Prime Minister Boris Johnson has already made it clear he will urgently look for a trade deal with President Trump. From a purely political viewpoint, this clearly makes sense in a world where the EU is mortally afraid of what President Trump might do next to it. However, there is also an economic logic to it which is worth spelling out, both for those embarking on the US deal at this end and for those seeking an EU response to our offers of a trade deal.
What a US trade deal would do would be to open up our markets to US goods, both food and manufactures, in return for UK tariff-free access to US goods markets and easier access into US services markets, where we already operate fairly freely in practice. From the EU viewpoint it is the former that matters: US barrier-free supply of food and manufactures into the UK market would mean that UK prices would fall sharply in response to the more or less infinite (relative to the UK market) availability of supplies from efficient and large US suppliers at best world prices. Effectively UK home prices would fall to world levels, a drop of some 20%, this being the scale of EU tariff and non-tariff protection against world competition. From our trade viewpoint this would therefore operate like unilateral free trade, lowering consumer prices and forcing competition on our home suppliers, who would have to meet it by raising productivity. The gain to UK GDP and welfare of even half of this would, we calculate, be around 4%; double that if it all goes through. This makes a US trade deal highly desirable for us in its own terms.
Of course this deal will be fought tooth and nail by all the usual business and protectionist lobbies – the CBI etc. Ministers must be ready for the full litany of objections; they should be in no doubt that for this deal to go through, they must rebut the whole stable of these stale arguments, whether it is the preservation of jobs (read ’existing jobs’ for that – new jobs are constantly being created by our economy); the collapse of manufacturing (only if it cannot raise productivity, which it has done relentlessly for three decades); the disappearance of our farm industry (but it too can raise productivity and will be helped by our new farm support policies); the pollution of food standards (by higher-standard US food?); and so it will go on.
Assume our new government has the determination to get this through. What then happens to EU attitudes? Already no doubt ‘softened up’ by worries about losing the £39 billion promised in the Withdrawal Agreement, these attitudes are now transformed by the new economics of failing to do a trade deal, that’s what. Suppose now no trade deal so that tariffs go up both ways between the EU and ourselves. EU sales to us are bigger and on higher tariff items, so our tariff bill on these would be £13 billion a year. On our sales to the EU their tariff bill would be £5 billion a year. But more importantly, who ‘pays’ these tariffs, in the sense of being worse off to the tune of these amounts? Once a US trade deal is in place and UK prices are at world levels, the apparently surprising answer is that all these tariffs, both ways, are paid by EU traders.
Consider why. First, EU export traders, to sell in the UK market at these world prices, will have to match them; they cannot raise prices when the tariffs go on, or they risk selling nothing at all. So these EU exporters must absorb the tariffs. The UK Treasury will thus receive its £13 billion direct from EU exporters.
Second, EU importers of UK exports. UK exporters can sell their products at home now at world prices, so they will not take less for EU exports; hence EU importers will not be able to ‘pass back’ the EU-levied tariffs to UK exporters. Instead they will add them into EU prices. Will this reduce UK exports to the EU? No, because remember EU prices are above world prices by 20%, the effect of EU protection. So in effect EU importers can well afford to absorb the EU tariffs on UK exports (which average about 5%, much less than that overall 20% world protection inclusive of non-tariff barriers), and still be cheaper than other EU competition. So what all this means is that the £5 billion tariff revenue of the EU is simply taken from EU businesses.
So overall, a failure to do a trade deal will cost EU businesses £18 billion a year in lost profits. £5 billion of this will go to the EU in extra revenue, £13 billion to the UK Treasury. From the EU’s internal viewpoint, these are non-trivial costs to business; the fact that some of it is directly levied by the Commission will add to its unpopularity with business opinion, which is the biggest Brussels lobbying voice. Total gross profits in the EU27 are around €4,000 billion, of which some two thirds is capital depreciation, giving net profits of about €2,500 billion, so implying on a normal dividend payout ratio dividends of about €500 billion. So we are talking here of a significant hit to company dividends in the rest of the EU from a no trade-deal Brexit.
Up to now, the assumption in EU circles has been that no trade deal would be unpleasant in some parts of the EU but the worst effects, such as in Ireland, would be manageable, through some sort of compensation to this small economy. With the UK still a protected market with high prices, EU producers would not face tough competition and so could possibly pass on UK tariffs to UK consumers without too much loss of market share. Meanwhile UK exporters would absorb EU tariffs with their alternative market only being the limited home market or much lower-priced world exports.
This all changes, as we have seen, once a US-UK trade deal is signed. The EU trade deal arithmetic is transformed to a nasty corporate loss across the whole EU business sector.
There is more. When the UK signs the US trade deal, the direct effect on the prices the EU can sell at in the UK market will be a fall of 20%, even with no change in UK tariffs. Similarly our exporters to the EU will now sell to them at those 20% lower (now world) prices, assuming no EU tariffs. As we import some £100 billion a year more from the EU than we export, this 20% price fall will cost the EU £20 billion – even before any action on EU-UK tariffs. This will also come directly out of EU business dividends.
So when we sign a US trade deal, the EU will lose £20 billion at once, and a further £18 billion if there is no UK-EU trade deal so that mutual tariffs are levied – a total of £38 billion a year, nearly 8% of EU corporate dividends. This implies that the EU will be anxious to dissuade us from making a US trade deal by being more obliging in its negotiating approach over Brexit. Of course, in doing this they will risk annoying President Trump; nor is our new Government anyway likely to be dissuaded from such an important strategic deal.
But it all goes to show that the route to getting sense at last from Brussels lies through Washington and President Trump. It is good to see that Mr. Johnson is planning to take this route in short order.
The post Why a US-UK trade deal ought to mean us finally getting some sense from Brussels appeared first on BrexitCentral.
The world is certainly changing. That’s not a new phenomenon – it’s been changing now for four and half billion years. But for those of us who measure change over a period of our lifetimes, it is probably changing as fast as anyone can manage.
Yet the change is not just around how we earn a living (who would have thought you could make millions out of posting cute kitten videos on the internet?), or the threat to many people’s future (what do we offer redundant Uber drivers after artificial intelligence gives us driverless cars?). Much of the change will be about how we see ourselves in the world as traditional structures alter in the 21st Century.
The West has a rich and mature economy. We have a standard of living that half the world desires, a broadly stable population and high and stable GDP per capita. We enjoy high productivity. Yet the three things that are fundamental to strong and rapid economic growth – a young population, a growing population and a low starting point – are in abundance across the globe outside the West.
Markets such as Asia are developing fast. Africa, while currently offering little excitement as a destination for Western global traders, will grow at a rate that we risk overlooking, passing up an opportunity to secure ourselves opportunities.
And as economies grow and the economic balance of power shifts, how will the world look in a decade’s time? What will be the role of the US, with its interesting politics, its America First approach and reluctance to enter into plurilateral trade deals? How will it influence the world and play its part?
China is rapidly about to take on the mantle of the world’s largest economy – a position it has enjoyed for all but the last three or four centuries of the last three or four millennia. But China’s economy, as a controlled market economy, is not one we intuitively understand in the West, and its approach to global influence and investment is characterised by the Belt and Road Initiative. BRI seeks to help nations develop a strong infrastructure, but uses Chinese capital, Chinese constructors, Chinese labour and Chinese machinery. The recipients of this investment find themselves mortgaged to the Chinese – and the growth that comes from it helps China as much as the recipient. Yet are those of us in the West, committed to the OECD’s definition of international aid, just a little envious of the Chinese approach of aid tied to trade?
Meanwhile, Russia asserts itself quietly through covert influencing of the West, and looks to build its global presence again; India’s population and influence grow every day (aspirational British brands such as Jaguar are now owned by Indian investors); and smaller economies such as those of South East Asia gather together, strengthening their ties established 52 years ago via the Association of South East Asian Nations (ASEAN), a collective whose economy is expected to surpass that of the EU by 2050.
In this changing world, we need to recognise that the world looks towards Britain with a sense of affection, a recognition that we have a rich cultural history, a tradition of standing up for decency and honesty – and a brand in the Union Jack that sells across the world.
It is remarkable that Hunter wellies have franchises in Tokyo; that housing developments in the outskirts of Shanghai are modelled on suburban Home Counties towns; and that owning a British car – a Bentley, Rolls-Royce, Jaguar or Aston Martin – is seen as the global epitome of class and success (irrespective of who the investors are).
