Boris Johnson, Brexit, Michel Barnier, Trade Deals

Putting a tiger in the tank of what?

Tiger Tank

On Friday, June 12, Michael Gove, the senior UK cabinet minister in charge of the Brexit process, said on Twitter:

“I just chaired a constructive EU Joint Committee meeting with @MarosSefcovic

I formally confirmed the UK will not extend the transition period & the moment for extension has now passed. On 1 January 2021 we will take back control and regain our political & economic independence.”

Responding on behalf of the EU, Michel Barnier, said: “The EU has always been open to an extension of the transition period. At today’s Joint Committee, we took note of UK’s decision not to extend. We must now make progress on substance. To give every chance to the negotiations, we agreed to intensify talks in the next weeks and months.”

The UK left the EU legally and politically on January 31 last. The UK no longer has any role or involvement in EU governance of decision making. However, until December 31, 2020, the UK is still part of the EU’s custom union and single market, which means that there have been no disruptions to trade flows in either goods or services between the UK and the EU. It was open to the parties to extent this transition arrangement for up to a further two years, but Gove’s June 12th announcement means that this will not now happen.

Customs checks

Before informing the EU on Friday that it would not seek a transition extension, the UK government said it would be not be able to implement full post-Brexit border controls on goods entering from the EU until July 2021. It plans to introduce its new customs regime in three stages, starting January 1, after acknowledging businesses concerns that the pandemic has hampered companies’ preparations.

“At the end of this year we will control our own laws and borders which is why we are able to take the sovereign decision to introduce arrangements in a way that gives businesses impacted by coronavirus time to adjust,” Michael Gove said.

This means that for the first six months of the year, businesses will have extra time to complete customs declarations, can defer tariff payments, and physical border checks will only be carried out on certain goods, the Cabinet Office said. From July, traders will have to make full customs declaration on entering the U.K. and pay relevant tariffs. There will also be an increase in physical checks on food safety standards.

For its part, the EU intends to enforce full customs and regulatory checks immediately after Brexit and will not reciprocate the UK’s “phase-in” plan.

Maroš Šefčovič, a vice-president of the European Commission who co-chairs the EU-UK committee implementing the Brexit withdrawal agreement, said that while the UK border was a matter for the British government, the EU would robustly maintain its equivalent. Mr Šefčovič said goods heading into the EU from the UK would face full customs and regulatory checks. “I can assure everyone that the EU will continue to fully protect the integrity of the single market and customs union as well as its financial interest.” here

The EU’s stance could mean lengthy queues on the UK side of the Channel as it is unlikely that all trucks will have the necessary paperwork to pass French border controls. It only requires one truck with the wrong paperwork to start a queue and there may well be more than one truck with the wrong paperwork.

A negotiating tactic?

There has been some speculation that the UK’s decision not to request a transition extension is a negotiating tactic designed to put pressure on the EU to offer the UK a favourable deal later this year as the December 31 deadline approached. There has long been a current of thought in the Conservative Party that the EU only does deals at the 11th hour and that if the UK government hold its nerve the EU will “blink” at the last moment. However, as Ignacio Garcia Bercero, one of the EU’s leading trade negotiators, has said here, this is simply not the way the EU works when it comes to trade negotiations with “third countries”.

There has also been speculation that the UK government may itself “blink” and request a transition extension later in the year. However, once the June 30th deadline passes it would be extremely difficult for the EU to find a legal basis to extend the transition period, as this report from the European Policy Centre makes clear.

Further, it seems to us that, having now said it will not request a transition extension, it would be politically extremely difficult for the UK government to later do so. A “U-turn” would be simply unacceptable to large parts of the Conservative Party. It will not happen.

As noted above the UK government appears to believe that the EU will only offer favourable terms if it is pushed up against a non-negotiable deadline. However, if the deadline is moved through a transition extension then time pressure as a negotiating tactic no longer works. You can only threaten an immovable deadline once.

As to how the Brexit process might play out over the rest of this year see this article from the ever excellent Tony Connelly, Ireland´s RTE Brussels correspondent.

An agreement before the end of 2020?

So, if there is to be no transition extension, what happens as and from January 1 next? Obviously, the answer depends on whether or not there will be an agreement on the future relationship between the EU and the UK concluded before then.

