Boris Johnson, Brexit, coronavirus, Michel Barnier, Negotiating

Doing #Brexit in the Days of #Covid19.

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Brexit is done. The United Kingdom has left the European Union. And it is always worth repeating that it was the UK’s decision to leave. It wasn’t asked to leave. Much less was it expelled. And, as elsewhere in life, leavers don’t normally get to dictate the terms of their leaving.

Brexit cannot now be cancelled, and the UK no longer has the option of remaining in the EU on current terms and conditions. The UK had no part in the negotiations over the past two weeks on the EU’s latest €500bn Covid-19 package and it will have no part in any future EU discussions on rebuilding Europe’s economies in the years ahead.

All that remains is for the EU and UK to work out the terms of the future relationship between the two. This agreement will not only need to cover the basics of trade in goods and services, but also issues as diverse as data transfers, aviation, road transport, financial services, fisheries, nuclear energy, personal and business travel arrangements, as well as potential UK participation in a wide range of EU scientific and other programs, if it wishes to do so.

While the UK has legally left the EU, the two sides have agreed a “transition year” to run until December 31, 2020. Because of this, there has been, to date, no visible impact of the UK’s exit. For the moment, there are no new custom checks and no new barriers to trade between the two. Travel between the UK and the EU, and vice versa, continues as before and UK citizens can still benefit from EU initiatives, such as the European Health Insurance Card (EIHC).

During the transition, the UK has agreed to follow all EU laws as if it were still an EU member. UK courts have to interpret existing laws in line with EU jurisprudence and can refer issues to the Court of Justice of the European Union (CJEU) for interpretation. However, the UK has no say in EU decision making during this period.

The Withdrawal Agreement (WA) between the EU and the UK allows the two sides to agree to the extension of the transition period beyond December 31, 2020 for an extra period of one or two years. The decision on an extension has to be taken by June 30th of this year, just over two months from now. Thereafter, any request by the UK for an extension would be legally difficult for the EU to agree to, and any decision by the EU Council of Heads of State to do so could be open to legal challenge in the fiercely independent CJEU.

While UK government spokespersons continue to insist that the UK will not ask for an extension of the transition beyond December 31, even if no deal has been done by then, as I write this, Tuesday, April 14, the Sun newspaper is reporting that UK government ministers, fearful that a deal will not be reached by year-end, are planning on proposing a rolling, month-by-month extension, until a deal is reached. I cannot see the EU accepting this. Too much uncertainty. I suspect the EU will insist on a clear-cut extension for a defined period of time or none at all.

Where are we now?

As the UK left the EU on January 31 last it was envisaged that a series of negotiating rounds would be held between the EU and the UK, led by Michael Barnier for the EU and David Frost for the UK. An EU/UK “stocktake” between the UK prime minister and the EU Council was planned for June, at which point the UK could have asked for an extension of the transition period, if it so wished.

But, to borrow a phrase from Star Wars, January 31 last is now a “universe, far, far away”.

Think back to last January. Covid-19 was being reported as another “flu” outbreak in China, brought on by the insistence of the Chinese on eating exotic wildlife, such as bats. The world’s headlines were dominated by “Australia on fire”. We watched as seemingly uncontrollable fires ripped through communities from Sydney to Melbourne.

Meanwhile, a silent killer was let loose upon the world. And all has changed, changed utterly as a result.

Following a first round of face-to-face negotiations in Brussels in February, the further rounds, scheduled to be held in March, were cancelled, as Covid-19 social-distancing became mandatory and travelling between London and Brussels was ruled out.

Now, it seems, that negotiators from both sides will meet again this week in video conference to try and get negotiations back on track. “Our work @EU_Commission continues, even though we are living through difficult times,” tweeted EU chief negotiator Michel Barnier, who had earlier reported coronavirus symptoms. “Next Wednesday, I will speak to [UK counterpart David Frost] to organise upcoming negotiation rounds.”

Frost, who himself had been compelled to self-isolate, said he wanted to “reassure everyone” that UK-EU contacts had been continuing.  “We have remained in touch throughout, both sides have exchanged legal texts, and last week we had a series of conference calls to explore and clarify technicalities,” Frost added. “The UK side will share further legal texts with @EU_Commission shortly.”

As of late March, the UK had tabled four texts, which it has refused to publish, including a draft of a Free Trade Agreement, along with texts on cooperation on aviation, transport, and civil nuclear issues.

