The new Prime Minister appears to be standing his ground that the backstop must go. The EU’s key players still insist that the Withdrawal Agreement (WA) can not be changed. A key Remainer, Dominic Grieve appears publicly to accept that Brexit will happen. Philip Hammond argues that Boris is asking too much. Can there still be a deal?
It is always worth remembering the process that led to the current situation.
Following the referendum of 2016, Theresa May came into power, delaying the implementation of Article 50 until March 2017. The EU put forward a negotiating sequence, to which May agreed. By July 2018 and the now infamous Chequers Agreement, options had narrowed.
The WA was finalised, for the time being at least, in November 2018, accompanied by the Political Declaration. The WA laid out terms for leaving the EU, the Political Declaration the basis for a future relationship.
The EU insists that no long term arrangements could be negotiated and agreed before the WA comes into effect. Accordingly, an “Implementation Period” would allow for final negotiation of the future legal relationships with a target date to be come into force after December 2020. The timing provides for flexibility up to two years but in theory could be indefinite.
As the old joke goes, the tourist stopping to ask a local for directions, the answer received is “if I were you I wouldn’t start from here”. It is a matter of perspective as to here we are now, which we can examine from both sides.
It is now a matter of history that the UK Parliament has failed to back the WA no fewer than three times, therefore ratification can not take place. That leaves three options; A – revoke Article 50 and stay in the EU, B – leave without a deal, C – compromise.
For the EU, there are only two options, revocation being a unilateral decision, therefore the EU can hope the UK changes its mind. The legal default position is currently that the UK leaves with no deal agreed, reverting to WTO terms, effectively option B. The EU view, in public at least, is that the WA can not be changed, therefore no compromise is forthcoming.
From the point of view of our fabled tourist, even though the direct route of option C might be the quickest, the bridge that must be crossed has washed away, bringing a further option into play; D – extend the journey and hope that the bridge can be completed. For this to happen, the EU Council, comprised of the leaders of the EU 27 must unanimously agree a further extension and the UK must request it.
Of course, some in the UK argue that option A is preferable, option D giving a chance to reflect on the journey by holding a second referendum which could yield the same result.
The net outcome is that all parties would be in the same place but with the expense of accommodation for as long as it takes, the hotelier raking in the profit from a captive market. If Grieve is right, the exercise is futile.
The stance of Boris Johnson is that the chance option B, leaving on World Trade Organisation terms are a “million to one”. This has been widely interpreted as option C, a late compromise on the WA although it could be a signal that he expects option B+ to materialise, leaving without a deal but with the promise to invoke GATT Article XXIV.
This would mean trading on current terms but expecting to agree a free trade deal with a “reasonable” time period, interpreted as up to ten years.
Putting B+ to one side for a moment, let us stay with the common assumption that the choice is option B versus C, the EU compromising on the removal of the backstop. What else is involved?
1. The so called “divorce settlement” of an estimated £39 billion. The figure includes provision for the UK to continue already committed funding until the end of the current EU budget cycle, therefore in practice can be interpreted as being less, alternatively if not completed by December 2020, potentially more. However, the House of Lords’ EU committee, taking advice from all quarters, concluded that there is no legal obligation to pay in the event of option B.
2. Looked at positively, the UK can participate in some meetings of EU bodies and agencies where relevant to the UK. Looked at negatively, the UK has no vote in decisions made that might affect the UK.
3. Looked at positively, during the Implementation Period, the UK is allowed to negotiate fresh trade agreements. Conversely, no such agreement can be implemented until the end of the IP, whether that is December 2020, whenever or indefinitely.
4. The UK would still be subject to EU law in many areas, including decisions made by the ECJ or other mechanisms provided for in the WA, including an alternative model derived from the EU’s arrangements with Ukraine.
5. Depending on political perspective, it may be a positive or negative that state aid rules still apply. In short, a Labour government would be unable to nationalise businesses where doing so might be considered in breach of EU competition regulations.
6. Foreign and security policy, where intelligence needs overlap but which is a field for enormous potential debate.
In simple terms, to agree a compromise on the backstop potentially keeps the UK bound to the EU until the end of the IP. On the reverse side, for the same duration, trade will continue, subject to new regulations, as currently. This means no new tariffs, yet potentially new regulations.
