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WESTMINSTER REFLECTIONS: Sir Bernard Jenkin MP says neither the UK nor the EU 27 want a ‘no-deal’ confrontation

westminster (Custom)

The new date for the UK’s departure from the EU is 31 October. As I write this, the Conservative Party is currently in the middle of choosing its new leader and, by extension, our new prime minister.

In all likelihood, the new prime minister will be a critic of the draft Withdrawal Agreement that was so powerfully rejected by the House of Commons on three separate occasions. Also likely, he will be committed to honouring the democratic mandate to take the UK out of the EU, with or without a deal, by 31 October. The UK’s EU interlocutors, and the 27 member states, will therefore be presented with a choice.

The EU could offer to ameliorate the Article 50 Withdrawal Agreement (WA), to make it acceptable to the UK Parliament, or they could decide to allow the UK’s legal and political relationship with the EU to terminate without the formal WA.

Over the past three years, many have warned of dire consequences of the UK leaving without a WA. Planes would be unable to fly, Netflix wouldn’t work and, most extraordinary of all, we would no longer have sandwiches. One of my colleagues in Parliament thinks the EU will switch off the gas connector, and thousands will die.  Of course, calmer heads have recognised these lurid scare stories for what they are.

This isn’t to deny that leaving without a deal would have an impact on the UK and the EU, but quantifying the risks is no more than speculation. Businesses on both sides can be as prepared as possible, and the UK can, and I expect will, do as much as it can to unilaterally ease any disruption. We have already seen a raft of legislation passed by the EU and in EU member states most likely to be affected: Germanyhas passed laws facilitating the continuance of insurance contracts and other financial services, and the Republic of Irelandhas made extensive legal changes to allow, among other things, the functioning of the all-Ireland energy market, which crosses the border into the UK.

But the simple fact is that any damage caused by leaving without a deal is significantly influenced by the EU itself. After all, the UK can unilaterally drop tariffs on imports in certain goods if it so chooses.  Earlier this year, the UK government published a draft WTO tariff schedule. This signals the UK’s intention to liberalise cross-border trade significantly. However, no EU member state can make unilateral decisions about tariff rates: this is the entire purpose of the EU’s Customs Union and its centralisation of trade policy.

So, as it stands, when the UK leaves without the WA, the operation of existing EU law means that the EU will automatically impose tariffs on all relevant trade moving from the UK into the EU. Import tariffs are paid by the importers, and the costs are passed on to consumers. So this imposes a significant additional cost on EU businesses and EU citizens, paid directly to the EU. A more agile and flexible EU could avoid this.  After all, Article 3 requires the EU to promote “free and fair trade.”  Article 8 of the Treaty on European Union places an obligation on the EU and its member states to “develop a special relationship with neighbouring countries, aiming to establish an area of prosperity and good neighbourliness, founded on the values of the Union and characterised by close and peaceful relations based on cooperation.”  Article 21(2)(e) requires the EU to “encourage the integration of all countries into the world economy, including through the progressive abolition of restrictions on international trade.”

This should also apply to the special circumstances which attach to the border between the Republic of Ireland and the UK. The UK can, using the regulatory and legal freedom regained from leaving the EU, ensure that any goods moving into the UK from Ireland are not stopped or checked at the border. For goods moving the other way, the same could apply, but the Republic of Ireland would need special exemptions in EU law to ensure the customs and regulatory frontier could be operated in the same way.

A situation in which the UK liberalised trade but the EU put up new barriers would work out worst for the EU, rather than for the UK. Austrian economist Gabriel Felbermayr, soon to be President of the Kiel Institute for the World Economy, estimates that the EU would collectively lose 0.6 per cent of its GDP in this scenario – slightly less than the 0.5 per cent loss for the UK.

But there is no point in getting into this tit-for-tat trade dispute. The UK wants to avoid this. So should the EU.  Article XXIV of GATT allows the provisional removal of tariffs and quotas between two negotiating partners in anticipation of a free trade agreement. The UK would agree to maintain regulatory alignment during this period.  Other legal changes that would, for instance, facilitate trade through Calais or allow continued financial services trade, could also easily be adopted.

Neither the UK nor the EU 27 want a ‘no-deal’ confrontation. What remains to be seen is how pragmatic the EU will prove to be to avoid inflicting economic damage on their own citizens, as well as on the EU’s largest trading partner.

Gervase@aumitpartners.co.uk

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