Brexit: Deal or no Deal?

Hello readers, welcome back to my blog. Last time you might remember me discussing some of the common misconceptions with privatisation and how sometimes it may be useful for the government to intervene within certain sectors of the economy. However, I pointed out that nationalisation is by no means a universal policy, rather each industry is unique and often governments need to strike a balance between the two extremes in order to reach the most optimal solution for society, as is the case with many economic problems. In this post I will be discussing something more topical. Brexit. Yes we have all heard it in some context a million times, “Brexit means Brexit”, ‘Hard or Soft”, “no deal”. Featuring in almost every newspaper, tv report or public debate about the welfare of the UK, Brexit seems to have become ubiquitous. Some of you may have already stopped reading this post after seeing the title and not being able to read anything further about this, but if you are still here it’s time to get down to business and actually assess some of the possible outcomes for the UK. Although it has caused a huge deal of concern and confusion among the public, politicians, other countries and even the UK prime minister-Theresa May, the deadline for the UK government to strike a deal with the EU is fast approaching and Britain needs to reach some sort of agreement before a “no deal” means “no deal”. Here’s everything you need to know about the current issues, in particular the impacts of a no deal, why it may be the only option and the potential consequences for the UK, in a nutshell. Please feel free to share any of your own ideas below or contact me about the content discussed at rajveersira@gmail.com

Brexit is an issue which is omnipresent; for an event which started over two years ago it is still considered a ‘recent’ news event, as the deadline to reach a deal between the UK and the EU is imminent. Although triggering article 50 is an extremely complex and multifaceted scenario, I am particularly interested in 3 aspects: The impact of a ‘no-deal Brexit’, the dilemma surrounding the Irish boarder and whether Brexit could be reversed.Screen Shot 2017-08-06 at 14.39.37

Firstly, if the UK was unable to come to any deal with the EU, then trading would revert to WTO rules resulting in tariffs on goods moving in and out of the UK. This includes the millions of German cars that people in Britain purchase every year (imports) as well as the financial products that Britain essentially exports, not to mention that there would also be physical disruptions due to increased custom and border checks resulting in production delays, inefficiency and potentially lower profits. It is some-what ironic that the UK population opted to Brexit considering a major source of income for the country is derived from the export of financial services, mainly within London. It has been estimated that without the contribution from London of such products, the UK’s GDP would be the same size as Spain’s.

If however the UK was able to strike a deal in its favour i.e. tariff free trading (access to the single market) yet without free movement of people (control over its borders) then other EU countries may want to do the same i.e. increased sovereignty without any strings attached. Essentially in game theory terms, this is a ‘zero sum game’ whereby one person’s losses are equal to the other person’s gain. This is where we hear the terms ‘hard’ and ‘soft’. The former referring to a clean break between the UK and EU i.e. no free movement of people and the latter allowing free movement to continue as normal. Since one of the underlying root causes of Brexit was the issue of immigration it is unlikely that Britain would want to remain in the single market. Clearly immigration in the UK has a negative connotation and stigma as it supposedly ‘steals jobs’. This is a huge misconception that was wrongly portrayed by the leave campaign who were myopic in their reasoning and did not consider some of the long term net benefits of migration hence why some argue that due to misinformation there should be a second referendum (more on this later). Although I have discussed the benefits of migration in an earlier post, I will reiterate them here. Firstly, with an ageing population, the UK needs to consider alternative avenues to fund pension schemes. One such way is to boost its tax base from immigrants working in both low and high skilled sectors of the economy. Secondly, migrants are often seen to be more hardworking than their British counterparts and as such they have a higher productivity, which can result in greater profits and efficiencies for firms and businesses. Moreover there are a number of acute skill shortages in the UK, particularly within the NHS and thus closing down the border would have major implications for the millions of  British people that rely on free healthcare. Finally, many people often forget that immigrants can create local and regional multiplier effects. The income that they earn may partly be sent back to their home country (remittances) although a large proportion is used to spend on local goods and services which can create different avenues of income for others and potentially result in the construction of new jobs. We should also consider the fact that previous waves of immigration have been a huge success in areas such as Leicester or London where there is a significant cultural diversity and these places are currently thriving. There are a number of other benefits and thus Britain should consider the impact of pulling up the drawbridge and  preventing like-minded, hardworking, individuals from entering the country. There are also implications for EU nationals currently living in the UK. Many lack the full political understanding of the situation and are concerned about their future regardless of what they may be promised by the UK. As such we could start to see skill shortages and lower tax revenues before Brexit has even occurred.

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The biggest impact of a ‘no deal’ is that both parties would face disruption to trade which is costly but also regressive-wealthy individuals can afford to absorb any shocks to consumer prices but poorer households may struggle to cope with increases in essential goods and services. This means that consumer incomes are essentially being ‘wasted’ on a tariff when they could have been spent on another utility enhancing good i.e. there is an opportunity cost. Moreover imposing tariffs may damage result in retaliation and trade wars between countries leading to higher prices and disruption.

Secondly, I am particularly interested in the dilemma posed by the question of the Irish Border. A return to a hard border may reignite the social and political tension of the past but also lead to customs checks causing massive disruption for the people and businesses on both sides of the border. A possible solution proposed by the EU is to allow Northern Ireland to remain in the EU customs union effectively making the Irish Sea the border, leading to the break up in all but name of the United Kingdom; this is something that no UK government can agree to. A technological solution is being suggested but details about this are still vague. A hard border is not wanted by either the UK or the EU but would be inevitable in a ‘no deal’ Brexit scenario. Both sides know this and its implications but seem powerless to prevent it from happening whilst the deadline looms ever closer. Having said that, an article from the Guardian (written today) points out that the EU is willing to extend the transition period after the UK leaves the bloc, but warned Britain must not renege on previous agreements to prevent a hard border between the Irish Republic and Northern Ireland.

Finally many argue that the people should have a chance to vote on the terms of the deal (once they have actually been formalised and confirmed) or even have the opportunity to reject the proposal and remain in the EU. After all there were many inaccuracies and misunderstandings about the referendum which may have skewed the outcome. In particular, the confusion about the impacts of immigration, the complexities in triggering article 50 and of course the potential for violence in Ireland. One should also consider that fact that the formation of the EU has resulted in the longest period of peace since WW2 and perhaps, economic & political arguments aside we should look beyond this and opt for the option that results in stability rather than ‘experimenting’ in ways to increase the UK’s control and sovereignty. In addition the amount of money that has been spent on this issue and the time that has been invested; has diverted the country’s resources away from focussing on other, arguably more important issues. Thus whilst the UK is trying to negotiate its position, other countries may be focussing on innovation and the roll out of AI or upgrading existing social institutions e.g. healthcare.

However this fundamentally comes down to the principles of democracy and the fact that an outcome which may not be desirable for many has been voted for by the majority and thus should be respected regardless. Going back on this would essentially be breaking a code and undermines the true meaning of living in a society whereby democratic decisions are adhered to.

Below is a short animated video to help clarify some of the issues surrounding Brexit and provide some optimism about the issue; how it could be a potential success. Don’t be too persuaded, its a lot more complex than it seems!

 

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