Article 50, Brexit, David Davis, GDPR, Irish border, Michel Barnier, Theresa May

Still a (very) Long and Winding #Brexit Road Ahead

This Briefing was written on 3rd Dec 2017

7EEC154E-1C26-4BA9-BD46-6E7E326308E2As we write this Briefing, early on Sunday Dec 3, it would appear that the EU and the UK are moving towards a position where the EU Council (heads of government) at its next meeting on December 14/15 will be able to declare “sufficient progress” in the Article 50 discussions to date to allow them to move on to the next stage, which will focus on the “framework” of the UK’s future relationship with the EU.

However, as one diplomat put it, until we see what has been agreed “on paper” rather than “in the papers” it is wise to withhold judgement. But it does seem that the logjam on citizens’ rights has been broken by the UK conceding an ongoing role for the Court of Justice of the European Union (CJEU) in upholding the rights of EU citizens resident in the UK after Brexit.

The UK has also agreed to meet all its outstanding financial obligations to the EU, estimated at around €50 billion net, while accepting that this money does not buy a future trade deal of any type, even if, for the moment, UK cabinet ministers are not exactly making that clear to MPs in the House of Commons.

What happens when the penny drops with Conservative MPs about the nature of the financial settlement and the ongoing role of the CJEU is anyone’s guess. For an honest assessment of the situation by an arch-Brexiter see here (behind a paywall). It is one thing to make promises across the negotiating table in Brussels. Delivering them as a minority government in Westminster is another, as this BBC report on the latest list of “red lines” drafter by Brexit hardliners makes clear.

The possibility of the reestablishment of a border in Ireland continues to be the most intractable of the three A50 issues. Effectively, the EU27 has made it clear that Ireland has a veto on “sufficient progress”, if it is not satisfied by commitments from the UK that there will be no border after Brexit. The president of the EU Council of Ministers, Donald Tusk, made that clear during a visit to Dublin on Friday, December 1 when he said:

“Let me say very clearly. If the UK offer is unacceptable for Ireland, it will also be unacceptable for the EU.”

For the complexities of the “Irish Question” see this excellent analysis by RTE’s Tony Connolly: here

However, let us assume that an answer is found to the “Irish Question” and the EU Council agrees that sufficient progress has been made to allow the discussions to proceed, what happens next?

Before discussing this question it is critical to keep in mind that, as matters stand, having served the Article 50 notice, the UK will leave the EU at midnight, Brussels time, on the 29th March 2019. At one minute to midnight the UK will still be an EU member. At one second after midnight it will no longer be a member. In EU terminology, it will be a “third country”, albeit one with an exit/transition deal, which we come back to later in this Briefing.

Once the UK is out of the EU after midnight on March 29th, 2019, there is no easy way back. The UK would have to apply to re-join. While accession could be fast-tracked it would be on different terms and conditions than the UK currently enjoys. No budget rebate, for example. Membership of the euro anyone?

As things stand, the only way the UK can avoid quitting the EU on March 29, 2019, would be for the House of Commons to vote to withdraw the A50 notice. Were that to happen, then legal and political signals from Brussels and European capitals suggest that the EU would agree to the withdrawal, through it is unlikely that the matter would be straightforward. The EU would surely not accept a situation where the UK was permanently sitting on an A50 notice which it could reactivate at any time. There would need to be certainty and finality that Brexit was over.

But let’s be clear. There is no evidence that any move to withdraw the A50 exit notice would win majority support in the House of Commons at this time. For business, the working assumption has got to be that the UK leaves the EU in March 2019. Everything else flows from that.

To move on. We noted above that there appears to be a mistaken belief on the part of many Conservative MPs that the offered €50 billion is conditional on a trade deal acceptable to the UK. A second mistaken belief on the part of MPs of all parties is that if the EU Council agrees to allow the discussions to move to phase 2 then talks will immediately open on the substance of a trade deal. That is not what will happen.

