Taking Back Control?

Free trade deals will ease a 'no deal' Brexit only slowly...

LAST MONTH, economic research consultancy Capital Economics released a report on the economic impact of Brexit, which they carried out for Woodford Investment Management, writes Matthew Partridge at MoneyWeek magazine.

It looked at three scenarios:

• a "no deal" exit on WTO terms; a "compromise trade deal" with Brussels; and
• a compromise trade deal with Brussels combined with ambitious external trade and regulatory policies.

While the "no deal" scenario would be slightly worse than the status quo, the two latter scenarios would produce additional GDP growth over the next decade.

Glyn Chambers, one of the report's authors, kindly agreed to discuss some of the points arising from the report, especially in light of last week's agreement.

"Although the size of the 'divorce bill' is a big issue in the public and media consciousness, it's a smaller deal when it comes to the economic impacts" argues Chambers. Capital Economics predicted an exit payment of £32.5bn, "equal to its share of EU assets and liabilities and a normal membership contribution for the whole of 2019 and 2020".

This isn't too far off the latest estimates, which could see the UK paying up to £40bn.

However, even if the bill turns out the closer to the predictions of £50bn a fortnight ago, "the increase of £17.5bn would likely be spread over many years, reducing the perceptible economic impact".

Under all three scenarios, Britain will need to strike new trade deals with third countries, to mitigate the damage caused by the loss of access to European markets. In some cases this may involve the UK having to change its rules and regulations, says Chambers.

"There could be some cases where regulations could need to be modified in particular ways in order to meet mutual recognition provisions that can form important parts of the agreements". However, it's important not to exaggerate the extent to which this will happen as "free trade agreements with other countries and blocs will not require us, in general, to adopt their regulations".

"If this was the case", he says "it would be difficult for countries for conclude more than one free trade agreement, since adopting the regulations of one partner would preclude an agreement with another".

For example, "Singapore has free trade or economic partnership deals with the United States, China, India, Japan, many other countries and has concluded one with the European Union" (not yet ratified).

Overall, "the degree of regulatory control from overseas will almost certainly be lower than it currently is with European Union membership."

Similarly, Chambers also feels that the UK won't have to make too many concessions on immigration. While India has hinted that a UK-India free trade deal will be conditional on increasing the number of business and work visas, the fact is that "most free trade deals don't contain provisions on the movement of people" so "it would be unusual for that to be part of the deal."

Even India "has concluded free trade agreements with Japan and ASEAN without such provisions". Still it is possible that they "could obviously make such a request and it would then be a matter for the ensuing talks".

Don't count on "business friendly" deregulation just yet
The report also assumes that the British government should take advantage of the exit from the Single Market to adopt more business friendly laws and rules, boosting growth. However, "given the political climate at the moment, particularly the government's small majority, we expect little in the way of deregulation" Chambers admits.

However, "it's not unreasonable to think that a small number of European Union regulations may be repealed after Brexit and we give some examples in the report". Even if it doesn't repeal any existing European laws, "Britain will avoid future European Union regulations". Although not actual deregulation, "this will be deregulation relative to the counterfactual of continued European Union membership".

When the report was originally published, Chambers estimated that there was a 35% chance of a "no-deal" scenario, a 50% chance of a compromise and just a 15% chance of a more ambitious agreement. Since "the government has seemed a little bit more desperate to get a deal, the chances of the low case might have fallen a little and the chances of the base case increased a little".

However, he still thinks that the chances of the third scenario, his preferred option, are "unchanged", so this outcome is still much less likely, though not impossible.