Institutions such as the Commonwealth bring together a diverse group of nations that have a common, British heritage and they are proud of that. But it is not all that simple.
A Thai banker or property investor would be understandably baffled that just a decade after the Asian banking crises in the late 1990s, Britain and America constructed their very own banking crash, having apparently not learnt a single lesson from recent history halfway around the globe. Similarly, as countries look to work together and form alliances, such as ASEAN, there is collective bemusement that Britain seeks to separate itself from what appears on the outside to be a good trading bloc. That confusion is only compounded by the extraordinary splits in the two main political parties and the possibly terminal drive to the left of Britain’s Labour Party.
As a former Trade Minister, my experience in the two years after the Brexit vote sums up how the world view has changed.
Understanding the importance of exporting
In the first few months after the vote, the wider world looked at Britain and asked the question: “What on earth are you crazy Brits doing?’, bemused by the decision to separate from a successful, complex organisation. But as time went by, the refrain changed to: ‘Actually, this Brexit looks interesting,’ as companies realised that if a UK bilateral deal with a third country was better than their own country’s bilateral, it was worth investing in the UK to take advantage of that opportunity.
But the third stage was more worrying. As people looked more closely at Britain, and the chaos of parliamentary splits, it has become more apparent that a guy who might introduce exchange controls, who might nationalise people’s investments, who might tax wealth, might just become a hard-left Prime Minister. Even if he doesn’t, the theory goes (for some), the Conservative Party might pivot left to counteract his influence.
This recent view of Britain, however, might give us a clue as to what lies ahead. Because while we introduce greater risks for ourselves, we also bring forward greater opportunities. As the geo-economic tectonic plates shift, we need to assess whether we leave ourselves more vulnerable by being outside a trading bloc, or more agile, nimbler and more fleet of foot to seize the advantages of global opportunities. So while the risks are greater, the prize is greater. The potential volatility increases.
And we need to ask ourselves just what our role should be in the wider political spectrum of a changing world.
In 1776, Adam Smith published The Wealth of Nations. In it he argued that we should move from mercantilism (where we sold stuff to the rest of the world in order to secure greater gold reserves) and adopt free trade, where we exported our surpluses and imported those things that others made better or more easily than us.
This has been going on now for a few hundred years, and despite flirting with Marxism and socialism, we keep coming back to Smith as a way that works and a way that fits the human spirit. But we must ask ourselves: are we, the sons and daughters of Adam Smith, truly living up to his ideas?
In the broadest sense, the answer has to be yes. We are advocates of free trade and we pride ourselves on our ability to trade freely with the rest of the world. But there was a common refrain during the EU referendum in 2016. Some Brexit campaigners challenged that the EU was holding us back, that we couldn’t trade with the rest of the world because of the EU. In the fog of war, much is said, including myths that don’t bear up to the hard reality of fact.
The broadest measure of a country’s financial internationalisation is the current account – the measure of all money coming in and going out, whether from trade, investment, borrowing, dividends or remittances.
Of the G20 nations, the UK in 2017 had the third highest current account deficit, behind Turkey (5.5 per cent of GDP) and Argentina (4.9 per cent). At 3.7 per cent of GDP, our current account deficit looked shameful compared with China’s surplus of 1.5 per cent, Italy’s 2.8 per cent, Korea’s 5.1 per cent or Germany’s amazing 7.9 per cent.
Even looking at our export performance, far from being held back by the EU, our numbers held back the EU’s. Our exports of goods and services were the equivalent of 30.5 per cent of our GDP, leaving us a lamentable 28th out of 28 EU members in terms of export performance. France was not much better. But a broadly (very broadly) similar economy to ours such as Germany saw exports reach 47.2 per cent of GDP, while the star performer was Luxembourg at a whopping 230 per cent (which is what you get when you combine a tiny economy with a vast financial services sector).
Trying to understand what lies behind these figures is hard. While much was made of our enthusiasm to export more during the referendum, the experience of the Department for International Trade was that the demand for British brands far exceeded our ability to supply. An estimated 400,000 British businesses which had exportable products were not exploiting their overseas opportunities. In taking their products to market, it seems, British businesses do not instinctively look overseas.
When I served as Minister for International Trade, I addressed a Chamber of Commerce business breakfast of 100 or so attendees. Just 15 were exporting already and only half a dozen were looking to export. That was disappointing in itself. But when asked how many were importing, just three hands went up. This from a room of people who sit on Swedish furniture, watching American films on Korean televisions, listening to Japanese hi-fis, wearing clothes made in the Far East, driving German cars. Birmingham’s signature dish is a Balti. We all love a Chinese takeaway. The truth is, we engage with the world – but mainly when it comes to us.
Brexit’s opportunities and challenges
Brexit is the most brilliant opportunity for this country. Brilliant because it can be used as a focal point for us to redefine how we engage with the world. It is the match that lights the blue touch paper of our global rocket. While divisive now, it can be the unifier that joins us in this great endeavour to engage globally. It can define us as a global influencer for good.
But we need to think about a few things first.
In his book The Road to Somewhere, David Goodhart looks at ‘the new tribes shaping politics’. He raises the point that two thirds of all people live within 14 miles of where they lived as a young teenager.
There is, among as many as three quarters of us, a strong sense of place, of loyalty to the local community, of attachment to the locality that we value so much. What a wonderful aspect of our nationhood that we feel so paternal about our neighbourhood.
But there is another side to this. That sense of care and devotion also leads to a sense of protection, a worry that the local way of life might be harmed or changed. As politicians we see this in its simplest form when planning applications are made. Once built, a new development is accepted almost immediately, but not until after quite a protest.
In trade, this manifests itself in odd arguments. Take TTIP – the almost certainly defunct Trans-Atlantic Trade and Investment Partnership between the EU and the US. Hundreds of thousands of emails to MPs were generated complaining that TTIP would result in a sell-off of the NHS as US firms would buy up vast swathes of our much loved health service. Or the recent row when British firm DeLaRue lost out to a French security printer in winning the contract to manufacture our new, blue, non-EU British passports.
Those howling in outrage (including from DeLaRue) protested that it was an abomination that the French should have anything to do with our sacred and symbolic passport. The reality is that these agreements form part of the Government Procurement Agreement, a deal among nations to open up their government buying contracts to other nations, thus creating a more efficient and fair market. We could withdraw, but in so doing DeLaRue would lose far more international contracts to produce other countries‘ passports (and banknotes) than it would gain in keeping the UK’s blue passport. Similarly, companies selling medical equipment and services to US health operators would lose out if we closed our medical market to outsiders.
The same applies to consumer interests and standards. This debate manifests itself with the so-called chlorinated chicken. Under EU standards, chickens are reared in pens at a significantly lower density than American chickens. The result is happier but more expensive chickens. In being happier, there is less chance that our chickens carry campono bacteria, so they are washed in fresh water during preparation for the meat market. But in America, they are washed in chlorine (or the modern equivalent) to kill off the bacteria (something we humans do every time we go to a public swimming pool). Although this sounds unsavoury, it turns out that you are four times less likely to pick up a bug from an American chicken than a UK one.
However, if we maintain our production standards, we will make our home-grown chickens uncompetitive against those imported from outside the EU. The result will be that domestic chicken farmers fail due to a price war. ‘But,’ ask some consumers, ‘if there is cheaper chicken available, why should I pay more just to keep some local farmers happy?’
Similarly, a producer of a desirable product, currently facing barriers to entry in the US, might suggest that we open up our chicken market to US exports in return for his access to the US. And all the while we do these trade deals, we must concede that having just won back sovereignty from the EU, we are ceding just a little bit of our hard-won sovereignty every time we sign a new free trade agreement with another country.
So, the challenge we face as we turn our trading eyes to the horizon is to bring the nation with us. The Brexit dividend – global free trade – is one that is not as clear-cut as one might think. We abandon the European Court of Justice only to replace it with the World Trade Organisation courts. We extract ourselves from the Lisbon Treaty merely to create new, and many more, deals elsewhere. But it is a challenge we must embrace and win.
The aid debate
There is another argument that needs to be won: aid. One of the Conservative Party’s greatest achievements is reaching the 0.7 per cent aid target. Set by the Development Assistance Committee (DAC) of the OECD, the UK is one of just five members (of 30) who have achieved the target. This is something to be incredibly proud of.
