Hard Brexit, Soft Brexit and No deal Brexit: What does it all mean?

By Richard Snow

On 26 June 2016, Britain held a referendum on whether to leave the European Union. The “leave” campaign prevailed, and the actual exit will take place on 23 March 2019 at 11 pm.

Major reasons behind the leave vote were that a belief that Britain should control its own immigration, a belief that laws that apply in Britain should be made in Britain, a belief that a lot of welfare money is spent on migrants and refugees, a belief that Britain spends a lot of money subsidising the EU, and that money could be better spent in Britain.

Major reasons behind the remain vote were that Britain would be economically worse off if it left because of lower export volumes from Britain to the EU and higher tariff costs on imports from the EU. There were other – less important –  issues such as the ability of British students to study in EU countries (and vice versa) or uncertainty over the positions of British people who have retired in Europe (e.g., Spain) and whether they could remain there.  The IMF says that Europe could lose 1.5 percent of GDP, and Britain could lose 4 percent of GDP, from a ‘no deal Brexit.’ The loss would come from a loss of exports to the EU,  and from disruption to supply and assembly chains. The  IMF thinks the greatest damage would occur to Britain’s car, aircraft, drug and agriculture industries. Ireland, Holland and Belgium are most exposed to Britain by trade, and would also face around 4 percent loss of GDP (see the IMF article below).

In the debate before the referendum, both sides appear to have made outlandish claims about the financial consequences. The leave campaign claimed leaving would free up billions of pounds to be put into the National Health Service. The remain side claimed that leaving the EU would result in severe damage to the country by way of lower trade with the EU and tariff barriers. It would have been hard for either side to make accurate claims at the time, since the exact nature of brexit was not known, i.e., whether the departure was ‘hard’ or ‘soft’ or ‘no deal’.

So far (30 July 2018)  Britain and the EU have not agreed on the future shape of trade between the two parties after that date, apart from a 21 month ‘transitional  period when many current arrangements will be continued. The terms “soft Brexit,” “hard brexit,” and “No deal Brexit” are being thrown around in public discussion, and don’t seem to be well understood by many people. It’s impossible to explain all of Brexit in one article, so this article outlines the main options that face the UK, and suggests some articles for further reading.

As Britain leaves the EU it must decide whether it wants to be part of the EU customs union for goods, and part of the free trade area (which is a separate thing).

A soft brexit means that Britain would stay in the EU customs union, and the free trade area, and a lot of EU rules would still be enforced.  When a country forms a customs union three things happen. First, the parties inside the customs union don’t charge each other tariffs or import taxes on goods that pass between them. There are no customs inspections or paperwork to prove where the goods were made as truck drives across a border. Second, all the parties inside the customs union charge the same import taxes to goods coming into the area from the outside.  A container of goods that lands in Los Angeles is charged the same import tax as a container of goods that lands in Portland Oregon.  Third, states inside a customs union give up their right to make their own free trade agreement with outsiders. California can’t make its own free trade agreement with China or Australia. The customs union – the USA – has that role.  The fifty states of the US constitute a customs union, as do the six states of Australia.

In order for goods to move between Britain and the EU in a frictionless way, Britain would need to be in a customs union with the EU. However this would mean that Britain couldn’t make its own free trade deals with other countries like the US or Australia. Britain has in fact announced that it intends to make a free trade deal with Australia ASAP, which implies it doesn’t intend to be in a customs union with the EU.

This will create problems for Northern Ireland. If Britain is not in a customs union with the EU, then the border between the Republic of Ireland (part of the EU) and Northern Ireland (part of Britain) becomes a border between an EU state and a non-EU state. If there’s no trade deal, this implies inspection of trucks passing between the two states. That also implies some infrastructure and barriers along the border – something which neither the Irish nor the Northern Irish want. In fact the Northern Irish hate the idea. The North spent 30 years in conflict between mostly British-descended Protestants and mainly Irish-descended Catholics. That ended in 1999. At present people in Northern Ireland can drive down the road to have lunch in a pub with their relatives and hardly notice they crossed a border. Many are afraid that a border wall and inspections would take Northern Ireland back to a previous era.

The EU has insisted on what is called a ‘backstop’ agreement: that if Britain and the EU have not reached any other arrangement on Northern Ireland, it would be treated as part of the EU customs union for goods. That would avoid a hard border with customs inspections. However it means that one set of customs rules would apply in Northern Ireland, and a different set in mainland Britain, creating what Theresa May calls a “border in the middle of the Irish Sea,” which she said she won’t agree to. Britain fought long and hard to keep Northern Ireland inside Britain and she has no intention of unwinding that. One current suggestion is that Britain will charge the higher tariffs (out of Brititsh tariffs or EU tariffs) on goods coming into Northern Ireland, and then give the money back if the goods were later proven to be sold in whichever jurisdiction had the lower tax.

The “free trade area” applies to goods and services. Essentially, Britain is part of the EU for things like occupational qualifications, banking, insurance, education, product standards etc. A British bank can set up a subsidiary or branch in Spain, and vice versa, without problems. A vet from the Czech Republic has his qualifications recognized in Spain or Britain and vice versa. no problems. However, the free trade area carries with it the obligation to allow the free movement of goods, services, money and people. The EU says you have to take or leave this as a bundle. Many British people who voted for Brexit don’t want the free movement of people. Some claim that incoming workers from Eastern Europe hold down British wages by competing for jobs. I’m an economist, but not a labor market economist, and I haven’t looked into the evidence for that claim.