Article 50 of the EU Treaty states:

In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union.

The Article 50 talks will only focus on the “framework” for the future relationship between the EU and the UK, not on the substance of that relationship. Detailed negotiations on the substance of the relationship (trade deal) will only begin when the UK has become a third country, after March 29, 2019.

All that will be on the table during the A50 discussion is an outline of the type of trade deal that the EU will offer the UK in the future, after Brexit happens. As of today, the best that the UK can hope for is a trade deal along the lines that the EU has signed with Canada, which focuses mainly on trade in goods, with relatively little to say about services, which constitute about 80% of UK economic activity.

But the UK hopes for more than “Canada” and every day UK newspapers are full of statements and reports from UK trade groups arguing for a “special” deal for their sector which would leave things more or less as they are today, as if that sector continued to be still in the single market and the customs union.

This is not going to happen.

How do we know? Because the EU has said so. Everything the EU has said during the Brexit process so far has happened, even when UK ministers waved away such statements as “negotiating posturing”. As the Financial Times noted (here) developments to date have been nothing more than a series of “UK concessions” marking a “slow surrender to Brexit reality.”

As Charles Grant of the Centre for European Reform notes, UK negotiators:

…hope that the member-states most dependent on UK trade will push the Commission to offer the British a better deal than the Canadians, that is to say one with more on services. So far the EU shows few signs of softening. But if it did ever grant the UK anything close to single market membership in specific areas, it would demand cash payments, compliance with EU rules and ECJ rulings, and perhaps a liberal UK regime on migration. If all went smoothly, a generous offer from the UK on security and defence co-operation could encourage the EU to accept Canada Plus. (here).

Further, when it comes to going beyond “Canada” the EU will be mindful that any concessions it makes to the UK could be claimed by other countries, if such concessions were seen to breach WTO rules. Though, to be honest, the intricacies of international trade policies are beyond our competency and are fully understood only by the trade Illuminati.

So, the ”framework” that the EU will put on the table in 2018, during phase 2 of the A50 talks, will be a framework for a trade deal that comes nowhere near the trading arrangements on manufactured goods, agricultural products, fisheries and, most importantly, services that the UK has as a member of the EU.

The EU is also likely to offer the UK a strictly, time-limited transition deal, of probably about two years, during which the UK will be a de facto if not de jure member of the EU, with the UK accepting during the transition the EU’s four freedom of movement principles, of people, goods, services and capital, as well as being subject to the jurisdiction of the CJEU.

During the transition, additional payments, over and above the €50 billion, will fall due. During the transition nothing will change and trade in goods and services, including financial services, between the EU and the UK will continue as of today. However, the UK will no longer be able to nominate an EU Commissioner, elect members of the European Parliament, or have a judge on the European Court.

During the transition discussions will open on the substance of the future trade agreement between the EU and the UK. We use the word “discussions” rather than negotiations because, the brutal truth be told, these talks will not be negotiations as most of the readers of this briefing, seasoned labour relations practitioners, understand the meaning of that word. It will be damage limitation on the part of the UK because the UK has initiated a process which it knows will leave it worse off than it is today. No one “negotiates” to make themselves poorer. There may be times when you are forced into such a situation, but Brexit is the first known example of the losing party initiating the process.

Just how much can be achieved in two years is also open to question, conjuring up the possibility of a mutual decision by the parties to extend the transition period. “Strictly time-limited” may turn out to be a somewhat elastic concept, capable of being stretched and stretched.

It is also worth keeping in mind that a transition period does not make Brexit “harder” or “softer”. It just postpones it for a few years, however long those years turn out to be.

Whatever deals emerges from these subsequent trade talks which, to repeat, will only take place after the UK ceases to be a member of the EU in March 2019, will, more than likely, have to be ratified by national parliaments. That could well be a tough ask, especially if there is any suggestion that the UK would be free in the future to undercut EU social, environmental and other standards.

