Boris Johnson, Brexit, British Government, Trade Deals, UK Labour Party

And so, #BREXIT is ‘Done’- Now for the Really Hard Part

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EU Council staff members remove the UK flag –  livier Hoslet/AFP via Getty Images

And so, Brexit is done. As of midnight, last Friday, January 31, Brussels time, the UK left the European Union. As of today, it is now a “third country”, anchored outside the EU´s legal order, free to go its own way and chart its own course. This will not become evident for another year, because the UK, as part of its Withdrawal Agreement, has accepted to follow all EU laws during 2020 as if it were still an EU member, including any new laws that come into force during the year.

But the UK will no longer have a voice in EU decision making in 2020. No UK EU Commissioner, no members of the European Parliament, no involvement of UK officials in the hundreds of EU meetings that take place every day.

Like the passenger who just got off the train, the UK is sitting there in its hat and coat in the waiting room, not sure where the bus will go when it does arrive. To all intents and purposes, nothing changes in 2020. Businesses can continue to work as if the UK were still a full EU member. No new paperwork, no new checks at the border and data can flow freely from the EU to the UK.

“Unknown unknown”

What happens when transition finishes on December 31st next really is an “unknown unknown”. Today, the only, underlying legal relationship between the UK and the EU as far as business and trade are concerned are the minimalist World Trade Organization (WTO) terms, hidden from the light of day for the moment by the year of transition.

During 2020, the EU and the UK will attempt to negotiate some new arrangement between them that will substitute for EU membership. An impossible ask in the time available. Insisting that it can be done, UK government spokespersons point to Prime Minister Johnson´s “sealing the deal” on the Withdrawal Agreement.

Yes, he did. By walking away from the agreement that his predecessor, Theresa May, had cut with the EU to keep the UK de facto inside the EU´s custom union to protect British businesses and to ensure that there would be no borders between the UK and Northern Ireland. Johnson signed up for a border in the Irish sea as the price for taking the UK completely out of the customs union and the single market. If this was a negotiating victory it had the word pyrrhic written all over it.

How difficult will it be for the UK and the EU to reach any sort of agreement in 2020? Keep in mind that until last Friday, and in practice for 2020, the UK had the best deal it would possibly have with the EU: membership of the customs union and single market which guaranteed frictionless trade in goods and the most liberal services market anywhere in the world. Whatever comes next will be a downgrade, a negative-sum agreement imposing costs on both parties. The UK´s approach is what we might call the “Reverse Oliver Twist Stratagem (ROTS): please sir, can we have less?”

Newspapers often seek to reduce complex negotiations to a sort of “gotcha game”. A good example is this recent line from the very pro-Brexit Daily Telegraph:

UK officials plan to publish a draft UK-EU trade deal before Brussels can finalise its negotiating mandate in a bid to wrongfoot the European commission

How the UK finally telling the EU what it wants would “wrongfoot the European commission” is difficult to understand. I think it is fair to assume that the EU has already anticipated all possible UK gambits and positions so will be neither surprised nor “wrong-footed” by anything the UK has to say. But for Brexiteers, for Brexit to be a success the UK has to “win” and the EU has to be seen to “lose”. Even if they are only “headline wins” in newspapers.

Size and unreal expectations

Whatever about “headline wins”, ultimately, the outcome of all negotiations is determined by size, power and leverage. Guy de Jonquières, former Financial Times chief EEC correspondent and co-founder, UK Trade Forum, has written:

In trade negotiations, size matters. A lot. And in trade terms, Britain just isn’t very big. The US, the EU and China all are. For the record, the UK accounted for 3.4% of world merchandise trade imports in 2018. The US: 16.6%. China: 13.6% and the EU minus UK and intra-trade: 11.4%. So, UK needs their markets far more than they need Britain’s. That’s how leverage works.

But unreal expectations can complicate the process.

There is a popular show on UK daytime TV, A Place in the Sun. Typically, a UK couple want to buy a place in Spain. “What´s your budget?”, the show´s host and property expert asks. “€90K”, they reply. “And what do you want for that?”. “We´d like a four-bedroom house, with a private swimming pool, sea view and direct access to the beach. 5 minutes’ walk from the town centre”. Needless to say, the couple experience disappointment after disappointment as it becomes clear that all their budget will stretch to is a two-bedroom apartment on the sixth floor in a block in a holiday complex, with a sea view if you stand on a box on a the table in the small “outside space” which passes for a patio. Just a 20/minute drive in your car from the town centre.

