How No Deal will Affect the UK's Economic Power 1

How will No Deal Affect the UK’s Economic Power

Written By: Josh Watts

At 11pm GMT on Friday March 29th 2019, the United Kingdom is supposed to leave the European Union. This will be the culmination of a process of confusion and negotiation that, if anything, looks less clear than it did on the night of the referendum. Currently, Theresa May is attempting to secure a short extension to Article 50 from her fellow EU leaders. This is being done in order to give May more time to get her deal through Parliament, which has already rejected it twice . It looks unlikely that this will be passed before occurs, so the possibility of ‘no-deal’ is looking increasingly likely.

Before trade deals between the UK and EU may be finalised, the all-important terms of withdrawal must be decided. You might have heard this referred to as the ‘divorce bill’. The current divorce bill contains divisive issues such as the Irish backstop, which has been a source of immense confusion in the press. Due to the controversy surrounding the divorce bill the negotiating teams haven’t had a great deal of time to deal with what trade between the UK and EU will look like post Brexit. Even if trade deals were set in place, with no ratified withdrawal agreement (i.e. no-deal) they are rendered useless.

Now, why is a trade deal so important? It all boils down to tariffs – the level of tax paid on imports and exports. Trade deals are designed mainly to reduce tariffs. This makes business between nations easier and more importantly cheaper. To do my best impression of the Chancellor and give you an economic explanation, if tariffs are lower through a trade deal, then the price of a nation’s exports are lower. Therefore, through the law of demand, more of that nation’s goods and services are demanded. Thus, the volume and value of these exports rises, in turn increasing the GDP of the exporter nation.

Not only does being part of the EU make trade cheaper between member states, it also gives states access to a number of trade deals with nations outside the association. Therefore, if the UK is to leave the EU with no-deal, not only will trade with the EU plummet, but so will trade with states including New Zealand, Canada and Japan. You can say goodbye to well-priced New Zealand lamb, which accounted for 73% of UK sheep imports in 2012.

Until the time comes when the UK negotiates its own trade deals, the country will not merely be geographically isolated, but isolated in terms of competitiveness too. Also, it might not be as simple as quickly negotiating deals with the top dogs once withdrawal is finalised – you might remember Barack Obama claiming the UK would be at the ‘back of the queue’ for trade deals. In a globalised world, these deals are essential to an economy surviving, let alone thriving.

It would be silly to just think in terms of the national interest. A no-deal will affect the daily quality of life of the people in the UK too. As part of the EU, our goods and services are cheaper, allowing us to have a higher standard of living. With no trade deals in place, the price of day to day imports that we take for granted, such as clothing and certain foods, will rise, and regular people will be left worse off.

All that has been mentioned so far has been theory. Let’s have a look at some figures.

As of today, the UK is the world’s 6th largest economy, which is partially due to the 44% of exports that go, tariff-free, to the EU. This lends itself to the view that with no trade deals in sight, the UK economy in comparison to the rest of the world will plummet. Remember this would all change if the government was able to sort out deals, but currently that looks unlikely. In the Brexit campaign, all the talk from the ‘Remain’ side was ‘recession this, recession that’. This was dubbed ‘Project Fear’ by Brexiteers, but negative economic effects, especially in the short term, seem likely. The Office for Budget Responsibility has predicted that the UK’s export-GDP ratio will fall, which is alarming as exports are often a more valuable source of revenue that domestic products. Government figures predict a 9.3% reduction in the size of the economy in 15 years if there is no-deal. Obviously you can take this figure with a pinch of salt and is likely exaggerated, but it does show the economic danger of no-deal.