As an Irish politician once said, all predictions are hard, but predictions about the future are very hard. Never say never.

Despite the meeting earlier this week between UK prime minister, Boris Johnson and the presidents of the EU Commission, EU Council and EU parliament, as of today, it seems to me that, on balance, there will be no agreement in place by the end of the year or, if there is an agreement, it will be so slight as to be of little value.

Johnson may have called on the EU leaders to “put a tiger in the tank” of the negotiations but snappy soundbites do not change the fundamental, underlying realities.

If there is no agreement in place, then from January 1 next, trade relationships between the UK and the EU will be solely subject to World Trade Organisation (WTO) terms, and these terms largely cover trade in manufactured goods and foodstuffs. What happens across a range of other issues, from transport to data flows to businesses and financial services to travel and tourism from the UK to the EU will be down to the EU to decide. Unilaterally.

Why unilaterally? Because of borders. As we commented here whenever you have borders, and Brexit is about a decision by the UK to reimpose borders with the EU after close on 50 years of no borders, then people, goods and services need the permission of the destination country (or countries in the case of the EU) to cross those borders. In the case of data, it needs permission to leave the EU. So, in the absence of an agreement with the UK it will be up to the EU to decide what it will, or will not, accept from the UK and on what terms.

Why no agreement?

Why do I say that I do not think there will be an agreement? Because what the UK wants is an agreement that gives it all the things it likes about the EU’s customs union and single market but with none of the obligations and without the judicial oversight of the Court of Justice of the European Union (CJEU).

Publicly, the UK says that all it is looking for is a “simple” Canada-style free trade agreement, with zero quotas and zero tariffs. But this is simply not the case. Yes, it wants a Canada-style trade agreement – but with multiple add-ons and enhancements.

For example, when it comes to manufactured goods, the UK is asking that the EU agree to “diagonal cumulation” which would allow businesses in the UK to use components sourced from countries with which both the EU and UK have trade deals. This would allow UK businesses to say that goods were “British manufactured” even if the majority of components were manufactured elsewhere.

The UK argues that such “cumulation” already features in many of the EU’s FTAs. But as trade expert Dr. Anna Jerzewska says this is simply not true: UK’s ask on rules of origin was very ambitious and similar provisions are not in force anywhere else.”

And similar, far-reaching asks from the UK are to be found when it comes to data transfers, financial services, business travel and transport. For example, the UK wants British drivers to be allowed to take a consignment from the UK to, say, Paris, pick up another consignment in Paris for Amsterdam, then back to Brussels, on to Lille and back to the UK. Effectively, free movement for UK truck drivers. The EU says a UK driver can deliver to Paris and then head back to the UK.

When you look at the range of issues that need to be negotiated and the distance between the parties on these issues you can only conclude that these are not issues that can be fixed in weeks. For example, see this latest twist to the issue of a data adequacy decision here.

Throwing away the backstop

Theresa May did not come across as the sharpest knife in the drawer or as the most sociable of people.  But she was astute enough to realise that it would be unwise for the UK to leave the EU without some sort of safety net. It may have been the need to safeguard the union between the UK and Northern Ireland that pushed her to negotiate the “backstop” but whatever the reason it was a decent card to have in your hand. Which is why Barnier had a lot of difficulty in getting the EU member states to accept it. They saw it as a “free pass” for UK goods into the single market, without the obligations that single market membership brings. Yes, it threw the services sector overboard, but that lost ground might have been recoverable down the road.

How different would the negotiating dynamic be today if the UK had the backstop card? No threat of queues at Dover/Calais next January. Goods flowing freely between the UK and the EU. Yes, the services and financial sector might have taken a hit, but people don’t see that. Not the way they see queues of trucks back up the M20. (Or at least they don’t see the “services queue” until the emails don’t get answered by Spanish hotels over data privacy concerns or credit card details do not get processed. Nothing crosses borders without agreements between the countries concerned.)

With the backstop May had half a future deal and that half could have been used to craft a full deal. But the Brexiteers hated May’s half a deal because they thought the EU would use it to trap the UK forever. The EU member states hated it because they though the UK would use it to trap the EU forever.