As I write, Tuesday, February 4, it would appear that the UK government is suffering from “place in the sun” syndrome and seems to believe that it can get a “four-bedroom” EU house for two-bedroom apartment money.

The Johnson speech

In a speech to business leaders in London, UK Prime Minister, Boris Johnson, said that he would rather accept tariffs than European law and that Britain has “made our choice” in refusing to follow EU regulations. Mr Johnson accepted that he would be trading full access to the single market in order for Britain to reclaim full control of its laws. He is willing to fall back on an “Australian” version of no deal and said, “there is no need for a free trade agreement to involve accepting EU rules”. (Note: Australia currently has no trade deal with the EU. The two sides are in the process of negotiating one).

What the UK seems to want is a “Canada-style” deal, an arrangement in which 98% of tariffs between Canada and the EU were removed. However, the EU has made it clear that any such deal would involve commitment on the part of the UK to a “level playing field” across a range of policy areas, including environmental and labour regulations and subsidies to business. The UK rejects this, and press reports say that the prime minister is “privately infuriated” that the EU is not willing to offer the same terms to Britain as were offered to Canada.

“There is no need for a free trade agreement to involve accepting EU rules on competition policy, subsidies, social protection, the environment or anything similar any more than the EU should be obliged to accept UK rules,” Mr Johnson said in his London speech. “The UK will maintain the highest standards in these areas — better, in many respects, than those of the EU — without the compulsion of a treaty and it is vital to stress this now.”

He added:

“We have often been told that we must choose between full access to the EU market, along with accepting its rules and courts on the Norway model, or an ambitious free trade agreement, which opens up markets and avoids the full panoply of EU regulation, on the example of Canada… We have made our choice: we want a free trade agreement, similar to Canada’s, but in the very unlikely event that we do not succeed then our trade will have to be based on our existing withdrawal agreement with the EU.”

The EU´s response to all this is that the UK is not Canada and that, given Britain’s size and location, more specific commitments than those made by Canada will be demanded. At times it seems as if the UK approach is to deny that it was ever part of the EU and that negotiations should be based on the assumption that the past 50 years never happened.

As Financial Times columnist, Martin Sandbu, said on Twitter:

There is another, more “fairness-based” argument. Unlike Canada or Japan, the UK has built up a deeply integrated position in EU markets by agreeing to common rules and enforcement. That presence makes it a much bigger dumping threat now that it no longer wants to comply.

UK needs EU markets

It is worth keeping in mind the extent of the UK´s trade with the European Union. According to a House of Commons report:

  • The EU, taken as a whole is the UK’s largest trading partner. In 2018, UK exports to the EU were £291 billion (45% of all UK exports). UK imports from the EU were £357 billion (53% of all UK imports).
  • The share of UK exports accounted for by the EU has generally fallen over time from 55% in 2006 to 44% in 2016, though this increased slightly to 45% in 2018.
  • The share of UK imports accounted for by the EU fell from 58% in 2002 to 51% in 2010, though this has now been at 53% since 2014.
  • The UK had an overall trade deficit of -£66 billion with the EU in 2018. A surplus of £28 billion on trade in services was outweighed by a deficit of -£94 billion on trade in goods.
  • The UK had a trade surplus of £29 billion with non-EU countries. A surplus of £77 billion on trade in services outweighed a deficit of -£48 billion on trade in goods.
  • Services accounted for 41% of the UK’s exports to the EU in 2018. Financial services and other business services (a category which includes legal, accounting, advertising, research and development, architectural, engineering and other professional and technical services) are important categories of services exports to the EU – in 2018 these two service categories made up just over half of UK service exports to the EU.
  • Wales, followed by Northern Ireland and the North East of England had the highest percentage of goods exports going to the EU of all the countries and regions in the UK in 2018. The East of England followed by Northern Ireland had the joint highest proportion of goods imports from the EU.
  • EU tariffs are generally low but are high on some goods, especially agricultural products.

