill Rutter on EU-Australia). Given the EU is likely to be higher up the queue with third countries in most cases (or already has deals nearly ready to go) and that our own limited trade negotiating capacity will largely be focussed on maintaining existing third country trading relationships in the early years of Brexit, when we lose the benefit of existing EU-third country trade deals - it seems to me the better view is that compared tom staying in the EU we are also likely to lose out from being slower to reach trade deals with third countries. That would add to the economic losses versus staying in the EU.

The EU is extremely bad at negotiating trade deals because it has to please all 27 countries. We have been invited to join the CPTPP by the Japanese and we could doubtless join NAFTA. This would give us a much larger market than the EU and its trade deals.

The Good, the Bad and the Ugly - remain, Mays deal, or no deal?

I agree with Permalink that the EU is going to progress faster, and with greater clout, than the UK.
Unfortunately the transparent analysis is biased and bereft of any sense of political reality and is incomplete. It ignores the option to remain. Will Thirty Ministers on the new Project Fear really convince the generation excluded from the referendum? They have yet to be consulted, but should be for the sake of transparency and fairness. Maybe project fear and an accept this deal, or no deal, will convince those who voted Brexit, and the Business Associations that want certainty – but that is almost certainly to buy time to shift high tech endeavours to the EU.
The UK is growing and prospering because of its membership of the EU. It had more clout within the EU, than it will have without, and was influential because of a pooling of sovereignty. The UK within the EU also provided a counter-balance to German power, with the appeal of a unique model of markets - well received in Eastern Europe. If we remain, which is not a political impossibility, we will remain an important gateway to Europe, attractive to FDI in high technology industries and those based on know-how.
Britain’s attractiveness will end with Brexit, so why not go for the economic and political benefits of remaining. This is a fourth no-deal option. And would allow us to move on as a country, with old friends and allies rather than enemies.
It is really a shame that Brexiteers chose to use a new and perverse project fear - as today with horror stories of hundred mile long ques at Dover or the need for stockpiling medication. It is also a real shame that some politicians have sought to seek personal political gain, on false promises and bogie men, instead of using what seems to be a new found voice and rationality in securing the peace that the EU gave us, instead of contributing to weeken this.
If you were faced with three Bully Boys in the playground running a protection racket (in the cold war, that was the Soviet Union, USA and EU), who’s protection would you opt for? In the post Brexit period, it will be EU, and we will remain bound to the EU not only in treaty terms, but because of the need for leverage against the US and China. Unfortunately the UK will be viewed with great suspicion in the EU. Hard line Brexiteers have, unknowingly or deliberately, ensured suspicion with hints at deregulation and social dumping of standards.
Do we really expect to get better bargains in trade and services from the US, from a Trump America First Policy, once we are outside the largest market in the world? Trump has adeptly used protectionist measures to get better deals - and is surely waiting with anticipation for a hammered UK to open up markets to the US on any terms - goodbye health standards and environmental standards.
And as to getting back control, we will be caught between a rock and a hard-place, rule taker with no say over those rules. That is not the case if we remain and re-join the table. Hopefully people, whose vote is used to legitimate stupidity, will not be fooled, and at least we may have taken a step towards reassertion of parliamentary democracy. But that will take transparency, and talking with the people, especially those likely to me most damaged by Brexit, rather than an exercise in preference shaping and casuistry.

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