When discussing negotiations, I often advise against putting yourself in the position of saying to the other party: “Here is a big stick. Beat me with it as often as you want”. Well, the backstop was a big stick with which the UK could have beaten the EU. But the first thing Johnson did was to hand that big stick back to the EU and agree instead to the “frontstop”, which puts a customs border down the Irish Sea between the Great Britain and Northern Ireland. Johnson said to the EU: “Here, I don’t want the big stick. You take it.”

Brexiteers think the EU blinked and will do so again! They are right. The EU did blink. In the negotiations with May. Not with Johnson. Johnson handed the “blink” back to the EU. The EU will not blink a second time.

What no deal means

Last weekend the Mail on Sunday reported:

Boris Johnson will ‘bang the table’ … to try to bring urgency to Brexit talks by warning that the two sides are heading for No Deal if the pace of negotiations is not accelerated immediately.

It may come as a surprise to the Mail on Sunday, but the UK has already left the EU with “no deal”. It did so on January 31st last. It left on the basis of the Withdrawal Agreement and the Political Declaration. The legally binding Withdrawal Agreement mainly focuses on the settlement of the UK’s financial obligations to the EU, the rights of citizens and the Irish issue. The non-binding Political Declaration set out a framework for the negotiations on the future relationship.

If by December 31 next there is no agreement in place between the UK and the EU, given that an extension of the transition period has now been ruled out by the UK, then the status quo prevails. And the status quo is that there is now no deal in place between the EU and the UK, save for minimalist World Trade Organisation terms.

The transition arrangement is not a “deal”. It is what it is, a transition from the old deal, full membership of the EU, to a new deal, whatever that is, if indeed there is to be one.

What needs to be understood is that there is no legal or other obligation on either party to actually come to a deal of any sort. Certainly, it may be in their mutual interests to come to a deal, but it is up to each side to determine what is in their own best interest and to judge whether the terms on offer deliver on those interests.

The EU27 has all the laws, structures, institutions, policies, and procedures in place to continue to trade among themselves and with all those other countries with which the EU has deals. Certainly, disruption to EU/UK trade will not be welcome, especially in the context of Codid-19, but the EU has the institutional and economic capacity to absorb that disruption and move on. And it is not as if EU/UK trade is going to dry up overnight. It will just become more difficult.

Whether the UK has the laws, structures, institutions, policies, and procedures in place, is another matter. But it seems unlikely.

Now, take a step back. Instead of watching the game from the side-lines where the action is intense and immediate, go upstairs to the front row of the stand. Look down on the game. From the stand you can see the whole pitch and all the players. What do you see?

You see a team of 27 well-organised players with strong management and a deep backroom staff playing against a team of 1, with dubious leadership and an uncertain game plan. The team of 1 wants the 27 to change the rules so it can still play but have a better chance of getting into the game. I think you would come to the conclusion that there is only ever going to be one winner here. And it is not the team of 1.

The politics of ratification

Following Monday’s meeting between Johnson and the EU leaders, the UK newspapers were reporting that the EU was preparing to give ground to the UK over fisheries. Given the political sensitivities around the fishing industry this seems somewhat unlikely (here). It is not for “Brussels” to decide on any deal with the EU. It is for the 27 members states and each one of those states has a veto. And they will not be shy about using them if they perceive vital, national interests to be at stake.

A columnist in the London Times recently described the UK cabinet as a collection of “nodding dogs” who meekly nodded their assent to anything the prime minister wanted. The EU council of heads of state and governments is no collection of “nodding dogs”. Nor is the European Parliament. It is also possible that any deal between the UK and the EU will have to be agreed by national parliaments. In the case of Belgium, regional parliaments also have a role. And all of these countries have “politics”.

Deals between the EU and third countries can be applied conditionally, pending final approval. Such deals usually have “champions” within the EU systems because they are seen as building bridges between the EU and the country concerned. Who within the EU system is going to champion a Brexit deal, especially if there is significant opposition to aspects of it?  To put it bluntly. Who is going to put their career on the line over a deal with the UK, a country that wants to put distance between itself and the EU? A country that sees itself as developing a social and economic model to compete with that of the EU?

Given the major differences between the EU and the UK over the many substantive issues that need to be negotiated, and ratification procedures on the EU side that need to be gone through, it seems to us unlikely that there will be any deal in place by December 31 next.

Some things just can’t be done in the time available. Especially the impossible.