As for time scales, perhaps the EU’s own website gives some clues. Of those 21 “being negotiated”, some have been suspended since 2008. Of the 25 “pending” some have not been signed since 2009. Of those 47 “partly in place”, many have made no progress since 2008. Of the 38 “in place” many are not full free trade agreements within the strictest definition of the term, some with maintained tariffs, some reduced tariffs.
Conversely, option B would allow the UK the freedoms espoused in Brexit, to negotiate and implement trade deals from 31st October, free from the jurisdiction of the EU and ECJ but unless B+, without the option to necessarily avoid trade barriers with the EU. Fiscal and tax policies can be determined within the UK.
So what of economic prospects?
Many of the predictions of Project Fear have not come to fruition. The body of opinion created may arguably have been exposed. A tour around LinkedIn demonstrates the career paths of those whose employment takes in the circuit of the Treasury, Bank of England, IMF and other bodies.
Both businesses and consumers may benefit from the abolition of tariffs on goods which are not produced in the UK. Of those still in place, 100% of the revenue will come to the UK as compared to the 20% that is landed here. The EU will lose out on the rest. Of those that come to the UK via Rotterdam, the Dutch will not benefit from 20% of that which is passed on to UK consumers, the rest of the EU will not benefit from the 80%.
Perhaps there are more clues to the Boris philosophy when he talks about “turbo charging” the UK economy, believing in a last minute deal of sorts.
If bound by the WA, this can not effectively be done whilst in the Implementation Period. He has also signalled the end of austerity, which was in any case a commitment loosely made by Theresa May.
On one arc of the economic divides is the Keynesian school of thought, more frequently nowadays associated with Labour. The basic model is that national income, or Gross Domestic Product (GDP) is made of consumption,(C), investment, (I), government expenditure (G) and exports (X) minus import (M), so GDP = C+I+G+(X_M). X-M is effectively the balance of payments.
Injections into the economy, I, G and (X-M) have a multiplied effect on GDP. In simple terms, a new worker needs accommodation, in turn requiring bricklayers, electricians and so on.
If tariffs are reciprocated on the EU, imports become more expensive, therefore fewer goods purchased but more can be produced domestically. As has recently been announced, Muller have increased investment in Telford. This is perhaps hardly surprising since EU dairy imports may be subject to punitive tariffs.
More investment might be expected, the more recent trend being British foods being processed in Europe rather than the UK, then re-imported. The picture can be seen with Scottish salmon, British pork, lamb and beef. There is incentive to invest to circumvent those tariffs by transferring processing capability back to the UK.
On an almost opposing side of the arc of economists are “supply siders” such as Patrick Minford. This school of thought identifies access to global markets for goods we do not produce as lowering costs. The profit incentive provides for more output at lower cost.
With aspects of both schools of thought probably having some validity, it is easier to see where the concept of turbo charging may come from, particularly given the freedom to lower tax rates and encourage business mobility towards the UK.
Perhaps key to whether this can happen is down to where Minford made his name, in the field of rational expectations, originally applied in inflation and unemployment but the principles can be extended. If growth is expected, more investment takes place, according to Keynesians, accelerated.
So back to Boris. Perhaps he has a cunning plan?
The WA looks to be dead and buried from both sides. It would be an immense climb down from the EU to suddenly reopen the backstop. Reciprocal tariffs would inevitably make a huge dent in their positive (X-M) or balance of payments. The knock on negative multiplied effects of an already fragile EU economy could be catastrophic.
Suddenly, a reversion to option B+ provides an attractive proposition to the EU in terms of loss minimisation, not to mention avoiding the potential collapse of the Irish economy as their major outlet for labour intensive agricultural production, suited to British tastes, is rescued.
A last minute deal between Boris and his EU counterparts may bear no relation to the doomed WA. It can be something else entirely. Even if Boris has not grasped the detail of GATT Article XXIV, undoubtedly some of his team will have.
A different compromise on the divorce settlement can be agreed, whether in access to shared technology, information or elsewhere. They may not keep the kids but at least they can have access.