Countdown to Brexit - deal or no deal?
29 Mar 2018
With high-profile departures from Theresa May's cabinet, uncertainty surrounding Brexit shows no sign of abating. Investec's UK chief economist talks about the delays of Brexit and what the possible scenarios around the movements of goods, services and people mean for business.
Listen to the podcast
Thank you Phil for talking to us.
Philip Shaw (PS): Hi Ana, always a pleasure to do these podcasts.
The Withdrawal Bill, what it includes, and what it doesn'tAJ: When you wrote your One year to Brexit article, the UK and the EU had just announced the agreed transition period, and the partially agreed Withdrawal Bill. Now that the bill has gone through parliament, does this bring more stability for negotiations to resume?
PS: The good news from the government’s point of view is that it managed to pass the EU Withdrawal Bill through parliament. This is the piece of legislation which transcribes European Union law onto the UK’s statute, so when the UK does leave the EU at the end of March next year, it has a continuous rule of law on its own books.
Now that wasn’t without difficulty. Parliament has insisted on being given what they called a meaningful vote on the final terms of the deal. There seems to be an issue as to whether the House of Commons would insist on being able to take control of the Brexit process would a suitable deal not reached by the autumn but that seems to have been watered down in a compromise, so it looks as though those agreements at least on the surface have been taken away, the Withdrawal Bill has been passed and that will become a formal Act of Parliament with Royal Assent fairly shortly.
Now what we need as well is progress on various other bills going to parliament as well, in particular, the trade bill and the customs bill and it looks as if the government is going to face a couple of fights from its own backbenchers on those bills.
Brexit: deal or no deal?AJ: So, there’s a lot of recent chatter about a "no-deal" scenario, or "the cliff edge", which seemed to have been taken away three months ago. Is this likely and, if so, what would the financial impact be on UK businesses?
PS: Ok, so let’s take this into two parts. Number one, is it likely, and number two, what the implications be if there was a no-deal?
Is it likely? The government has always said that it reserves the right to walk away from the negotiation table with the EU in the event that talks don’t make sufficient progress. Now, I think it’s an essential part of any negotiation as the Brexit secretary David Davis says from time to time. And that’s entirely legitimate. What the government doesn’t seem to have done is to have put in place sufficient preparations for a no-deal, and if it were to walk away from the table we’d have a situation that is, if I can tell you politely, quite chaotic, rather than following a decent and well-argued plan B.
The financial impact of a no-deal scenarioPS: Now, if there were to be no deal, what would happen? The EU’s mantra is that nothing is agreed until everything is agreed. Now, back in the spring, we had an agreement on a transition phase or, technically, an implementation period where the UK’s relationship with the European Union once the UK leaves in March next year would remain virtually identical for a good 21 months.
Now, in the event of no deal, that implementation period, at least in principle, wouldn’t happen. In so the UK, and again this is just in theory, would be facing WTO tariff structures with the EU and wouldn’t have any continuity in terms of an absence of customs checks. Now, that would be extremely disruptive to businesses. Now, in practice, perhaps what might be agreed, you will get a sort of a limited implementation period to smooth over what most people would call the cliff edge, but essentially it would seem that a no deal would be very bad news, actually not just for the UK, but many other European Union economies as well that are dependent on Britain as one of their key markets. But it is in everyone’s interests for a deal to be struck.
Possible delays of BrexitAJ: Assuming we have a deal, could these delays in negotiations result in the transition period being extended beyond 2020?
PS: Although the Brexit negotiations have been mired with problems, and that’s not just the UK disagreeing with the EU as I’ve mentioned, there has been a lot of internal disagreements within the Conservative party itself, which have held up negotiations, our starting assumption is that a deal will be agreed, it might not happen right on time in October but we’d have thought that by the end of 2018 at least the outline of the details will be made known and agreed between the various parties. So, it does mean that once you get through the ratification process we go into the transition period at the end of March next year until the end of 2020. Now there is a feeling that, depending on what happens with the Northern Irish border, and perhaps some other details as well, that that period is not long enough to ensure a smooth transition into a full exit of the UK from the EU.
It’s possible that the transition deal gets extended, that we face a longer implementation period, and that’s been talked by some people. One of the issues from a domestic, i.e. UK political perspective, is that we’re due a general election in June 2022 and the government feels that it has to have made sufficient progress into severing its ties with the EU in a formal basis well in time for that election. Now, again in principle, there could be a lengthening of the implementation period, but it has a limited shelf life for those domestic political reasons.
The impact of the Irish border situation on businessesAJ: You’ve just mentioned the Irish border situation. How important is it for UK and European businesses?