A country like Ireland may even consider that the deal would have to be ratified by referendum, to establish the “will of the people”. Funny thing this ¬“will of the people” stuff. Apparently it is not just limited to the UK and other people in other countries might have other “wills”.

The EU’s chief negotiator, Michael Barnier, has said that the A50 negotiations must conclude by around October 2018, to allow time for national governments to consider the proposed agreement and for ratification by the EU Parliament. So, as of October 2018, the UK House of Commons will know what is on offer:

1. The UK must meet all its existing financial obligations to the EU, approximately €50 billion net.
2. The UK will be offered a transition deal or around 2 years during which nothing much changes.
3. The UK will be required to make additional payments to the EU over and above the €50 billion during the transition.
4. All that will be on offer after the transition will be a Canada style deal on terms and conditions considerably inferior to those offered by EU membership, or even by membership of the single market and the customs union.
5. Whatever trade deal is eventually negotiated could be subject to ratification by national parliaments in all EU27 member states. In effect handing 27 vetoes to 27 national parliaments.

Confronted with this reality, in all its nakedness and stripped of political spin, will the House of Commons vote for it? The UK’s Secretary of State for Brexit has told the Commons that if MPs vote down any deal then the UK will simply leave the EU without a deal. But then Davis also told the Commons that any deal would only be done at a minute to midnight on March 29, 2019, leaving no time for a meaningful vote or any time to reconsider the Article 50 exit notice.

If the House of Commons knows what is on offer six months before March 2019 then there is a time for a rethink. Could there be a rethink? From now to October 2018 is a very long time in politics.

A lot could happen.

For example, the idea that there are trade deals aplenty to be done with other countries to compensate for the loss of EU trade, could take a knock, especially if political uncertainty in the US puts a UK/US deal on hold. A collapse of the existing NAFTA deal would underscore how difficult trade talks with the Trump administration can be.

There is a long and winding road ahead, making it difficult to see the final destination. Developments over the next two weeks will be critical.

Article 50, Brexit, David Davis, Irish border, Negotiating

#Brexit: “Sometimes it seems like they haven’t thought all this through”

This article was written on 17th Nov 2017

Hammond BoJoAnother week, another seven days that leaves us little wiser as to what happens next. With each passing day it becomes ever clearer that the UK government fundamentally misunderstands the position it has placed itself in as regards exiting the European Union.

This misunderstanding is such that, as of today, there would appear to be only two possibilities open to the UK.

The first is to leave the EU in March 2019 without an agreement as to its future relationship with the EU and, therefore, obliged to conduct trade with the EU within the framework of the World Trade Organisation (WTO) rules.

The second possibility is to accept a free trade agreement modelled on the agreement the EU has recently signed with Canada. That agreement basically covers trade in goods, resulting in a reduction in tariffs of some 98%, and mutual recognition in regulated professions such as architects, accountants and engineers, and easier transfers of company staff and other professionals between the EU and Canada.

However, it has little to say about services, such as financial and legal services. As such services constitute a significant portion of the UK’s trade with the EU the “Canadian model” is of limited value, certainly as compared to the access the UK enjoys today to European markets through membership of the internal (single) market and the customs union.

It is the UK government that has put itself in this position with its decision that Brexit had to mean not only leaving the EU’s political structures but also meant leaving the internal market, the customs union and common commercial policy and putting itself outside the jurisdiction of the Court of Justice of the European Union (CJEU). It didn’t have to be that way but the UK’s prime minister, Theresa May, decided that such an ultra-interpretation of the Brexit referendum vote was the best way to manage the internal politics of the Conservative Party.

As has become clear since, this choice may well have resulted from a complete ignorance of the way the European Union is constituted and how it actually works. Those UK cabinet members actually charged with managing the UK’s exit from the European Union have very little actual experience of dealing with the EU. David Davis, the UK’s chief Brexit negotiator, spent 20 years on the back benches in parliament before being appoint Brexit Secretary in June 2016.

