Anand Menon and Jonathan Portes / Oct 2019
Finally, it seems, people are cottoning on. Britain’s largest manufacturing industries have warned of a ‘serious risk’ to competitiveness and ‘huge new costs and disruption to UK firms’ under the terms of the relationship proposed with the European Union by Boris Johnson. And their concerns were focussed simply on the dangers of regulatory divergence. Presumably, particularly for sectors such as automotive, the prospect of customs checks, and the associated increased costs and delays, will hardly be reassuring.
The fact is that, despite debates focussing on their implications for the Irish border, Boris Johnson’s motivations for ditching Theresa May’s Withdrawal Agreement have little if anything to do with Northern Ireland. And the implications for the other 98% of the UK economy are far-reaching.
This is because the Prime Minister sees the ultimate relationship the UK should have with the EU far differently to his predecessor. As Mr Johnson put it in his letter to Jean-Claude Juncker:
‘the backstop acted as a bridge to a proposed future relationship with the EU in which the UK could be closely integrated with the EU customs arrangements and would align with EU law in many areas. That proposed future relationship is not the goal of the current UK Government. The Government intends that the future relationship should be based on a Free Trade Agreement in which the UK takes control of its own regulatory affairs and trade policy.’
So, this is about our long-term relationship with the EU. And the bottom line is that the Prime Minister envisages a far looser such relationship than his predecessor – meaning much greater barriers to UK exports.
From what we can ascertain, the present Government is seeking a goods only deal. This will involve only minimal coverage of services. But manufacturers will be particularly hard hit, compared to Theresa May’s deal. The Johnson proposals will mean significant non-tariff barriers on trade, given that the UK will be in its own customs territory, and over time, with increasing regulatory divergence between the UK and EU.
And even a comprehensive goods-only deal may be ambitious. The Government intends to drop Theresa May’s commitment to EU level playing field provisions on labour and environmental standards. The EU Member states will be extremely wary of a UK that will have the right to cut its environmental and worker protection standards, giving it a competitive advantage in competition with their own industries. The result is likely to be considerable EU reluctance to give UK firms tariff-free access in the most sensitive sectors.
So, what would all this mean for the economy? If we assume – as most economists do – a productivity impact of declining trade, we arrive at per capita GDP figures of -4.9%, -6.4% and -8.1% for Mrs May’s deal, Mr Johnson’s proposals and a WTO Brexit respectively as compared to membership.
Our findings, in other words, suggest that, relative both to the status quo of EU membership and to Mrs May’s proposals, the economic impact of Mr Johnson’s proposals would be significant and negative.
Of course modelling the economic impacts of hypothetical scenarios is fraught with difficulty - both because of the difficulties inherent in any economic forecasting exercise, but also the political uncertainties that inevitably surround Brexit. And overall economic performance obviously depends on many other factors, including global economic trends and domestic policy choices on issues ranging from immigration to transport to education.
That being said, the forecasts do give an indication of the scale of the impact of Mr Johnson’s proposals. Our main insight is that his proposals sit somewhere between Mrs May’s deal and a WTO scenario. All the Brexit scenarios we consider would make us poorer, but Mr Johnson’s proposals would be more damaging than Mrs May’s deal.