Originally posted by shaunbhoy
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The notion that the UK can simply “fall back” to WTO rules as providing an alternative (as summarised in “no deal is better than a bad deal”) is, in our view, very dangerous. Significant parts of the UK service sector would, under these conditions, lose their ability to provide services to EU-based counterparties overnight. Much of the plumbing that supports trade in goods and services on a day-to- day basis would be left without defined administrative processes and legal foundation. The imposition of tariffs is almost a side show relative to these issues. In addition, the UK is threatening that under constrained market access it would reinvent itself as a pseudo-Singapore of Northern Europe via low corporate tax rates and a ‘new economic model’. We note that the success of such low-tax entrepots has typically been at least partially based on the ability of firms to access markets in their locale, not on the withdrawal of that access. And, as we wrote yesterday, it is far from clear that there is a durable political commitment to the UK becoming a permanently low-corporate tax, low-regulation locale.
Taken as a whole, we do not view the no-deal WTO option as credible. So what happens in these negotiations? We assume that the EU will not seek a punitive arrangement for the UK, only that it will negotiate guided by its legitimate self-interest. Even so, we see a high likelihood of a disruptive and damaging outcome. For some time, we have argued that the bespoke FTA route would ultimately see the UK realise that it could not land the required deal within a pre-2020 election timeframe, while the option of a “WTO only” route would be recognised as untenable. Hence, it would be forced to prioritise a set of sectoral deals while seeking to extend the Article 50 process, and the result would be an exit under a hastily arranged patchwork of deals with some sectors seeing significant disruption upon the EU exit. An alternative (to which we ascribe only slightly less probability) is that the EU offers the UK a heavily modified temporary version of EEA membership to allow further time for discussion on future arrangements as the EU exit occurs. While that may have broader sectoral coverage, accepting it would come at high political cost for May, having eschewed the EEA route at the outset.
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