When you look at these numbers it is probably a fair assumption to make that the UK has more to lose from “walking away” from negotiations than the EU. But even if the EU and the UK were to agree a “Canada” deal it would still impose substantial costs on businesses on both sides. Tariff-free and quota-free trade is not the same as frictionless trade. Other issues come into play such as “rules of origin” (where was the product and its component parts made?) and under what product, labour and environmental standards was it made? Checks for these at borders add to time and cost.  A few extra minutes at Dover and Calais will lead to tailbacks stretching for kilometres. Just-in-time supply lines will be shredded.

A “Canada” deal would also have very little to say about services, with which the UK has a significant surplus with the EU. Freedom of travel and freedom of movement are critically important to the delivery of services, as is the free flow of data across borders. January 1, 2021 is likely to see new restrictions come into force between the UK and the EU. Jumping on the next Eurostar for a hastily arranged client meeting in Brussels, Amsterdam, Paris or London may soon be a thing of memory. Certainly, such meetings will still take place, but they will require more time, planning and paperwork. Brexit brings more red-tape, not less.

Not equal

How often over recent weeks have we heard British ministers use the words that the UK is the “sovereign equal to the EU”? For these ministers, it would appear, mere membership of the EU was beneath Britain because Britain could never be just another remember of the EU. Britain had to be equal to the rest of the EU combined.

To note that this is the mindset of British ministers is not to pass judgement on it. But if this is what they genuinely believe then it will make negotiations even more complicated than they already will be.

Of course, the UK is the “sovereign equal” of the EU just as, for instance, Malta, an independent country, is the “sovereign equal” of the US. But no one would pretend that Malta is either the political or economic equal of the US. As Guy de Jonquières says, “in trade negotiations, size matters” and the EU is five to six times bigger than the UK. That´s what matters. Not theoretical, sovereign equality.

Along with size, the other dynamic in play in the negotiations will be that of “home advantage”. Now, this is not a question of whether the negotiations will be held in Brussels or London. By “home advantage” I mean that the EU has all the benefits of the customs union, the single market and the other intra-EU agreements that facilitate life, travel and trade between the EU 27. It also has the regulatory and judicial infrastructure that underpins all of this and ensures “fair-play”. Business between the 27 will continue seamlessly.

The UK, on the other hand, has left all this behind. If it wants access to the EU’s internal market it will have to negotiate that access from the outside and whatever deal it does, if it does do a deal, will be on lesser terms than today. It will also have to build all the regulatory infrastructure to manage its own internal market and supervise the future relationship with the EU. Like going out to play against Barcelona for the second half when Barca is already 7-0 from the first.

Walk away

Of course, the UK can reject the EU’s terms and walk away. Yes, at some point, somewhere down the road the UK may cut deals with the US, Australia, China and who knows who else. But in the meantime, how many businesses will go under, how many jobs will be lost? Yes, the EU will take a hit as well. But that hit will be widely spread and the EU will be able to assist those worst affected. Size matters.

As does unity. Of course, there will be tensions within the EU, but the overriding value of membership will overcome these tensions. What internal tensions will the UK experience, especially if a hardline government stance results in economic damage? Neither Scotland nor Northern Ireland voted for Brexit and majorities in both continue to oppose it. The Welsh Assembly voted against the Withdrawal Agreement. How will MPs from English constituencies that suffer job losses react? Labour, if it elects a competent new leader, could, at last, properly articulate the concerns of those who believe the UK has turned in the wrong direction in leaving the EU.

Brexiteers will say that none of this matters, as Johnson has a big enough majority in the Commons to push things through. But majorities can splinter as quickly as they are assembled. The last three Conservative prime ministers, Major, Cameron and May faced serial rebellions from Brexiteers. Johnson could face the same from other wings of the party. Nothing is written in stone. There are no guarantees in politics.

For businesses, the Brexit future of the UK remains as clouded in uncertainty today as it ever was. It is unlikely to become any clearer anytime soon.

 

 

 

 

 

 

 

 

 

 

You can access the BEERG Brexit Blog archive at: www.beergbrexit.blog