But it is understandable that, in the latter stages of the austerity process, people challenge whether this money would be better spent at home. The ‘charity begins at home’ mantra is well used.
Yet consider something as simple as a person’s need for clean water. Every individual needs 1.5 litres a day of drinking water to survive. Two billion people across the planet have limited or no access to fresh clean drinking water, yet we Brits each flush 35 litres of water down the lavatory every day.
It’s almost certainly too simplistic an argument for a complex debate. But a UK shipbuilder recently challenged a decision by DFID to give a developing nation tens of millions to build a ship. “Why’, they reasoned, ‘didn’t DFID commission the ship from us and then give them the completed ship instead? It’s a very good question. Job creation in the UK and help to a developing nation. I struggled to find a good answer.
This brings us back to the Chinese Belt and Road Initiative. China’s money helps developing nations achieve infrastructure ambitions while helping China develop economically. It also secures a Chinese footprint that straddles the globe.
Of course, there is a reduced economic benefit for the receiving country as little of the investment money is spent locally. But China is expected to invest something in the region of US$1 trillion. That blows Western aid commitments out of the water.
Yet it has to be a good thing – a wealthy nation sharing its wealth with those who need it, creating for itself a new market, more global stability, lower migration. But with just one sixth of DAC members achieving the aid target, should we ask if there is something wrong with the target?
So the challenge for new Global Britain is this. First, we must come to an agreement that international aid is a good thing, and that we want to continue to give 0.7 per cent of GDP as Overseas Development Aid money (ODA). If we achieve that, do we want to be free to choose how we give it, tying aid to trade, by abandoning the DAC definition and our membership? Or do we remain in DAC and try to modify the definition of ODA spend, thereby encouraging others to up their contributions? Or should we be quiet and carry on as before?
I suspect that an ambitious, truly Global Britain may want to be an influencer. I suspect that we would proudly hold our head up high if we can change DAC to a more achievable definition, helping others achieve the 0.7 per cent target.
The World Trade Organisation (WTO)
A confident Britain should be looking to extend its reach further. An organisation such as DAC within the OECD is important, but it is already something where we have our own voice. In the new, post-Brexit world it is important that we look to speak up in forums where our membership has been subsumed by our membership of the EU. There is no better example than the World Trade Organisation.
The WTO, and its predecessor GATT, have been instrumental in reducing tariffs to trade. This has been a good thing, freeing trade and helping both consumers and producers within the 164 member countries. But in the last few years, the WTO has identified a fourfold increase in non-tariff barriers – even before we saw the locking of horns of the world’s two biggest economies.
The trade war between the US and China reflects nationalism in the US and game-playing by the Chinese. With the world’s second biggest economy (soon to be the biggest) maintaining it is still a developing economy, and the world’s current biggest economy introducing blatantly protectionist measures, it is clear that consumers will suffer. And not just Chinese and American consumers. When elephants fight, goes an African saying, it is the grass that gets trampled.
What is clear is that a confident Britain has a big role to play post-Brexit. But for its role to be clear and effective, it has to have a sound strategy. It is not good enough to simply say that we need to get our current account deficit down, or to boost our exports. Simply being an advocate of free trade is good in itself, but by itself it does little more than help consumers.
A grand strategy that draws together free trade, reform of aid and ODA, that brings with it the enthusiasm of the population of these great sceptre’d isles, will put Britain front and centre of a maturing and developing globe.
In working as global reformers and free traders, we will play a leadership role in securing a safe and reliable future for our global economy. In so doing, our people will be proud of our achievements, hold our head high as global leaders, yet certain of the security of their local communities.
Moreover, as we develop our own trade policy, and influence others, is now the time for the UK to seek to introduce our social values within trade deals? Workers’ rights, the rights of minorities, women’s rights and protections, animal welfare, tackling modern-day slavery, ridding the planet of plastic waste: these are just a small handful of many progressive policies that we are proud to have championed in the UK. Can we demonstrate, successfully, our ability to influence others to follow our leads though not just our new-found independent membership of global organisations, but by the choices we make when securing free trade deals?
Brexit is just the catalyst we need. The future is exciting. Now is the time to embrace it.
The above is one of more than 35 essays by Conservative politicians included in the new book, Britain Beyond Brexit, just published by the Centre for Policy Studies.
The post Brexit Britain has a big role to play in promoting free trade and reform of international aid appeared first on BrexitCentral.
The pressing and immediate task of whichever candidate the Conservative Party elects as its new leader and Prime Minister will be to achieve Brexit and deliver the results demanded by the 17.4 million people who voted to Leave the EU in 2016.
That task requires a new start. It should not involve an attempt to renegotiate the Withdrawal Agreement (‘WA’) which resulted from Theresa May’s disastrous negotiations with the EU. Such an attempt would be futile, since the EU has set its face against any ‘reopening’ of the WA. The EU even extracted a formal commitment from Mrs May not to try to reopen the WA as a condition of the European Council decision to grant an extension under Article 50 of the UK’s membership to 31st October 2019.
And negotiating changes to the WA with the EU, and then getting the necessary legislation through Parliament in time to leave the EU on October 31st, would be quite impossible. The 175-clause Implementation Bill (still kept under wraps) is a horror story packed with contentious clauses. It effectively unrepeals the 1972 European Communities Act, and gives supreme status in our own courts to the WA and the EU laws which it would continue to apply to the UK.
The opposition parties and the Tory ultra-Remainers would make havoc opposing or delaying the Bill in the hope of again deferring our exit from the EU. Or, worse, hijacking it by inserting amendments: such as for permanent customs union membership or a second referendum. Even on the optimistic assumption that the changes to the WA were enough to bring on board the DUP and the Tory opponents of the WA, it is hard to see that the Bill would ever get through in unmolested form, let alone by October 31st.
But not having a Withdrawal Agreement under Article 50 does not mean having “no deal” with the EU.
The Withdrawal Agreement – the problem is not just the backstop
The WA (of which the Northern Ireland “backstop” Protocol is ‘an integral part’) is just a draft treaty which has been negotiated but not legally agreed. The WA would become legally binding in international law if it were ratified by the UK and the EU Parliaments. The WA contains a series of remarkable features which are detrimental to the UK and which would make ‘Brexit’ illusory:
(1) It would perpetuate the doctrines of ‘direct effect’ and supremacy of EU law over UK law (including supremacy of new EU laws on which the UK would have no voice or vote). Under these doctrines, UK courts are required to strike down Acts of Parliament if found to be inconsistent with EU law or vaguely drafted treaty provisions. The doctrines apply to the provisions of the WA itself and also would apply to any long term relationship agreement with the EU that would replace it.
(2) The WA would perpetuate the jurisdiction of the European Court of Justice either directly, or via a backdoor mechanism modelled on the EU’s agreement with Ukraine, under which the supposedly neutral arbitral tribunal set up under the WA would be bound on matters of EU law by decisions of the ECJ. Meanwhile the ECJ itself after Brexit would have become an entirely foreign court with no British judge.
(3) The WA has uniquely stringent mechanisms for breaches by the UK, which would make the UK subject to financial penalties or even to discriminatory trade sanctions. Any attempted recourse by the UK to WTO disputes procedures would be prohibited.
(4) The WA requires the UK to use ‘best endeavours in good faith’ to negotiate terms for a long term future agreement in line with the principles set out in the Political Declaration (PD).The absence of an exit clause from the backstop Protocol would trap the future Prime Minister into having to negotiate against the genuine and formidable threat of the UK falling into the backstop if it did not agree to the EU’s terms. The scope for negotiation on any future long term deal is severely reduced by the concessions that have been made by the UK in the terms of the PD.
(5) The WA has no exit clause from the backstop Protocol except with the agreement of the EU, making it unique amongst international treaties.
(6) Even in the wholly unlikely event that the EU were to agree to remove the whole backstop Protocol from the WA, the rest of the WA would still contain serious constraints on the UK and little or nothing of value. For example: (a) Its ‘long tail’ jurisdiction would lead to UK companies being subjected to State Aid or competition proceedings for many years after the UK had left the EU and after the transition period; (b) It contains an obscure clause on ‘geographical indications’ which would severely disrupt future trade negotiations with other countries.
