A ‘thumbs up’ to the Brexit deal

The agreement reached between the UK and the EU is as good a deal as we were ever likely to get. I will leave others to comment in detail on the legal and technical aspects, but here are five key points (my personal views) on the economics.

First, it important to be clear about the ‘counterfactual’, or what would have happened if a deal had not been done. Opponents of Brexit like to use a rosy view of continued EU membership as their benchmark. But that ship has long since sailed, if it ever existed at all. It makes far more sense to compare the new agreements to the alternative of ‘no deal’. On that basis this outcome is a clear win.

Leaving with what most agree is a ‘fair and balanced’ deal is undoubtedly good for consumer and business confidence. It provides a much-needed boost to the credibility of the Johnson government, which can now reasonably claim to have delivered on the promises to ‘take back control’. It surely also vindicates the decision not to extend the transition period.

Second, this deal will provide some immediate economic benefits. Any negative impact of Brexit so far has been much smaller than the Treasury had warned. Nonetheless, the prolonged uncertainty caused by the vote to leave the EU has meant that UK GDP has grown more slowly than it would otherwise have done. In particular, business investment has stalled. At least some of that lost activity should now be recouped.

In contrast, many academic studies assume that any hit to GDP to date is a permanent loss. Indeed, they take it for granted that investment will fall further as a result of increased trade frictions with the EU (which I’ll come to next). This is all far too pessimistic.

In reality, many surveys (such as the EY Attractiveness Report) show that the UK’s long-term appeal remains high, and that investment projects have typically been postponed rather than cancelled. Global businesses which might have been worst affected by ‘no deal’, such as Nissan and Airbus, have also been quick to welcome the agreements that have been made.

The Office for Budget Responsibility’s latest analysis looks pessimistic here too. Of course, the impact of Brexit may be lost in the fog of Covid. But in the OBR’s central scenario, business investment is projected to rise by little more than 1% in 2021, after falling by 18% in 2020, even assuming a deal. If, instead, the lifting of Brexit uncertainty accelerates the recovery in business spending, UK GDP could be boosted by another 1% or so next year.

Third, the new arrangements do introduce some new frictions to trade with the EU, mainly in the form of additional border checks and red tape, and this is an unwelcome cost of Brexit. The Prime Minister was therefore wrong to claim that the deal ensures ‘no non-tariff barriers’.

By the way, it would not matter here whether the UK has a surplus or a deficit with the EU in a particular sector. Anything that makes trade more costly is damaging to both parties, since free trade wouldn’t happen at all if it didn’t benefit both the exporter and the importer.

However, there is still plenty of room to disagree about the significance of the additional costs. The more pessimistic studies have assumed that the UK-EU deal would be no better than the average Free Trade Agreement (FTA), that this would lead to large additional costs, that these costs would have a big negative impact on overall trade, and that this in turn would have substantial knock-on effects on investment and productivity which would only increase over time.

Each and every one of these assumptions should be challenged. For example, the Customs and Trade Facilitation chapter in the Brexit deal includes many measures to simplify and speed up border arrangements. The evidence for the assumed link between trade openness and productivity is also far from certain.

As a rule of thumb, I’d halve the estimates for the negative impact of Brexit on UK GDP (including those published by the OBR), and then begin again from there.

Fourth, beware of claims that the Brexit deal leaves protections for workers, climate and the environment at ‘serious risk’ on the basis that, in theory, the repatriation of sovereignty to the UK provides more scope for key rights and duties to be rolled back. These claims doesn’t stack up at any level.

For a start, others (including many who are no fans of Brexit itself) have acknowledged that the protections in the new agreements are the strongest ever in a comparable trade deal. In addition, the government’s determination to regain sovereignty here was primarily a matter of principle, rather than a signal of its intention to use this flexibility to ‘roll back’ rights, in practice.

Of course, only time will tell. But if anything, the current administration seems to have a clear bias towards more state intervention in these and many other areas, as demonstrated by the planned increases in the National Living Wage and the Ten-Point Plan for a ‘green industrial revolution’.

Above all, even if this or a future administration did want to make substantial changes here, and roll back protections that (rightly or wrongly) the public like, it would still have to answer to the UK parliament and the UK electorate.

Fifth, beware also of claims that services have been left out of the new deal. This is just plain wrong, as even a cursory glance at the summary will tell you. Much of the negative commentary here has focused on financial services, but it’s surely significant that the City itself appears to be relatively relaxed about this. Most understand that this agreement isn’t the last word, and that ‘specific equivalence determinations’ are likely to follow.

In the meantime, London has actually cemented its position as Europe’s dominant financial centre, Brexit has failed to deliver the big hit to jobs that many had feared, and the sector’s underlying strengths mean it is still expected to thrive.

Overall, many of the usual suspects who never wanted the UK to leave the EU in the first place will find fault with any agreement that doesn’t simply replicate what went before. For them, nothing could ever beat ‘the deal we already had’. That’s fair enough.

But the rest of us have moved on. In my view, this is a good deal, which respects the outcome of the 2016 referendum, minimises the economic costs of Brexit, and maximises the potential benefits.

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