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Jonathan Portes, professor of economics and public policy at King’s College London, on what Boris Johnson’s Brexit may mean for the UK as a whole.
Endless column inches have been devoted to analysing the implications of the latest UK Government proposals for Northern Ireland and the Irish border, compared to the deal agreed by the Prime Minister’s predecessor Theresa May. Rightly so, given the political implications. Much of the public may, quite understandably, be under the impression that not that much has changed for the rest of us. But nothing could be further from the truth.
In fact, Boris Johnson’s Brexit looks very different to May’s – and not just for Northern Ireland. He proposes two key changes.
May’s priority was to preserve the status of Northern Ireland within the UK by ensuring that there would be no customs border in the Irish Sea. That meant proposing that the entire UK would, for all intents and purposes, stay within the EU’s customs territory, so that it would apply EU tariffs and so on.
Contrary to the myth now espoused among some Brexiteers, this was not some nefarious plot by the EU’s chief Brexit negotiator Michel Barnier to keep the UK in the EU by the backdoor. Indeed, the European Commission was not at all keen on it. It was a British proposal, reluctantly accepted by the EU as the least bad way of avoiding a Northern Ireland border while reaching a settlement acceptable to the UK.
But Johnson’s objectives are very different. Continuing to apply EU tariffs would make reaching trade deals with third countries, such as the US, far more difficult if not impossible. So his proposal would, in effect, revert to the original Barnier proposal, whereby Northern Ireland stays (at least for most practical purposes) in the EU customs territory, but the rest of the UK – 98% of the country’s economy – does not. That “liberates” the UK to make its own trade deals.
And it doesn’t stop there. As a price for accepting May’s proposals, the EU required that the UK agree to what are called “level playing field” provisions, which would commit the UK to maintain – at least in broad terms – its current environmental and labour standards, rules on state aids, and so on, so that the UK would not be able to undercut EU producers.
Taken together, these measures – a de facto customs union and level playing field provisions – were intended to form the basis of the UK’s future permanent trading relationship with the EU after Brexit, to be negotiated over the next few years. The aim on both sides was for an “ambitious” free trade agreement, with no tariffs or quotas. This would still have disadvantaged many of the UK’s key service industries that currently benefit from our membership of the single market, but it would largely have protected UK manufacturers.
Johnson’s proposals also ditch the level playing field commitment. The UK would have “flexibility” to do what it wanted on environmental or labour standards, or to subsidise specific industries. This, in itself, is not a problem for the EU in negotiating terms – no one suggests after Brexit that the UK would not, if it wants to, have the right to set its own standards. But, it is a major roadblock to a future free trade deal between the EU and the UK. In practice, it would mean that May’s proposed deal is a non-starter.
It is far from impossible that if the UK really makes good on Johnson’s implicit threat to lower our standards to improve our competitiveness with respect to EU producers, that no trade deal would ever be signed. But, even if one is, it is likely to be a minimalist, bare bones version – sometimes described as “Canada-minus”, which is less comprehensive than the EU’s current deal with Canada.
In practice, Johnson’s deal means a very different economic future for the UK. Instead of a close economic relationship with the EU – including a de facto customs union, broadly comparable standards, and a broad free trade deal – the UK would be outside the customs union, with complete freedom and flexibility to make its own trade deals and set its own standards, with, at most, a minimal trade deal with the EU.
So what does this mean for the UK economy?
A report by The UK in a Changing Europe group, which I co-authored, provides the first detailed analysis of the long-term impact of these proposals, compared both to May’s proposals and to a situation in which there is no trade deal with the EU at all. We take account of the impact both of leaving the customs union and of having a less comprehensive trade deal with the EU.
Even under the relatively optimistic scenario that the UK succeeds in negotiating a “Canada-minus” style deal, the economic impacts are considerably more negative than May’s deal. UK manufacturing, in particular, would suffer. The hit to GDP per capita – the best measure of prosperity – might be up to 6.4%, very roughly £2,000 per head, over 10 years, compared to a 4.9% drop or £1,500 per head decrease, under May’s proposals.
But, what about the upsides of being able to do free trade deals with the likes of the US and China, and being able to (further) deregulate the UK economy by reducing environmental or labour standards? Indeed analysis published by Economists for Free Trade, which shows large gains from a ‘hard’ Brexit, goes even further and assumes that the UK abolishes all standards – health, safety, pollution and so on – on all imports.
Leaving aside whether any of this is politically feasible or desirable, the problem is that economically the ‘benefits’ are unlikely to be very large.
The UK labour market is already – within the EU – relatively flexible. Even employers’ organisations do not think that there are significant benefits to, for example, abolishing the working time directive. While a free trade deal with the US might have some benefits, no serious analysis suggests that they would be remotely comparable to the losses shown above. Indeed, the Government’s own detailed modelling, published last November, suggests that, even on optimistic assumptions, free trade deals with almost every major economy outside the EU – China, India, the US and so on – would boost GDP by no more than half a percent over 15 years. Whatever the political merits of the extra flexibility afforded by Johnson’s proposals, the economic costs are large.
While May sought a much ‘softer’ Brexit than Johnson’s proposals would entail, she also espoused a particularly restrictive approach to immigration policy after Brexit. Under both Johnson’s and May’s plans, free movement would end after Brexit and the UK would have much greater flexibility to set its own immigration policy. Our modelling also shows that if the Government followed the approach set out in its white paper last December, there would be a further hit to the economy from lower immigration, both skilled and unskilled. But, if Johnson chooses to adopt a more liberal approach, especially to skilled immigration, that could go some way towards mitigating the damage.
How should these factors inform the debate as we approach the latest Brexit deadline of 31 October?
Of course there’s huge uncertainty around the estimates shown above – both because of the inherent uncertainty in economic modelling and because we simply don’t yet know the detail either of any future UK-EU trade deal or of the policy choices made by future UK governments. But, if Parliament is asked to vote on a deal along the lines proposed, our analysis is, so far, all that it will have to go on about the economic impacts of Brexit for the UK as a whole.
Northern Ireland matters. But so do jobs, wages and public services in the rest of the country.