If the WA were to come into force, even if the UK had nominally left the EU, it would still be subject to all EU laws (including new ones), the jurisdiction of the ECJ, the decisions of EU institutions such as the Commission and EU Parliament, and nor would the UK be entitled to submit ‘proposals, initiatives or requests for information to the (EU) institutions’: WA Art 128(5)(b).
Because Article 184 of the WA requires the UK (and EU) to use best endeavours to negotiate a long-term agreement which conforms to the principles set out in the PD, the UK cannot attempt to negotiate for any future agreement that departs from those principles. A failure to agree a long-term relationship in accordance with those principles will mean that the UK is locked into the backstop Protocol terms with no way out and no legal means of complaint. This constraint does not appear to have been appreciated by either Mrs May, her advisors or many of the Conservative Party leadership candidates.
But a Withdrawal Agreement under Article 50 is not necessary to leave, or for a trade deal
There is no requirement that a Withdrawal Agreement has to be concluded in order for a member state to withdraw from the EU under Article 50. Given the position we are in, any attempt to conclude a Withdrawal Agreement should be abandoned. The EU will not agree any changes and the current version will not be agreed by the UK Parliament. Instead, the future Prime Minister should concentrate on addressing the longer term relationship between the UK and the EU.
An exit from the EU without a Withdrawal Agreement under Article 50 does not mean leaving the EU without deals of any kind, unless the EU refused to enter negotiations, despite the UK’s willingness to do so.
In the absence of a trade agreement between the UK and the EU, WTO rules prima facie require that the EU must charge its Common External Tariff (CET) on goods imported from the UK and the UK must charge its standard external tariffs (those charged on imports from the rest of the world) on goods imported from the EU. Contrary to common belief, the UK is not obliged to continue to charge tariffs at EU levels – it will be free to reduce them or remove them on sectors of goods where they are not warranted. The UK Government envisaged doing so pre-29th March 2019.
Further, and contrary to claims made by certain committed Remainers, the Most Favoured Nation (MFN) principle does not require that the UK’s customs border procedures need be identical at its ports and airports and at the UK’s only land border, that between Northern Ireland and the Republic. Nor does the MFN principle or WTO rules require customs rules to be enforced by physical checkpoints on the border.
A Civitas study demonstrates that the total value of tariffs charged on UK goods imported into the EU, and subject to the EU’s CET, would be approximately 4.5% on average. This does not amount to a swingeing increase in the price of UK exported goods to the EU. The tariffs borne by UK exports would be less than half the net contributions that the UK makes to the EU budget each year.
What to propose – bridging arrangements on tariffs
The future Prime Minister should propose the continuation of zero tariffs on goods between the UK and the EU. The mechanism would be a simple temporary Free Trade Agreement, to apply until a fuller long term FTA can be negotiated and ratified. A draft (complying with GATT rules) has already been prepared by Dr Lorand Bartels of Cambridge University. This simple FTA satisfies the requirements of Article XXIV of GATT, and does not need to be satisfy the additional requirements for so-called ‘interim’ agreements under that Article.
Such an offer would be hugely beneficial to the EU, since the tariffs which would be borne by EU exports to the UK are likely to be more than double those on UK exports in the opposition direction. This is because EU goods exports to the UK are £95 billion per annum higher than the UK’s goods exports in the opposite direction, and also because EU goods exports are more highly concentrated in high-tariff sectors such as agriculture, clothing and motor vehicles.
Such a bridging arrangement would be preferable to the elaborate and highly constricting ‘transition period’ envisaged by the WA, under which the UK would be subject to all EU laws (including new laws on which it would have no vote) and could not implement any trade agreements with third countries. By contrast, this bridging arrangement would be compatible with the immediate negotiation and implementation of trade agreements with third countries such as the USA.
As for the suggestion that there would have to be a closed land border in Ireland to deal with tariffs, it must be recalled that both the Channel ports and the Irish land border are already fiscal borders for the imposition of VAT and Excise Duties on goods imported into the UK. VAT is currently satisfactorily collected by businesses filing electronic returns with periodic inspection to ensure compliance. The same process can be applied to any collection of trade tariffs (if there are any).
Overcoming regulatory barriers
As for regulatory barriers post-Brexit, under the terms of the 2018 Withdrawal Act, the UK’s post Brexit regulations relating to goods will be the same as the EU’s, unless and until divergence occurs in particular areas. Moreover, UK law (the 2018 Withdrawal Act) lays down the default rule of continuing to recognise EU goods as conforming to British standards. There will be no legal barrier against the continued importation into the UK of goods made and certified under EU standards and rules. Stories of ‘shortages’ of food and medicine are wrong.
Arrangements on regulatory recognition are normal between trading countries whether or not they are in any preferential trade agreement such as an FTA. Mutual recognition is mandated by the World Trade Organisation’s TBT and SPS agreements. Thus the EU will be under both legal and practical pressure to enter into arrangements to continue to recognise UK goods as conforming with EU standards.
As for services, the UK is a net services exporter. There are no current plans to change the rules and standards of UK-based services providers, so the EU has no rational basis on which to refuse recognition. In the financial sector, EU industries’ access to the City is important, if not vital. Under the Withdrawal Act 2018 the default position is that EU-based service providers would continue to be recognised and able to provide services to UK customers unless and until UK rules are positively changed.
As previously mentioned, a zero-tariff Free Trade Agreement is hugely beneficial to the EU, having regard to the size of the UK’s deficit in goods trade and the way in which EU goods exports to the UK are concentrated in high-tariff sectors. It would be entirely reasonable for the UK to ask in return for interim access for goods and services into the EU market for as long as relevant rules remain aligned.
In conclusion: what we have proposed is a better way forward than the WA from all angles. Nobody can guarantee how the EU will choose to react, but if they have any sense and if these proposals are pushed by a determined UK Prime Minister then they present the best chance of an optimal exit from the EU.
Martin Howe QC is co-author with Sir Richard Aikens PC and Dr T.D. Grant of Avoiding the Trap: How to Move on from the Withdrawal Agreement (published by Briefings for Brexit/Politeia)
The post How the next Prime Minister can move on from Theresa May’s Withdrawal Agreement appeared first on BrexitCentral.
Only a credible non-cooperative strategy that cannot be blocked by either the EU or Parliament will get us out of the EU by 31st October 2019. And that strategy needs to be executed with ruthless conviction and commitment by the new Prime Minister. To demonstrate his support for Global Britain, his first trip abroad should be to the US to kick-start the UK-US Free Trade Agreement.
As the largest ever list of candidates to offer themselves as the next British Prime Minister has been whittled down to the final two, it is clear that we are in grave danger of validating Einstein’s definition of insanity – doing the same thing over and over and expecting a different result.
Between them, Boris Johnson and Jeremy Hunt have said that they will: renegotiate the Withdrawal Agreement (WA) and the backstop; leave the EU with a ‘deal’ on 31st October; and get parliamentary approval for their new improved deal. They both claim to be skilled negotiators, implying that this makes them ideally suited for the most important job in their career. There are differences, however: Johnson recognises that the WA as a whole is dead and just wants to lift some of its acceptable features, such as on citizens’ rights; while Hunt is prepared to delay leaving the EU for ‘a short while’ to achieve a ‘better deal’.
The naivety of the candidates’ positions is breath taking. Have they not observed how easily the EU has run rings around our current ‘skilled negotiators’? Are they like the Bourbons and learned nothing and forgotten nothing?
The new Prime Minister needs a credible negotiation strategy
It is going to be déjà vu all over again, unless the new PM has a clear strategy to leave the EU on the basis of what game theorists call a non-cooperative solution. That is one that the EU cannot block if it is not willing to cooperate in producing a solution that makes both sides better off.
This means that the starting point for any negotiations with the EU cannot be the WA. The EU says that it will not renegotiate this and it remains completely unacceptable to the vast majority of the British people. As Chairman of Lawyers for Britain, Martin Howe QC, says:
‘I can’t think of any clause in the WA end-to-end which is actually in the interests of the UK. The only neutral part of the agreement is the reciprocal rights of UK and EU citizens, in which the clauses on substantive rights are acceptable. However, even those are surrounded by completely unacceptable requirements that the treaty must perpetually have direct effect and must (as interpreted by the courts) override future UK Acts of Parliament in our own courts, and must be “interpreted” by the European Court of Justice for about 10 years by direct references and thereafter via a back-door mechanism in an international arbitration clause’.
