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A guests hold a report published by Britains Treasury on the economic impact of Brexit
Image: A guests hold a report published by Britains Treasury on the economic impact of Brexit. REUTERS/Matt Cardy

The Cost Of A Chequers Brexit

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Image: A guests hold a report published by Britains Treasury on the economic impact of Brexit. REUTERS/Matt Cardy

The UK Government’s Brexit white paper has proved so controversial that both Britain’s Brexit and Foreign secretaries resigned last week, but what could it mean for the British economy?

The so-called Chequers Brexit – named after the meeting held at Prime Minister Theresa May’s country estate to agree plans to leave the European Union – led to a volatile week in British politics last week. David Davis, the former Brexit secretary, and Boris Johnson, the UK’s colourful former foreign secretary, both resigned over what they complain is a watered-down approach to Brexit.

The resignations and outcry from hard-line Brexiteers over the proposals have left May’s minority Government looking increasingly fragile. But, if successful, what could the impact of a Chequers – largely seen as a ‘softer’ – Brexit be on the British economy?

Compromise or ‘Fudge of the Century’?

Under the proposals, UK negotiators will seek the establishment of a UK-EU free trade area for goods, which effectively means maintaining the current regulatory regime for trading manufacturing and agricultural goods. The UK would essentially stay in the customs union while also seeking trade deals with other territories.

Although Britain will establish its own legal jurisdiction after Brexit, under the plans British courts would still pay ‘due regard’ to EU rulings on trade. This effectively gives the EU Supreme Court the last say in these matters, although UK parliament could ultimately veto any changes to the trade rule-book.

Under the proposals, Britain would also stay within the EU’s value-added tax (VAT) regime and under the control of EU agencies that authorise medicines, chemicals and aviation.

However, crucially, Britain would leave the single market for services – which represent 80% of the UK’s economy. The City of London Corporation says that the loss of its pan-European passport to operate for financial services, for example, would be a “real blow”.

According to the Financial Times, one EU official called the proposals the “fudge of the century” while, in his resignation letter, former Brexit minister David Davis described the notion of UK parliamentary control as “illusory rather than real”.

“Taken together, the safeguards offer no more freedom than Norway enjoys as a member of the European Economic Area,” comments Alex Barker in the FT.

‘Softer Brexit’ still comes at a cost

The notion that a Chequers’ Brexit would be a ‘softer’ break-up may suggest that the economic impact would also be limited, however this looks unlikely.

Indeed, the Government’s own financial modelling of different EU divorce scenarios, leaked in March this year, revealed that all of them would mean a significant cost to the UK.

“All these scenarios resulted in significant negative economic impacts,” argues Jonathan Portes, professor of economics and public policy at Kings College, London, in the Independent.

“Leaving the customs union leads to increased costs at the borders. Leaving the single market means new non-tariff barriers to trade. And ending free movement reduces net migration, although by less if the UK introduces a preferential regime for EU citizens.”

While, under a Chequers Brexit, no fundamental changes to EU-UK goods trading regulations should mean no extra border charges for manufacturing companies – which alone could have cost 1% of GDP, says Portes – new non-tariff costs would increase the burden on the services sector. The difficulty is that services account for 80% of the UK economy.

“Using the Government’s own figures – including both the positive impacts of a US trade deal and some deregulation – and assuming that in future non-tariff barriers apply to services but not goods, the central estimate would be a negative impact of about 3 per cent of GDP over 15 years,” says Portes.

“That’s in between the Government’s published estimates of the impact of an EEA-type [European Economic Area] scenario (1.6 per cent) and an FTA-type [Free Trade Agreement] scenario (4.8 per cent).”

The impact is equivalent to around £60bn or £2,300 per household, explains Ben Chu, the Independent’s economics editor.

Portes also estimates that we could have to pay £40bn a year – or £770m a week – to remain in the customs union.

But will the EU agree?

The question is whether the EU will agree to the terms of a Chequers Brexit anyway or if officials will merely see it as the UK ‘cherry-picking’. While countries such as Ireland, Poland and Hungary, as well as some figures in the German Government, are open to the idea of an EU goods area including the UK, France and the European Commission insist that the single market must remain indivisible.

According to the FT, one EU official involved with Brexit said it was “difficult to see” how the UK ideas “are workable”.

Even if the UK is successful in persuading the EU to agree, “the longer-term [financial] impact will still feel very hard indeed,” warns Portes.

A ‘national humiliation’

Meanwhile, former EU trade commissioner and UK business secretary, Peter Mandelson, calls the Chequers Brexit the “polar opposite of taking back control”.

“Britain would be entrapped and the more you think through the implications the more the whole thing looks less like a soft Brexit than a national humiliation,” he writes in the Guardian.

“Not only would it fail to secure all the trade we have presently but it would severely compromise our ability to negotiate future trade agreements with other countries.”

Note: The opinions expressed in this article are the author's own and do not necessarily reflect the view of Alvexo on the matter.