The UK wants a ‘suite’ of agreements covering these various areas, each with its own separate governance system. For its part, the EU wants one, overarching agreement, with a single governance mechanism, as set out in the 440-page draft agreement which Brussels published last month.

The parties also disagree over the EU’s insistence that any trade deal between the two must have “level playing field” provisions, covering social, labour and environmental laws. Such provisions would prevent the UK deviating from existing EU laws in these areas which have been transposed into domestic UK laws over the years of EU membership.

Comment

Paul Samuelson, the US Nobel laureate in economics recalled in a TV interview that John Maynard Keynes was once challenged for altering his position on some economic issue. “When my information changes,” he remembered that Keynes had said, “I change my mind. What do you do?”

Brexit cannot be undone. It is done. The UK has left the EU. If it wants to rejoin it would now have to reapply and negotiate new terms of membership. One of those terms would be acceptance of the euro as its currency. That does not seem likely anytime soon.

But the economic consequences of Brexit are a different matter. Because the economic consequences have not yet “been done”. As of today, the UK continues to act as a member of the EU’s Customs Union and Single Market. No new barriers to trade in goods or services between the EU and the UK have yet been erected. But they will be if the UK insists of leaving the Customs Union and the Single Market on December 31 next.

The Brexiteer argument for leaving the EU’s Single Market and Customs Union is that it would leave the UK free to negotiate trade deals with the US, China, Australia and the rest of the world. Now, there was always a certain perversity to the argument that you should walk away from the best trade deal you could have with your near neighbours who account for around 50% of your export business so you could potentially negotiate deals with countries far away who might, or might not, want to do such deals with you.

I work with major multinational businesses every day of the week and some of them have been known to do some very stupid things. But I cannot name one business that ever decide to make it a lot harder to do business with 50% of its customers on the off chance that it could pick up new customers elsewhere.

Any CEO who announced to his stakeholders that he was going to put 50% of the business at risk because he thought that there might possibly be some better opportunities somewhere down the road  but he couldn’t be sure where and when, would not even get to finish the statement. He or she would be “socially-distanced” from the business at turbo pace.

Back in the dim mists of time, on February 1, 2020, it was still just about possible to believe that the UK, once outside the EU´s legal order, could move sharply to negotiate a raft of trade deals with countries who had been wondering where the UK had been for the past 40-odd years. (Answer: growing as a member of the EU’s Single Market which was, by and large, driven by the UK).

Not now. The world in which Brexit was conceived is no more. And it is not coming back. Countries, once they come out of Covid-19 lockdowns, will not go back to having all their supply-chain eggs in the Chinese basket. Their electorates simply will not allow it. Economic theorists and free-trade advocates may rail against such protectionism, but this will be the new reality. Not everything comes down to economics.

As the Economist noted in its April 11 issue:

…global supply chains will be recast… firms will seek bigger safety buffers and a critical mass of production close to home using highly automated factories.

It also quotes Anand Mahindra, chairman of Mahindra Group, one of India’s biggest conglomerates as saying:

“What people thought was a global supply chain was a Chinese supply chain.” Factories outside of China were dependent on inputs from factories in China.

However, let’s be clear about one thing. We are not going back either to the world of closed-border nation states, striving to be self-sufficient in all things. That road leads to North Korea and I don’t believe that this is where Western electorates want to go either.

This paper is about Brexit and Europe, not the wider world. The retreat from China will result in the building of new, intra-European supply chains in pharmaceuticals and essential health care materiel. Never again will the people of Europe allow their health to be dependent on the sourcing of such materiel from manufacturers on the other side of the world. In his address to the nation last Monday, France’s President Macron made this clear. The political direction of travel is being mapped out.

But no European country is capable of doing this on their own. So, what we will see is the building of European capacity, shared across EU member states. It will not be easy, simple or straightforward to do, but it will be done. One step at a time, and often with backward steps as well.

Already we see the beginnings of the pooling of hospital resources, with hospitals in countries with spare beds taking patients from countries which are hard-pressed. Europe will learn to plan ahead. Because there will be other pandemics and other emergencies where the resources of 27 member states will be better able to cope collectively than the resources of any individual member state.

The UK will be outside all of this. No part of the new, intra-European pharmaceutical and medical value chains will be located in the UK. Why would any business locate a facility outside the Single Market when they can as easily locate it within? Why would any business knowingly make trading with its main market difficult when it does not have to do so?

