Back to the (original) backstop? By conceding that any customs border will have to be in the Irish Sea, Boris Johnson appears to have revived the possibility of a Brexit deal. But the focus on the politics of the Irish border risks missing the implications of his proposals for the economy of the UK as a whole. And, as we reveal in our report for The UK in a Changing Europe, these are significantly worse than was the case for Theresa May’s Brexit plan.
Indeed, Johnson’s motivations for ditching May’s withdrawal agreement have little if anything to do with Northern Ireland. Rather, it is because the new prime minister sees the ultimate relationship the UK should have with the EU very differently to his predecessor. Gone is the notion that a shared customs territory and close regulatory alignment on goods should form a “bridge” to the long-term relationship. As Johnson put it himself 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 isn’t about Ireland. It’s about our long-term relationship with the EU. And the bottom line is that the prime minister envisages a far looser relationship than his predecessor.
From what we can ascertain (and remember, we cannot be certain what the government will want in the way of a future relationship until negotiations start) the present government is seeking a goods-only or “Canada minus” deal. This will involve only minimal coverage of services. It will also involve significant non-tariff barriers on trade, given that the UK will be in its own customs territory while only Northern Ireland will be bound by EU rules on agriculture and goods.
Even if Johnson were to change his mind and decide he wanted a closer relationship, it is entirely possible it would not be on offer. The current government has refused to sign up to EU level playing field provisions on labour and environmental standards. The proximity of the UK mean that it would insist on such provisions in return for access to the EU market. Without them it will be difficult for the UK to reach a comprehensive free trade agreement with the bloc.
So what would this mean for the economy? Based on the reduction in trade alone, under May’s deal (assuming no productivity effect, on which more in a moment) income per capita would have been 1.7% lower than under membership. The equivalent figure for the Johnson deal is 2.5%, while that for a World Trade Organization Brexit (no trade deal at all) is 3.3%.
However, economists are convinced that reductions in trade also affect productivity. The literature suggests that a 1% decline in trade reduces income per capita by about 0.5%. If, then, we combine this productivity effect with the trade impacts summarised above, we arrive at per capita GDP figures of -4.9%, -6.4% and -8.1% for May’s deal, Johnson’s proposals and a WTO Brexit respectively, as compared with membership.
Our findings, in other words, suggest that, relative both to the status quo of EU membership and to May’s proposals, the economic impact of Johnson’s proposals would be significant and negative.
This being said, there are steps the government can take to mitigate this impact. One obvious policy lever is UK migration policy. This is an area where Johnson, given his relatively more liberal approach, has more scope than May. And there are clearly other important mechanisms, such as fiscal policy and regulatory policy, where choices will be crucial in determining overall economic performance.
As with all forecasts, the findings of our report should be used with caution. Modelling economic impacts of hypothetical scenarios is fraught with difficulty. We don’t seek to reach fine-grained conclusions about the economic impact of various Brexit scenarios. Rather, we hope to have established the broad impacts of leaving the EU, taking into account the major determinants: trade, migration and, indirectly, productivity.
What the forecasts do is give an indication of the scale of the impact of Johnson’s proposals. Our main insight is that his proposals sit somewhere between May’s deal and a WTO scenario. The impact on income per capita is negative in all scenarios, but Johnson’s proposals would be more damaging than May’s deal.
It should be stressed that we have not looked at what might happen to the UK economy as a whole, but the isolated impact of a change in the UK’s relationship with the EU. Overall economic performance obviously depends on many other factors, including global economic trends and domestic policy choices.
It is more than 25 years since the Clinton presidential campaign almost used “It’s the economy, stupid” as a slogan. We have learned a lot since then, not least that it’s not always the economy and that, when it comes to Brexit, there are many who are willing to accept economic losses to achieve what they see as essentially political objectives. We respect such arguments.
Equally, however, we believe that decisions should be taken on the basis of information that is as complete as possible. Brexit might be a largely political project, but in deciding what to think of it we should be in a position to talk knowledgably about its potential economic effects. Making trade harder with our nearest and largest trading partner will inevitably have a negative economic impact. What our findings show is that this impact will be greater for Johnson’s proposals than for May’s deal. That, at a minimum, strikes us as worthy of debate.
• Anand Menon is director of UK in a Changing Europe; Jonathan Portes is a senior fellow at UK in a Changing Europe