His devastating criticism of the WA is here: Avoiding the Trap – How to Move on from the Withdrawal Agreement. How a British Prime Minister could collaborate with the EU to produce this document and how so many MPs could subsequently vote for it is beyond me. The WA is nothing less than a venus flytrap. It therefore needs to be avoided at all costs.
In any case, the WA does not offer a ‘deal’ about a future relationship in any meaningful sense. For example, there is nothing on services which account for 80% of UK GDP. Trade in services will be negotiated after the UK leaves the EU. It is completely bizarre for MPs to object to leaving the EU without a deal, when the WA itself involves leaving the EU without a deal.
A non-cooperative solution requires the UK to specify both the terms under which it will leave the EU and the terms under which it will trade with the EU in the future. And to do so in a way that the EU cannot block.
Theresa May specified the leaving terms very clearly in the Lancaster House speech in 2017. They were to leave the Customs Union, Single Market and the jurisdiction of the ECJ. In other words, a clean Brexit. This was a clear deliverable strategy that did not require EU cooperation. But then Remainer Philip Hammond stepped in and said there needed to be a transition period which would require EU cooperation and this was the beginning of the backtracking that led to the toxic WA and the equally toxic Political Declaration (PD).
The non-cooperative solution involves three steps. And each one has to be credible to the EU
The first step is for the new PM to restate that the clean Brexit set out in the Lancaster House speech will be implemented by 31st October 2019. This is credible and does not require EU consent.
In parallel with this, the new PM should immediately inform the US President that the UK will enthusiastically take up his long-standing offer to negotiate rapidly a US-UK Free Trade Agreement (FTA). This also is credible and does not require EU consent once we leave. During the few weeks that remain before 31st October, the UK can make much progress in setting the stage for post-Brexit negotiations – a task that the International Trade Secretary, Liam Fox, has consistently dragged his feet in doing. This will send an electric shock to the EU that will tilt every aspect of subsequent negotiations with the EU in our favour. The prospect of us concluding an FTA with the US when the EU has been struggling for years to achieve this will motivate the EU to conclude an FTA with us. They will fear the fact that the UK would be able to import virtually all of its requirements from the US and at lower world market prices. This would signal to the EU that we can leave them behind if necessary.
The second step is to set out in a new Departure Statement (DS) how the principal issues involved in departing from the EU will be implemented: citizens’ rights, the financial settlement and the border between Northern Ireland and the Republic. The PM can guarantee the rights of EU citizens living in the UK without granting them the special status of the WA. He can agree to pay our financial obligations up to the point of departure. Any additional money is not a strict legal requirement but can be used as a bargaining tool in negotiations about the future trade deal – as the EU is fond of saying, ‘nothing is agreed, until everything is agreed’. Let the EU take the UK to international arbitration if they want. Finally, he can restate that the UK will not impose a hard border. All these are credible and do not require EU consent.
The big advantage of being absolutely clear on the border is that it will force the EU and, in particular, the Irish Taoiseach Leo Varadkar to agree a workable solution that allows the UK to leave the Customs Union and Single Market at the end of October. Solutions exist to protect the integrity of both the UK and EU internal markets without any physical infrastructure on the border or any need for new technology. The Smart Border 2.0 report commissioned by the European Union Parliament from customs expert Lars Karlsson confirms this – as does the more recent report of the Alternative Arrangements Commission. Annegret Kramp-Karrenbauer, Angela Merkel’s successor as leader of the Christian Democratic Union, has said that a workable solution could be agreed in five days of discussions. There were discussions between British and Irish customs officials on creating an invisible border, but Varadkar stopped these when he came to power. In doing so, he politicised the border issue and turned it from being the EU’s Achilles’ heel into the UK’s – ably abetted by collaborating British ‘negotiators’.
It was this single issue that was then exploited in order to propose the backstop comprising a ‘single customs territory between the (European) Union and the United Kingdom’, without rules of origin. Northern Ireland, in addition, would have to abide by the rules and regulations of the EU Single Market. So long as the backstop is in operation, the UK would have to meet ‘level playing field conditions’ that prevented the UK competing against the EU. The UK would not be able to leave the backstop without the consent of the EU.
This, of course, is completely unacceptable. By making it clear that the UK will leave the EU on 31st October, the positions are immediately reversed. Both the EU and Varadkar have said that there will be no hard border. Varadkar would be forced to restart the discussions between British and Irish customs officials. He knows full well how devastating for the Republic’s economy a ‘no deal’ Brexit would be: the Irish Central Bank predicts a 4% cut in GDP and 100,000 job losses. And there are plenty of five-day periods between now and the end of October to agree a workable solution. But it requires the UK side to make it absolutely clear that we are leaving on Halloween, come hell or high water. This too is credible and again does not require EU consent.
The third step is to make a Future Relationship Statement (FRS), setting out the terms on which the UK will agree to trade and cooperate with the EU. Again, this has to be done in a way that cannot be blocked.
There is only one set of trading terms that the EU cannot block. Under WTO (World Trade Organisation) rules – which almost all international trading arrangements follow – we are free to set the tariffs and product standards for trade with the EU, so long as these are the same as for all members of the WTO under MFN (Most Favoured Nation) rules, unless we have a FTA with any country or group of countries. This is the default position, so is also credible and does not require EU consent.
We can actually do better than that and offer the EU to continue trading in goods on current zero-tariff terms under Article XXIV of GATT (General Agreement on Tariffs and Trade) and in services under Article V of GATS (General Agreement on Trade in Services) – while a full FTA is negotiated. But if they refuse, we can temporarily revert to the MFN rules under Article I of GATT.
The EU will ultimately agree to a FTA. In the meantime, we need to exploit the fact that the UK has a huge trade deficit with the EU – we are net buyers of goods of around £100 billion, equivalent to 5% of our GDP. Since the customer is king – and we are the customers – it should be us who decides the quality and prices of the goods and services we purchase from not only the EU but from the rest of the world. But what the WA and PD do is to allow the EU to determine these things. The audacity is astonishing. Did the EU and our ‘negotiators’ seriously believe that they could get away with this – and not just in the short term but indefinitely?
Since we will no longer be bound by the EU’s Common External Tariff, we can lower the tariffs we set on goods that we do not produce domestically. But whatever tariffs we set, the EU will be worse off given that they sell us mostly high-tariff goods like cars and agricultural products. We would pay tariffs to the EU of around £5 billion and they would pay tariffs of £13 billion. In addition, we would save the £11 billion net contribution to the EU.
This provides a strong incentive for the EU to agree a FTA, unless they want to continue punishing us for leaving the EU, and in doing so damage the EU economy even more. Given that we have a services trade surplus with the EU of around £30 billion, it is essential that this is secured in a future trading relationship. This means a SuperCanada deal, already offered to us by the EU in March 2018.
But although there is a strong economic incentive to agree a FTA, we cannot force the EU into accepting any deal that works for us in terms of services, and, in particular, financial services. Still this does not prevent us leaving the EU on the basis of the above DS and FRS. There are enough ‘mini deals’ in place – covering visa-free travel, aircraft landing, rail and shipping agreements, road haulage licences, student exchanges, defence and security etc – for the citizens and businesses of both the UK and EU to continue visiting and trading with each other. In addition, a sufficient number of the international trade deals negotiated by the EU have been novated that we can continue trading on the same terms with most of these countries as we do now. A key example is Switzerland which accounts for more than a quarter of our trade under these EU-negotiated deals.
A number of proposals have fleshed out the details of a future relationship along the lines outlined above: A Clean Managed Brexit from Steve Baker MP, The EU, The UK and Global Trade: A New Roadmap from Professor David Collins, A Better Deal from Shanker Singham, Robert MacLean and Hans Maessen, A World Trade Deal from Economists for Free Trade, and the Howe et al report cited above. For example, Baker suggests that we should send a draft UK-EU FTA to the EU – such as the ones proposed by Shanker Singham, Victoria Hewson, Hans Maessen and Barnabas Reynolds or Dr Lorand Bartels of the University of Cambridge – rather than wait until they do the drafting – which was such a disastrous error with the WA and PD. The EU could agree such a FTA under Article 207 of the TFEU (Treaty on Functioning of the European Union) on the Common Commercial Policy on the basis of qualified majority voting.