Such was Davis’s lack of understanding of the EU when appointed that one of his first announcements was that he planned a trip to Berlin to negotiate a trade deal with Germany, seemingly unaware that individual EU member states cannot negotiate trade deals with non-EU member states. The EU does that on behalf of all its members.

But Davis’s lack of understanding on trade matters merely speaks to a greater lack of understanding on the part of practically all UK politicians as to the constitutional nature of the EU, not helped by the fact that very few of them speak any European languages. The EU is a rules-based, legal order with complex decision making processes. This is the only way a bloc of 28 member states can work. Politics cannot trump this legal order. Legislation, once enacted, cannot be disregarded for the sake of some short-term political expediency. The CJEU ensures that decisions and legislation conforms to the Union’s legal and constitutional order.

The UK’s concept of parliamentary sovereignty is very different. Whatever parliament decides, it decides. Adverse decisions of the courts can be quickly overturned. A UK government with a solid parliamentary majority can do pretty much anything it wants.

This leaves UK politicians believing that, in the end, politics will always trump legal considerations. This belief has informed their approach to the EU exit process. They see the process as a classic “give and take” negotiation. I compromise, therefore, you must reciprocate with a compromise.

Davis said as much in a BBC interview on Friday last. He told his interviewer that the UK has “been offering some creative compromises and not always got them back”, insisting that “nothing comes for nothing”. He suggested there needed to be more give-and-take from the other side. “I want them to compromise, surprise, surprise, nothing comes for nothing in this world,” he said. “But so far, in this negotiation, we have made a lot of compromises. On the citizens’ rights front, we have made all the running.”

The problem for Davis is that the EU does not see the UK exit process as a negotiation in the same way as he does. They see it as something to be managed, as damage limitation, as the protection of the legal order.

For example, the UK continues to see the EU’s insistence that it settles its financial obligations, obligations the UK signed up to as a member of the EU, as something to be bargained against a future trade arrangement. The EU sees it as paying what you already owe and will not allow the UK to “double bubble” that money, buying future benefits with money owed from past obligations.

Likewise, when it comes to future trade relations between the EU and the UK. By now, even if they have never said so explicitly, it is clear what the current UK government wants: a trade deal that gives the UK de facto membership of the internal market and the customs union but without the financial and legal obligations that come with membership.

As Davis put it in a speech in Berlin last Thursday night:

“We will be a third country partner like no other. Much closer than Canada, much bigger than Norway, and uniquely integrated on everything from energy networks to services. The key pillar of this will be a deep and comprehensive free trade agreement – the scope of which should beyond any the European Union has agreed before. One that allows for a close economic partnership while holding the UK’s rights and obligations in a new and different balance.

It should, amongst other things, cover goods, agriculture and services, including financial services. Seeking the greatest possible tariff-free trade, with the least friction possible. And it should be supported by continued close cooperation in highly-regulated areas such as transportation, energy and data.”

Where does this “deep and comprehensive free trade agreement” actually differ from membership of the internal market and the customs union? The answer lies in the words about holding the “UK’s rights and obligations in a new and different balance”, code for the UK wanting three of the four freedoms of movement – goods, capital and services – while closing down the free movement of people. Except if you are a banker, for whom Davis has promised to negotiate a special free movement deal (here). Too bad if you are a Polish plumber.

The UK does not just want to cherry pick the single market and the customs union, it is asking for the whole cherry orchard.

Even if the discussions between the UK and the EU get beyond the three Article 50 issues, then the UK is going to have to face the reality that best that will be on offer is a Canadian-style free trade agreement. The EU will not compromise the integrity of the single market and the custom unions for the benefit of a third country, the UK.

To paraphrase some words from Davis’s Berlin speech: the EU will not put EU prosperity at risk for the sake of UK politics. 2018 looks like being a long, slow, steep learning curve for the UK that short-term political choices made in the interest of party management can have long-term adverse economic consequences.