Which brings us back to Brexit

In Three Years in Hell, The Brexit Chronicles, the Irish writer, Fintan O’Toole, reports the veteran Gibraltar trade unionist and labour leader, Sir Joseph Bossano as saying about Brexit:

“There were only three possibilities. One was the status quo, which the British have decided they don’t want. The second is something better than the status quo, which the EU can’t possibly give them. And the third is something worse than the status quo, but since the status quo was not acceptable to you, something worse than the status quo couldn’t be acceptable either. It is quite simple: if you enter into a negotiation in which all your options are impossible, you can’t win.”

This is a brilliant formulation which accurately describes most economic and labour negotiations, exactly as you would expect from a grizzled, hard-bitten union leader.

Think of it this way. Who normally goes into any negotiation demanding a worse deal than they now have, asking that the lives of those they represent be made more difficult, that barriers be created where none now exist?

The question answers itself. But it leaves emotion out of account and, as O’Toole well describes elsewhere in Three Years in Hell, Brexit is not driven by rational, economic calculation but by the raw emotions of a newly minted English nationalism.

As an aside, I am often struck by the fact that those who demand the hardest of Brexits have no personal “skin in the game”, that their incomes and jobs will not be at the slightest risk no matter what happens. But they are more than willing to sacrifice the incomes and jobs of countless others because it will all “be worthwhile in the long-term”. Try feeding your family “in the long-term”. Supermarkets do not take 50-year post-dated cheques.

While the EU will be busy building new, intra-EU medical supply chains, and reinvigorating food supply chains, the UK will be busy dismantling their connection to such supply chains by creating new barriers to trade. The reality is this. When you are out you are out. You no longer have a seat at the table. You no longer have a say in how things are going to be constructed. Shouting from the outside does not count.

Brexiteers will argue that the UK can compensate for the loss of EU trade through new deals with the US, China and elsewhere. I somehow doubt that.

Take China. The UK government was already under pressure over its decision to give Huawei, the Chinese telecoms operator, a major role in the roll-out of 5G. Chinese dissembling over the origin and the numbers impacted by Covid-19 will only add to wariness over doing business with China.

As Edward Lucas noted in The Times

The dream is over. For two decades the conventional wisdom has been that China’s economic rise comes at no political cost. Indeed, it was argued, prosperity would bring democracy.

The pandemic has laid bare our mistake. First, the death and destruction caused by the coronavirus stem directly from the deceit and bullying that is the hallmark of the Chinese Communist Party.

So, deals with China will be examined in microscopic detail. Of course, the Western countries will continue to do business with China. You simply cannot ignore a country of that size and wealth. But the scale of dependency will be cut back, especially in sectors deemed sensitive and strategic. And if this costs, then it will be a cost electorates are prepared to accept.

It is also unlikely that the UK will cut a trade deal with the US in the months ahead. Planned trade talks have been put on ice as the US grapples with Covid-19. Even if talks do take place, the US’s “big ask” in these talks will centre on market access for agricultural products, particularly chlorine-washed chicken and hormone-raised beef. These were always going to be a tough sell to the UK electorate in any event. With food safety and security racing up the agenda they become an impossible sell. And without them there will be no trade deal with the US.

Further, some on the UK side seem to think that a trade deal is in US President’s gift. It isn’t. It has to be approved by Congress. And senior leaders in Congress have made it abundantly clear that they will not approve a deal with the UK if the UK is seen in any way to undermine the Good Friday Agreement, which ended thirty years of violence on the island of Ireland.

Conclusion

In writing these Brexit Briefing over the past four years I have always made it clear that I never thought Brexit made either economic or business sense. However, if there ever was an economic case for Brexit it now lies in tatters in the wastelands of Covid-19.

Brexit is done. The UK has politically left the EU. But it is still a part of the Single Market and the Customs Union, at least until December 31 next. Until the genie of English nationalism really escaped from the lamp it had always seemed to me that any UK government concerned about the economic health of the country, once political Brexit was done, would look for a way to stay in the Single Market and the Customs Union and sell the deal as “Recovered Sovereignty and the Economy Safeguarded”. But the stridency of Brexit nationalism has seemingly made that impossible. Every tie with Europe must be cut.

The problem is that the UK would have no say in the rules of the Customs Union or Single Market. But I am fairly sure that a way could have been found to resolve this, provided the UK did not have more of a say as a non-member than as a member of the EU.

It can still be done.

When the facts change, change your mind.