But unless the strategy is clear about what is needed to deliver these outcomes, we will soon be back wading through the same treacle of compromise and capitulation that have been the hallmark of our negotiations over the last two years. The only strategy that is guaranteed to work by 31st October is the non-cooperative one outlined above.
The new Prime Minister also needs to demonstrate conviction and commitment – and that involves putting Parliament in its place
A credible negotiating strategy is necessary, but this will not be sufficient. The new Prime Minister also needs to have ‘conviction and commitment’, as Dominic Raab has pointed out. But Boris Johnson – the front runner to be PM – has already wavered by first stating categorically that the UK will leave the EU by 31st October and subsequently saying that this is merely ‘eminently feasible’. This change was immediately picked up by EU negotiators, one of whom told The Times: ‘Even the boldest Prime Minister for a no-deal will have to demonstrate that he has had one serious try and that means an extension [beyond 31 October]’. Another told the Daily Mail that the EU believes Johnson will end up trying to sell an amended version of the WA: ‘If people really brief Boris and talk him through the implications of ‘no deal’, I think he will really think twice’. The first view is perfectly plausible and, unless further wavering is prevented, then we are very likely to end up with the second. After all, Johnson supported the Withdrawal Agreement on the third vote. Hunt voted for it three times. Johnson’s declared position, however, is that he is seeking a FTA with the EU and clarified that he will leave the EU by the end of October ‘do or die’.
The new PM also needs to demonstrate conviction and commitment with the other group trying to block Brexit: the British Parliament. It too needs a lesson in democracy. Read our lips: we voted to leave the EU in June 2016 by a bigger majority than any vote that any individual MP has ever received. We understood the decision we made. We understood why we made it. No amount of scaremongering by the majority of MPs who oppose this decision or their friends in the civil service and CBI etc will change this.
So if MPs are still determined to block the deal that the next PM sets or try to insist that the deal is put to a ‘confirmatory vote’ – weasel words for a second referendum to try and get Brexit reversed – then they also need to be blocked. They need to be made to understand that it is the people who are sovereign not MPs. And the people are here for ever, they are not.
If this, in turn, means that Parliament is prorogued until after 31 October 2019, then so be it. Constitutional historians like Professor Jonathan Clark argue that this would not be ‘“unconstitutional”:
‘[It] would be in accord with statute law, but applied in a situation that legislators could not foresee. [Nor] would [it] be “undemocratic”, for the point at issue is the clash between two sorts of democracy, representative and direct. Whatever the merits of these two, Parliament recognised the priority of the People in legislating for the referendum of 2016. Parliament’s claim to control prerogative depends also on public opinion, and support has ebbed away as Brexit has not been delivered’.
However, prorogation might not be necessary since, in June 2019, Parliament voted down a Labour motion to block a no-deal Brexit. Indeed, Maddy Thimont Jack from the Institute of Government argues that MPs have no decisive route – such as legally binding backbench motions, emergency debates, amendments to the Queen’s Speech, or ‘no confidence’ votes – to stop a PM determined from leaving the EU on 31st October.
Only a credible non-cooperative strategy executed with ruthless conviction and commitment by the new Prime Minister will get us out of the EU by 31st October
The message needs to be clear, simple, with no compromises. Theresa May said in her resignation speech outside No. 10 that the next Prime Minister must compromise. Well just look where that got her. Time’s up for doing the same thing over and over and expecting a different result. Only a credible non-cooperative strategy that cannot be blocked by either the EU or Parliament will get us out of the EU by 31st October. And that strategy needs to be executed with ruthless conviction and commitment by the new Prime Minister. Given that both Johnson and Hunt have voted for the WA, the new PM would need to signal his conviction and commitment by appointing a Brexit Secretary who refused to vote for the WA on all three occasions. To demonstrate his support for Global Britain, his first trip abroad should be to the US to kick-start the UK-US Free Trade Agreement. There is no need to make another round of humiliating visits to Brussels or to Europe’s capitals – as Theresa May repeatedly did.
This is an extended version of a blog originally posted on Briefings for Brexit
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It’s funny, but every time one mentions ‘Article 24’ publicly – meaning (using the correct Roman numerals) Article XXIV of the General Agreement on Tariffs and Trade (GATT) which predates the World Trade Organisation (WTO) – you receive a barrage of hysterical abuse from Remainers, often with long academic titles. They are clearly terrified we’re on to something.
They say: ‘The EU would never agree to it!’, ‘The EU would not be minded to do a deal if we leave on bad terms!’, ‘You can’t do it in a no-deal situation’ and ‘We’d have to levy tariffs not just on EU goods but all good from around the world’. This last point was made on Radio 4’s Today programme discussion of Article 24 yesterday morning.
But these claims are wrong. We know they are wrong because collectively we have asked the EU: its Chief Negotiator Michel Barnier, its trade advisers and personnel, and people David has worked with for ten years on the International Trade Committee of the European Parliament doing trade deals. And together we’ve asked very senior people at the WTO and top trade lawyers too, such as the impartial Article 24 expert Lorand Bartels of Cambridge University.
Their conclusion: GATT Article 24 is not only doable, it is desirable. Here are a few facts relating to Article 24:
1) Let’s not confuse what ‘deal’ or ‘no deal’ we are talking about: we are not seeking to renegotiate the Withdrawal Agreement or attempt ratification of that deal by 31st October. Angela Merkel and other EU leaders have made it clear that ‘deal’ is not negotiable.
So this is not a deal based on the Withdrawal Agreement under EU law such as the Lisbon Treaty’s Article 50. Nor is it a trade deal conducted under the EU’s ‘Future Relationship’ or ‘Political Declaration’ provisions either with its binding legislation – it is a separate deal done under World Trade Organisation rules.
2) The World Trade Organisation makes trade rules, not the EU. There’s a clue in the title. The EU quite correctly works within the global rules system on trade via the WTO. Most EU free trade agreements incorporate WTO level agreements like GATS – the General Agreement on Trade in Services.
3) GATT was the predecessor to the WTO and Article XXIV/24 is contained within these global GATT rules which all individual WTO members – that includes the UK as an individual full WTO member, every EU member state as individual WTO members and the EU as an entity – agree to implement.
4) The whole point of the WTO is to promote free trade around the world. The WTO does not like tariffs (taxes on goods entering), quotas (a certain quantity of goods entering at a certain tariff) or barriers to trade (e.g. excessive regulation advantaging home producers or in services). So the WTO will not like it if the UK and EU return to imposing £13bn tariffs on EU goods and £5bn on British goods into the EU. It goes against the grain.
5) GATT Article 24 is there to allow two countries or blocs to move towards a free trade area or a customs union. It basically allows the two countries to level lower tariffs and quotas than what is called ‘Most Favoured Nation Rules’ (MFN). Ironically it is the very basis of the EU’s zero tariff Customs Union which took between 1957 and 1968 to actually enact.
By offering one country a better deal than other WTO members you are discriminating – you are offending the rule that everyone must be treated the same – so you must levy the same MFN tariffs to all. This is such an important rule it is actually Article 1 of GATT. But Article 24 is a specific exemption to this.
Free Trade Agreements (FTAs) are really a licensed form of discrimination where you are allowed to offer better terms to one country over all the others but only if you really free up trade – particularly getting rid of at least 90% of tariffs.
6) So given the WTO hates tariffs (it’s not happy with President Trump and others reimposing tariffs but that’s another story), then it is amenable to ways of avoiding tariffs without disadvantaging its other members.
So if the UK and EU go to the WTO jointly and say that we have agreed to move to a full and comprehensive Free Trade Agreement (what we term ‘SuperCanada’ – that is better than the EU-Canada FTA) – that keeps tariffs at zero with no real change to other members, the WTO is happy to allow us a period of time to keep tariffs and quotas at preferential rates. GATT 24 allows what are called ‘standstill’ arrangements – much remains the same and this is essentially a WTO form of a transition – but is not an interim arrangement as is often claimed.
We can keep tariffs at zero for as long as the two partners need to negotiate the full works: that comprehensive FTA. Legally this could be up to ten years, but most are two to three years to negotiate. That is GATT 24.
7) Yes, GATT 24 needs a temporary agreement between the EU and UK, but frankly it could be written on the back of an envelope. Lorand Bartels has helpfully written a one-page FTA properly that is sufficient to allow Article 24 to apply. This is a ‘basic deal’ or a ‘temporary FTA’. But it is entirely manageable and legally sound.