PS: There are big implications on how the border issue is dealt with both in terms of commerce and of course political as well, and I believe the political implications are pretty well discussed and fairly obvious, so I’ll concentrate on the economic ones.
For any business that conducts business between the Republic of Ireland and the North, having the free movement of goods and people is absolutely essential. Now the government in Westminster fully believes in an open border, but it also fully believes that the most appropriate solution is a technological solution, the so-called Max Fac situation. Now that is going to take a while to develop.
But there is a wider issue as well, and that is one of customs checking and regulatory checking, and for example, when I go and see our corporate clients in the Republic they are of course concerned about what happens to the border with Northern Ireland, but they are also worried about the sort of delays that could happen with the UK mainland, as their goods could, for example, be perishable, or they have very tight delivery schedules, so the wider issue is what sorts of customs checks to we have to have? How can we streamline them? Do we have to have regulatory checks as well, how much alignment are we going to have between the UK and the rest of the EU that facilitates a relatively smooth passage of goods in and out of the UK? The Northern Ireland and Ireland border is an important example, but there is a wider situation which negotiators need to take account of.
AJ: So the implications are not just relevant for businesses that trade between the UK and Ireland but also the UK and Europe in general?
PS: Absolutely, you know, we are talking about the way and ease with which goods enter and leave the UK and enter or leave the EU in general.
Possible scenarios: free or restricted movement of goodsAJ: So we’re talking about the possible scenarios of free or restricted movement of goods between the UK and the EU. The two other areas which are still up in the air are about the free or restricted movement of services and the free or restricted movement of people. What would each of these scenarios mean for people doing business in the UK?
PS: Yeah, it’s a very good question and you have quite correctly separated out that subject into goods, services and people. So I’ll deal with them in sequence.
On goods, I guess I better reinforce the point that if we’re talking about the free movement of goods we’re not just talking about tariff-free trade. Customs arrangements and other regulatory checks are extremely important in facilitating trade and we’d urge that these things are not forgotten.
Possible scenarios: free or restricted movement of servicesPS: On services, absolutely critical, and there has been relatively little talk about what sort of services arrangements are going to be in place post-Brexit, and one of the issues is that services are such a heterogeneous area, you have different rules applying for different subsectors. Even if you take the financial sector, once you begin to drill down a little bit, it gets so complex. You really have to be a specialist lawyer to understand everything that is going on, so I won’t pretend I am an expert here!
Very recently we had the Chancellor of the Exchequer giving his Mansion House speech, talking about the regime of super mutual recognition, where supervision might not be exactly the same on financial services in the UK and the EU, but there is sufficiently high standard in each for each party to recognise if you like a sort of equivalence between the various systems and allow unimpeded movement of services, or trading services across the various blocks.
Now, where that goes with the EU yet we don’t know yet, as we don’t seem to have advanced very far on those negotiations. We had Michel Barnier on the EU side effectively saying that it’s a non-starter but of course, that is his opening gambit on the negotiations.
Possible scenarios: free or restricted movement of peoplePS: On people, from a political perspective it was pretty obvious that the free movement of labour across the EU into the UK was a red line in terms of the referendum vote, and the government intends to respect that. Therefore, we don’t know the details yet but we’d expect that there are a series of restrictions in place which limit the amount of labour that comes from European Union countries into the UK.
Now businesses are lobbying for one thing, the population probably wants something that’s tighter, we don’t know exactly how that’s going to look, but in terms of the free movement of people or, should I say, the free movement of labour, that looks to be a piece of UK legislation which looks very different in the final post-Brexit environment.
Impact of labour restrictions on businessesAJ: And what would the impact of that restriction be for UK businesses?
PS: Well, businesses are always saying that there isn’t enough of a domestic labour pool available for them to conduct their businesses and they will be lobbying very hard for the government to make the restrictions as loose as possible. At the end of the day, it’s very difficult to set guidelines and rules which suit everybody’s needs and what you have is a compromise between the needs of the economy and business and the wishes of the electorate, i.e. the domestic politics of the situation.
Conclusion and next pieceAJ: Thank you, Phil. This ends the first part of our Countdown to Brexit podcast with Philip Shaw, Investec’s chief economist. In the second part, we’ll be talking about some of the most affected sectors and the European reaction to Brexit. For more information, visit investec.com/brexit.
About the author
Chief Economist, UK
Philip graduated with an Economics degree from Bath University and a master’s in Econometrics from the University of Manchester. He is a regular commentator on the economy and financial markets in the press and on TV. Philip joined Investec in London in 1997 and heads up the Economics team there.