But the discussions may not get beyond the Article 50 issues. Ireland wants a written commitment that there will be no hard border on the island after Brexit. The UK has committed to this but doesn’t know how to deliver on it. As the Irish Taoiseach, Leo Varadkar said on Friday after a meeting with Theresa May: “Sometimes it seems like they haven’t thought all this through”.

Not just on Ireland, but on all things Brexit, that becomes more obvious by the day.

 

 

Brexit, British Government, David Davis, Michel Barnier

My #Brexit Blog: of gold and gorillas

DD9E17AD-FCA5-4574-98B2-7CA25C82D730It was a week when reality bit, and bit very hard. Brexiteer illusions about a world of easy free trade deals beyond EU membership took a heavy hit when the US slapped a 219% tariff on Bombardier, the Canadian plane maker, over alleged illegal state aid, putting 4,000 jobs in Northern Ireland at risk.

Then, on Friday, the economics editor of SKY TV reported that close on 10% of UK exports was made up of gold which was simply recycled through London. As most of this went to non-EU countries, such as Switzerland, India and China, it had the effect of understating the value of UK manufacturing exports to the EU. The figure is closer to 50%, rather than the 44% quoted by the Brexiteers. The UK does not export as much to the rest of the world as it thinks it does.

Reality also bit when a further round of negotiations between the EU and the UK ended with little or no progress, despite an improvement in the atmosphere between the two sides. Talks on citizens’ rights inched forward, with the UK offering to allow EU citizens with permanent residency in the UK the right to return if they left for a prolonged period of time. In return the UK wants the EU to allow UK citizens who move to the EU to be able to move and settled in different countries, instead of being restrict to the country in which they lawfully reside when Britain leaves the EU.

The UK also offered to enshrine the Withdrawal Agreement into UK law, with lead UK negotiator, David Davis, saying that this would give it “direct effect”. “Direct effect” is a term in EU law which means that an EU citizen has rights under an EU law, enforceable through national and European courts, even if the country in which they are living has failed to transpose the EU law into national law or has transposed it incorrectly.

It is not clear if this is what Davis meant. Probably not. Meanwhile Barnier, the EU’s main negotiator, said that there were still serious issues over the role of the Court of Justice of the European Union (CJEU) in upholding the rights of EU citizens in the UK. The UK is opposed to any such direct role, but has indicated that some sort of indirect role may be a possibility.

Not much progress on the financial issue either. UK Prime Minister, Theresa May, said in her Florence speech that the UK would meet its financial obligations to the EU and that no country would be worse off as a result of the UK’s decision to leave during the current budgetary cycle. But when Davis arrived in Brussels at the start of the week’s negotiations he was again playing the “double bubble” game, trying to use the same money twice. The UK would pay what it owed but only in the context of talks on a trade deal. “We’ll fix our bar bill provided we can continue to play the course”. There will not be many takers in the EU for such a “generous” offer.

And not a word on the Irish border issue, the third of the three Article 50 issues identified by the EU as needing significant progress before the discussions can proceed to deal with the future relationship between the UK and the EU and transition arrangements to get to that relationship.

Let me be very blunt about this. If the UK insists on leaving the EU’s custom union then there is no solution to the Irish border issue. None. The Irish border will be the EU’s only land border with the UK, a third country. The EU is not going to leave that border unprotected for to do so would allow good of whatever origin and whatever quality to be shipped to Northern Ireland, then taken across the border into the Republic of Ireland for onward, custom-free shipping into the EU. That is not going to happen.

The return of a border in Ireland will be the direct result of the UK’s decision to leave the EU’s custom union. Nothing else. There are no magic technological bullets to avoid the need for a hard border. Such “magic bullets” only exist in the imagination of those Brexiteers who want to deny the consequences of their own decisions.

Make no mistake. The “Irish Question” could be a Brexit dealbreaker, because a border is a border is a border, no matter what its shape and form and Irish people in both the Republic and Northern Ireland do not want a border, visible or invisible.
All of which resulted in EU Commission President, Jean-Claude Juncker, saying onFriday morning that a miracle was needed between now and the next summit of EU leaders in October if they were to give the green light to move on in the exit discussions to talks about future relations.

