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Brexit: Could no deal be a good deal?

There is probably a 50:50 chance EU negotiations could breakdown without a deal. But, contrary to the conventional wisdom, might this be good for the UK economy?

The European Council and European Commission’s good cop, bad cop routine, makes it very difficult to assess whether or not the Brexit negotiations will end in acrimony and breakdown. My guess is that there is a 50:50 chance that the UK could end up walking away with no deal.

And we know what would happen the morning after. Politicians, business groups, the chattering classes, the establishment and the media would work themselves up into a right lather. Those who remember Dad’s Army, will see Corporal Jones marching around everywhere shouting “don’t panic, don’t panic”.

Frightened that the economy was about to fall off a cliff, financial markets would sell the UK and short sterling big time. But they’d be wrong, very wrong. Amidst the chaos, more sober minds would recognise the 10 unique opportunities, which would rise like a phoenix from the ashes.

Number 1, the divorce settlement would have just got much cheaper. The UK would honour its financial obligations up until the end of the Article 50 period, but that would be the end of it. The Chancellor would have 0.5% of GDP per annum to play with, and no additional costs associated with the divorce.

Number 2, the UK would definitely be leaving the EU’s Common External Tariff. The protectionist wall surrounding the UK at present, would be removed if we imposed zero tariff and non tariff barriers on UK imports from across the globe. Regular readers of this column will be familiar with the benefits to consumers in the short term, and consumers and producers in the long term, from gaining the freedom to operate unilateral free trade. The UK could become overnight, the world’s biggest advocate of genuinely free trade.

Number 3, the UK would also be leaving the Single Market. You would never know it, from reading the news and watching the TV, but this would be good news not bad. The UK would become a rule maker not taker, and could begin to take down the regulatory state. Only 10% of UK GDP is engaged in trade with the EU, but 100% of UK companies are subject to EU regulation at present. And as my Legatum Institute colleague, Shanker Singham, constantly points out, we need to be outside the Single Market, so as to have ‘skin in the game’ in trade negotiations focused on services - where the UK’s comparative advantage lies.

Number 4, the benefits of leaving the Customs Union and the Single Market would begin in 2019 not years later, after a transition period.

Number 5, the shock of no deal is likely to push the political class towards deep cuts in Corporation Tax (say a commitment to a 10% rate by 2025) in order to boost competitiveness – every cloud has a silver lining.

Number 6, we could move to complete and implement free trade agreements with the rest of the world, far more quickly than if there was a transition period. The Anglosphere economies alone (US, UK, Canada, Australia & New Zealand) account for 33% of global GDP.

Number 7, no deal could be beneficial for the City if it triggered a shift towards an offshore model, free from Mifid 2 and tens of thousands of pages and millions of paragraphs of prescriptive regulation.

Number 8, it would shift the UK’s entire economic focus away from the EU (with its sharply declining share of global GDP), and outwards towards the big wide world, where the greatest opportunities from economic growth are to be found.

Number 9, As a free market economist I’m uncomfortable with industrial strategies, but exiting the EU would provide far more opportunities to dabble with such interventions and buy off certain key sectors.

Number 10, sterling would undoubtedly plummet the morning after, but that would be a helpful boost to exporters, and introducing zero tariffs on imports would counter the sterling effect on import prices. Brexit with unilateral free trade will lead to lower prices.