So to our Remainer friends – yes, you need a deal, but one or two pages of FTA is much easier than the 585-page Withdrawal Agreement to agree.
8) So why would the EU agree?
Well, the UK is the fifth largest economy in the world and the EU’s largest single market – bigger than the USA, China and India. The EU has a £96 billion goods deficit with us (we have a £13bn services surplus). Over a million German jobs alone rely on British consumers buying German goods like BMWs. Without a basic GATT 24 deal, the EU would have £13bn tariffs slapped on its goods – 10% on VWs; 12% on wine, 40% on cheese. They would suffer far more than the UK simply because they sell more to us than we do to them. The EU – particularly Germany, which accounts for nearly a quarter of all EU trade to the UK – does not like the idea of this. Better for everyone surely to keep on an even keel?
There is also the question of money. The UK may well be prepared to pay a fair contribution, if not anywhere near the £39 billion associated with the Withdrawal Agreement, but this would be contingent on such a basic deal. It is also much easier to deliver by the end of October.
In the absence of EU agreement to GATT 24, the UK can unilaterally and universally change its import tariffs, and be open to cutting all tariff rate quotas – but obviously the UK would not be able to control EU import tariff rates.
9) What about services and standards?
Services will be a part of the future trade deal but will be along the lines of ‘Mutual Recognition’ of standards or ‘enhanced equivalence’, not on a harmonisation or rule-taking basis.
10) What about all the the other non-trade elements, such as aviation flying rights?
GATT 24 is not the only basic deal needing to be done if there is no Withdrawal Agreement. It will need an accompanying flotilla of what we call ‘mini deals’.
But – good news – the EU has already quietly agreed most of these through emergency legislation. As an MEP, David has voted on 17 main pieces of legislation to keep trucks rolling, planes flying, trains running, goods flowing, fishing boats sailing, visa costs eliminated, energy efficiency maintained, social security cooperation, the Northern Ireland Peace programme running, Erasmus+ for students allowed, and other affairs. The UK just needs to reciprocate.
The reality is that much of the non-controversial elements of the Withdrawal Agreement can be agreed as separate ‘mini deals’ in exactly the same way – for example, the elements on citizens’ rights – but can be done outside the provisions of the European Court of Justice. This is the case with other EU free trade deals including Canada and Switzerland.
11) What about the Northern Ireland border and Good Friday Agreement?
Iain served as a soldier in Northern Ireland and well knows its challenges, whilst David worked on the Peace Process 20 years ago as a Government Special Adviser. There is no mention of the border in the Good Friday Agreement for a start (rather a sensitive subject!).
With Ireland only checking 1% of goods imported now and with existing trusted trader and other current mechanisms available, such as checks in factories and warehouses, even the EU admits alternative arrangements can be done with the border remaining free. No one wants a hard border. But the detail of this can await the negotiation of the bigger free trade agreement – and is part of that.
What GATT Article 24 represents is a Clean Managed Brexit – and what’s more it is deliverable by 31st October.
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There is no easy, undiscovered solution to the Brexit impasse waiting for some brilliant mind to uncover. A ‘better deal’ – in the sense of a modification to Theresa May’s Withdrawal Agreement without the Irish Backstop – is unlikely. As many have known for some time, the best outcome would consist of a comprehensive Free Trade Agreement (FTA), like the CETA concluded between the EU and Canada, but which includes deeper commitments on services and mutual recognition of professional qualifications.
To be sure, this will not replicate the closeness currently enjoyed under the Single Market but, crucially, it will allow the UK to diverge in terms of regulatory standards in order to promote a more competitive economy focused on pragmatism, innovation and the needs of business in the tradition of the common law (which helpfully permits everything except that which it does not) as distinct from the uncompromising continental civil law (which irritatingly prohibits everything except which it deigns to allow). Our dynamic, reliable legal system is one of the reasons that the UK and the US have thrived while Europe continues to stagnate under the weight of its own bureaucracy and rigidity.
The new Prime Minister must pursue such an FTA aggressively in the spirit of full co-operation and amity with our European partners, presenting it, and genuinely so, as in our shared interest. While it would be difficult to finalise such an agreement in four months, an interim agreement could be agreed in principle, as specified in Article XXIV of the GATT and Article V of the GATS, allowing the two parties to trade with virtually friction-free trade until a final agreement is in place.
If an FTA or an interim agreement leading to one is not forthcoming by October 31st, so be it. Preparations to mitigate any shocks from trading with the EU without a formal trade deal must continue in earnest. This will include continued infrastructure and technology enhancements at all borders. A significant portion of the £39 billion that would have been paid to the EU had there been an FTA, but which will be withheld without one, can be set aside to help businesses cope with adjustments. This could support tax relief, especially for small- and medium-sized businesses, to help offset some of the costs of handling diminished access to the EU market. With a no-deal Brexit in time for Halloween, by Christmas people will be wondering what all the fuss was about. It will be the biggest anti-climax since the predicted non-recession of the autumn of 2016.
It is hard to see why presenting ‘No Deal’ as a sensible counter-strategy to an FTA should in any way be construed as reckless or extreme. No-deal Brexit continues to be painted by the media and some politicians as the most radical of all options, one which represents a complete rejection of not only Europe but one which is the embodiment of isolationism, as if it were somehow the manifestation of the UK’s taking on the mantle of the North Korea of the Atlantic. The reality could not be further from the truth. No one, including not one candidate for Prime Minister, has advocated anything remotely like this. No one has said we should impose punitive tariffs on EU goods after Brexit. No one has suggested rejecting the WTO or trade deals with other countries. To the contrary – everything that has been put forward by Brexit supporters has unfailingly embraced free trade and economic globalisation.
Under WTO terms, the EU’s MFN tariffs on most goods are quite low, with some exceptions for agricultural products. There is every indication that the customs processes at borders will minimal, designed to prioritise flow with minimal inspections based on genuine risks. Likewise, there is no reason why the UK would block goods coming in from Europe. The picture for services is somewhat less promising, but steps can be taken to enhance GATS-level access to EU markets through the establishment of a commercial presence in an EU Member State.
We do not need membership of the EU to be active participants in the global economy; if anything, it is the EU which is holding us back from doing so more robustly. It has been the EU’s trade agenda which has imposed all sorts of harmful policies, such as high tariffs on goods we don’t produce, anti-competitive data localisation rules, unscientific health and safety regulations on food and labyrinthine financial regulations. Don’t believe the merchants of doom. An FTA/No Deal strategy is the very essence of prudence and moderation.
The EU, The UK and Global Trade: A New Roadmap by David Collins is published today by Politeia
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As President Trump visits the UK, it is worth thinking about the potential for a UK-US free trade deal of the sort that President Trump has promised, and how that might work in practice.
On February 28th, the Office of the United States Trade Representative (USTR) announced its negotiating objectives for a free trade agreement (FTA) between the US and the UK. It announced objectives for negotiations with the EU and Japan at the same time. While the objectives are similar for all the countries with which the US is seeking to negotiate FTAs, they were received in the UK with predictable howls of anguish from those who fear being railroaded by superior American negotiating strength and forced to consume supposedly dangerous, unhealthy American food. Here, we will consider whether the objectives could yield a genuinely liberalising FTA, and whether they accord with what the UK government is likely to seek in negotiations. We will also compare the potential UK response with the potential responses from the US’s other trading partners.
The US Context
Under the US’s Trade Promotion Authority legislation, the USTR must produce negotiating objectives prior to negotiating trade agreements. The objectives for the proposed FTA with the UK mirror the equivalents published recently for FTAs with the EU and Japan, and essentially build on existing agreements which the US has negotiated to date. They look to address the key trade barriers where the US is most concerned, responding to consultations with industry and interest groups. The negotiating mandate is consistent with a comprehensive UK-EU FTA. It is not consistent with the UK being in the (or a) Customs Union, or regulatory harmonisation with the EU (whether achieved through membership of the European Economic Area or a bespoke agreement, or by operation of the backstop set out in the Protocol to the Withdrawal Agreement).