Which brings us to “Gold and Gorillas”.

Ed Conway, the economics editor for SKY news writes in the Times (September 29th):
What is Britain’s biggest physical export? Given that the UK has some of Europe’s most advanced car factories, you might have assumed the answer was motor vehicles. Or perhaps pharmaceuticals, or engines, or crude oil from the North Sea?
No. In July, the latest month for which we have the figures, Britain’s biggest physical export was gold.

How does that happen?

The short answer is that London is the hub for the world’s physical gold market. Sitting underneath the ground in warehouses inside the M25 are vaults containing well over half a million bars of bullion, worth a grand total of about $300 billion: roughly the equivalent of £9,000 for every household in the country.

As noted earlier, most of this gold goes to non-EU countries thereby over emphasising non-UK exports and underestimating exports to the EU. While the latter have been falling they still account for roughly 50% of all the UK’s physical exports. In other words, the export hole to be filled if exports to the EU drop as a result of the UK leaving, is significantly bigger than previously thought.

A Brexit claim goldfingered you might say.

From gold to gorillas. Canada has a free trade agreement with the US: NAFTA. That did not stop the US hitting Bombardier with a potential 219% tariff over planes it sold to Delta, resulting from a complaint by Boeing. The tariffs were slapped on Bombardier, a Canadian company. The 4,000 jobs in Belfast are just collateral damage.

Those favouring the UK’s departure from the EU have claimed, long and loudly, that once outside the EU the UK would be first in the queue to sign a sweetheart trade deal with the US. They appear to believe that global trade negotiations are conducted in accordance with the elegant theories found in economic textbooks. No such thing. They are knockdown, drag-out, bare-knuckle fights. Dominated by the economic self-interest of powerful players. Fairness and justice has got nothing to do with it. Bringing “fairness and justice” to a trade negotiation is akin, as one commentator has noted, to bringing a “chocolate spoon to a knife fight”.

In such a world the big gorillas dominate. The EU, US, China, Japan and India. And when a 160 kilo gorilla goes head to head with a 40 kilo chimp (the UK outside the EU) there can only be one winner. Clue: it is not the chimp.

But the US thinks twice about cutting up rough with the EU because, in trade terms, the EU is as big, if not a bigger gorilla than the US. Further, the EU has teams of highly skilled trade negotiators, unlike the UK, which has next to none.

On March 5, 2002 President George W. Bush hit imported steel into the EU with 8-30% tariffs because of an alleged detrimental surge in steel imports. There was a widespread belief on all sides of the debate, confirmed by top Bush administration officials, that politics played a role in the decision to impose tariffs. Namely, the large and important Rust Belt swing states of Pennsylvania and West Virginia would benefit from the tariffs.

After Bush ignored a World Trade Organisation (WTO) decision against the US on the tariffs the EU threatened to counter with tariffs of its own on products ranging from Florida oranges to cars produced in Michigan, with each tariff calculated to likewise hurt the President in a key marginal state. Bush lifted the tariffs. Wikipedia here)
Inside the EU the UK, as part of a big gorilla, gets treated with respect by the US and the others. Outside, it will be eaten for breakfast.

With 4,000 jobs in Belfast at risk whether the Democratic Unionist Party (DUP) will reconsider its support for the UK government’s decision to quit the customs union and the single market remains to be seen. The DUP’s politics are rooted in tribal identity rather than rational economics.

A final decision on the Bombardier tariffs will be taken early in 2018. If the tariffs are upheld then Brexit dreams of easy free trade deals will be well and truly dead.
Finally, after their conference this week it is now clear what the Labour Party policy on Brexit is. Its policy is not the government’s policy. But as we don’t really know what the government’s policy is, we, therefore, can’t know what the Labour Party’s policy is. Now, is that clear?