A hard brexit means Britain would not be in the free trade area or the single market area. It could then determine its own immigration policy, and perhaps discriminate on welfare payments between long-time British residents and new arrivals. Britain and the EU then need to negotiate a free trade deal as soon as possibe. Britiain and the Eu could have a deal on recognition of qualifications, university students,  recognition of banks,  residency status of Brits living in the EU or Europeans living in Britain. and various other matters: a large number or a small number.

A ‘no deal’ Brexit means that Britain would leave with no agreement on trade, finance, immigration or anything else. The EU has said it will never allow an a la carte brexit, i.e. one where Britain can choose which bit of the various freedoms and trade arrangements will apply (just as one can order different combinations of soups, appetizers, main courses and desserts from a restaurant menu.) As the EU sees it, it is not a restaurant.

A no deal brexit means for example, as Ian Dunt explains in the article below, veterinarian inspectors who watch meat hygiene in British abattoirs may go back to their own countries just before Brexit (most of them are from EU countries, and most British vets don’t want to work in abattoirs), for fear their qualifications may no longer be recognised. In fact, many have left already. This will mean British meat may not be exported to the EU, because there may be no certification body in Britain which is recognised by the EU to certify the sanitary standards of the meat, and no inspectors to do the certifying. Ian Dunt’s article suggests that Britain could have temporary food shortages immediately after Brexit, because Britain only produces 60 percent of its own food, and it would need inspections for everything coming in from the EU, which would be slow and cause a great back-log. Britain just hasn’t got the facilities or the experienced inspection staff to do the job. To overcome this problem he suggests that Britain will have to let anything in from a European food supplier. Britain could become a dumping ground for sub-standard foods. [Later edit: one solution is just pay the vets more – whatever it takes – to get people to do the job. And for the EU to just recognise whatever British veterinarian council Britian has to be a recognised authoriy to just certify the vets.  If you want the meat, just do the recognition.]

A “no-deal brexit” casts a doubt over whether British banks could continue to offer services to clients in the EU, since British banks may not be treated as European. No one yet knows how the banks will reorganise or relocate themselves if they are treated as ‘foreign’ banks after Brexit. There are also doubts about the validity of ‘derivative contracts’ (options futures and the like) after Brexit date if no deal has been sorted out by then. [Later edit: there will be pressure in the EU by businesses that deal with british banks to do a deal quickly on recognising banks as effectively European, just because industry doesn’t want disruption.]

Students would not automatically be entitled to enroll in other European universities. British companies won’t automatically have the right to sell insurance in Europe.

In order to reduce uncertainty, the British government is passing into British law tens of thousands of European laws to apply in Britain immediately after Brexit. It will then unwind these one at a time.  That way businesses will still know that a certain law applies to them. Otherwise there would be mass confusion. There will be a transitional period until 31 December 2020. During this period most current arrangements – perhaps for occupational recognition etc, but who knows – would continue to apply. After that date, nobody knows what will happen. Several useful articles are linked, below. If the whole thing sounds like a mess, that’s because it is. So far there is a lot of uncertainty. personally, I wish everyone would just pull their fingers out and do a free trade deal, so that everyone knows what the rules will be after March next year.

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A lengthy overall explanation of Brexit by The Times newspaper is here. This quite a long article, covering many aspects of the process.

A shorter article from The Conversation giving an overview of recent developments is here.

A BBC article about the transition period is here.

A BBC article about the Irish border is here.

The article by Ian Dunt on food and agriculture is here.

The Guardian, ‘The IMF is Right, Hard Brexit is an International Threat,’ is  here.

This article in Quartz magazine has numerous useful links here.

An article on derivative contracts (futures, options, interest and currency swaps and the like) is here.

An article from the Irish Times on the ‘backstop’ issue  for Northern Ireland is here .

 

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One comment

  1. Excellent! I learned a lot. Clear and concise. Somehow Britain thrived before the EU and using the pound. Being in the EU has hurt them more than helped… from what I saw on the ground. I understand why so many want out. It is similar here. Our founders wanted to limit the power of the fed Gov, leave most limits in the hands of the states. Then amendments came along to address gross injustices. Somehow we’ve survived … it’s exactly a buffet… sadly there are many here that feel states rights are bad (think gun laws) that the fed Gov should be our nanny (even dumping into conservative states huge numbers of illegals migrants… many of whome aren’t vetted. We have many more similarities. The trick is to find that balance between the tyranny of the EU and the benefits of it. To see who benefits from them staying in the union… look and see who is crumbling under the weight of refugees and generous benefits. .. they want Brittain to continue carrying that burden with them. Britain (in my opinion) was a sucker being dragged into the union with many countries that have been spendthrift with their budgets. It seems to me that having an all-for-one union benefits the socialist and irresponsible countries more… unless a country handles money like all the others, the Euro hits the responsible countries more. Sure these are probably woefully simplified comments compared to your very educated summary…I do wish you’d address why countries like Germany and Britain would have ever wanted to be lumped together with less responsible countries like Italy. I remember feeling quite perplexed by that when it happened…I think one set of money and no borders is convenient, especially with trade,
    but there are many things that are convenient but are not good. Do I want to pick up the slack for CA, bail them out of the mess they put themselves in with their welfare state mentality? He’ll no.. they made their bed…. my own state… more responsible with Tabor law has decided not to tax ourselves into oblivion, has tighter limits on freebies to people who never paid into the state coffers. Why would I want to be put on the same footing with CA ? Plus, most of us in the US speak the same language and have many of the same overall values. These things matter when it comes to uniting. Thanks for this very concise, well written article!

    Like

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