The US wishes the UK to honour its WTO commitments particularly in the SPS area. It should be noted that these objectives are what it seeks from all of its partners, not just the UK. Many of the objectives merely restate commitments already made in international agreements such as a commitment to regulate in the SPS area on the basis of sound science. These would not, in the normal course be seen as an aggressive move, but they do highlight the fact that the EU is in violation of WTO rules in a number of these areas, and does not give them in its FTAs. The US government appears to be proceeding on the basis that the UK will be prepared to be more open than the EU in a variety of areas, making a UK-US FTA both more likely and quicker to deliver than an EU-US agreement.
The UK Context
The UK government has also carried out a public consultation on the basis that “the UK will have the opportunity to negotiate, sign, and ratify Free Trade Agreements (FTAs) during the implementation period (provided for under the draft Withdrawal Agreement) and to bring them into force from January 2021”. Responses have not yet been published. The consultation document, issued in July 2018, stated that the UK would be pursuing an “ambitious bilateral trade agenda, taking full advantage of the flexibility provided by our proposal for a future economic partnership (as set out in the White Paper on The future relationship between the UK and the EU on 12th July 2018)”.
This refers to the so-called ‘Chequers plan’, under which, as previously noted, many of the trade objectives of a UK/US FTA would not be achievable. The future relationship described in the Political Declaration (which the parties are obliged to use their best endeavours to negotiate) is based on a single customs territory with no rules of origin, and consideration of regulatory alignment, so even if the UK is able to avoid or exit the customs union arrangement provided for in the Irish backstop, the prospect of the UK’s future relationship with the EU allowing either the UK or the US to meet its objectives seems remote. The outline terms in the Political Declaration would be difficult to reconcile with a US-UK FTA meeting these objectives; a more usual FTA between the UK and EU would be.
US negotiating objectives must be looked at in the context of the evolution of US trade objectives over the last several years. These objectives have been developed to secure a bipartisan consensus in the US, and to achieve maximum market access gains abroad.
As an opening principle, the objective is to “ensure fair balanced, and reciprocal trade with the UK”. The US will be seeking “comprehensive duty free market access for US industrial goods” this is certainly positive and liberalising but there are a couple of protectionist hangovers, in respect of textile and apparel products where “US import sensitivities” are to be taken into account, and for agricultural goods where there is a suggestion that tariffs will not be eliminated entirely and will be subject to adjustment periods in close consultation with Congress.
If the UK is ultimately in a customs union with the EU (whether as a result of the backstop coming into effect or the conclusion of the future relationship currently envisaged in the Political Declaration), then it will not be possible to fulfil this negotiating objective. On the other hand, if the UK and EU agree an FTA, then this would be consistent with the US objectives. If the Withdrawal Agreement is ratified on its current terms, then the UK could have simultaneous negotiations with the EU and the US, in which case the terms pursued in each will influence what is possible in the other. The negotiation that is moving more rapidly will drive the process. If the US is prepared to exert political will as is evidenced by the many statements of the US President and the US Ambassador in London, then it is possible the US track will move much faster than is generally thought. It may even be possible to achieve an interim agreement with the US on basic matters like tariffs and quantitative restrictions more expeditiously.
The EU has indicated that it does not intend to include agriculture in its FTA negotiations with the US, and therefore will find it difficult to match the pace of a UK-US FTA if the UK is willing to have different regulatory settings than the EU.
Sanitary and Phytosanitary Rules
The US will seek to build upon the existing WTO commitments of both parties, working towards rules and mechanisms to eliminate unjustified restrictions and barriers on trade in food and animal products. This has been a source of friction between the US and the EU and will be an important test of the UK’s commitment to, and capacity for, real progress towards free trade. The EU has a history of violating WTO commitments on sanitary and phytosanitary (“SPS”) rules, in particular with respect to goods of interest to the US and does not make significant commitments beyond the WTO SPS Agreement in the SPS area in its FTAs. Critically, under the US objective it is expressly stated that each side “can set for itself the level of protection it believes to be appropriate to protect food safety and plant and animal health in a manner consistent with its international obligations”. This is vital for sovereignty and innovation and makes clear that it will not be a case of adopting US standards, rather of removing or amending regulations that are discriminatory in their effect and not based on sound science to achieve their policy goal.
The US wishes the UK to commit not to “foreclose export opportunities to the US with respect to third country export markets, including by requiring third countries to align with non-science based restrictions and requirements or to adopt SPS measures that are not based on ascertainable risk”. This is unusual, but given the challenges the US faces as the EU actively seeks to export its regulatory approach, it is understandable. There is a global battle between the EU’s approach to regulation, which is prescriptive and precautionary, and more liberal approaches based on evaluations of equivalence and adequacy, as envisaged by the WTO SPS Agreement.
A significant concern of the US and other trading partners of the EU and of China is the tendency of both to use the size of their markets to project their regulatory approaches, and base their market access offers on trading partners having identical regulation. This is an outlier position to that of most countries in the global trading system, which is to try to recognise as much as possible of other countries’ regulations provided the regulatory aims are aligned, and the regulation objectively achieves these goals. The US will be anxious to ensure that its trading partners adopt this vision of regulatory coherence and not that of the EU and China.
It is in the SPS area that the EU would find the greatest difficulty in meeting US negotiating objectives. It would require a course reversal on the EU’s overall direction on SPS regulation. If anything, the EU’s SPS regulation is becoming more restrictive not less.
Technical Barriers to Trade
The US’s objectives for non-agricultural goods are similar to the objectives for SPS rules. The US wishes the UK to address trade barriers in its technical regulation by adhering to WTO TBT Committee decisions and recommendations, and pursing mutual recognition of conformity assessment, amongst other things. This section includes an equivalent objective in respect of third country agreements that might prejudice US trade to that in the SPS section. Depending on the negotiations of the future relationship with the EU, the UK is more likely to share this objective than the EU. TBT/SPS and other regulatory issues have plagued the EU-US relationship from the early days of the Transatlantic Business Dialogue in the 1990s to the more recent attempt to negotiate an EU-US deal (the Transatlantic Trade and Investment Partnership, “TTIP”). TTIP foundered primarily on the fundamentally different approaches to regulation, and standard setting between the EU and US. If the UK merely replicates the EU approach, it is likely the UK-US FTA would founder for the same reasons.
There should be much for the UK to agree with in the objectives that the US has set out for services trade and investment.
The US objectives for trade in services, including telecommunications and financial services, are generally very liberalising on market access and non-discrimination, with reservations from the core commitments to be by way of “negative list”, which means that all sectors will be covered unless specifically excluded. This would lead to greater openness than the “positive list” approach under the General Agreement on Trade in Services. The US has long advocated a negative list approach. Even the NAFTA agreement, now almost a quarter of a century old, has this approach to services.
The US objectives also accept the possibility of exceptions from the core disciplines for the UK, to be kept as narrow as possible. This will be of vital importance to UK negotiators who will be required to secure reservations to protect public services, including the NHS. As noted by Liam Fox, “the UK’s public services are protected by specific exceptions and reservations in all EU trade agreements, and as we leave the EU, the UK will continue to ensure that rigorous protections are included in all trade agreements to which it is party.”
The EU has now partially adopted the negative list approach to services but is likely to require many more reservations than the UK, as the UK has traditionally been one of the most open member states on services.
The US primary objective in investment negotiations is to ensure the best possible protection for US investments. In international agreements, this has come to mean agreeing not to engage in expropriations, actions tantamount to expropriation and even to cover some areas where government action takes away an investor’s legitimate expectations. Investment is an area where the US seeks maximum protection for its investors. Since both countries are the largest investors in each other’s markets, both will likely seek this protection they should come to an agreement on this measure of protection.
The US objectives are silent on the issue of investor state dispute settlement (ISDS) which allows private parties to bring claims against state parties for violations of investment provisions. The UK has not made its position on ISDS clear. In his letter to the International Trade Committee, Liam Fox was at least open to the inclusion of ISDS, but given the political sensitivity of ISDS in the UK as well as in the US, it seems unlikely that the UK would insist up on it as an objective. Investor-State dispute resolution has been a part of the regulation of investment for decades under Bilateral Investment Treaties (BITs). While publics in the EU have resisted them, it should be pointed out that they do provide an avenue for smaller firms to hold governments to account when they expropriate their property or take actions tantamount to expropriation. Large firms can simply rely on their governments lobbying on their behalf. The mere possibility of being sued under ISDS does have an effect on a government’s domestic policy choices.
The US has handled this issue in the USMCA by eliminating ISDS with Canada but limiting it in Mexico to certain sectors (oil & gas, power generation, transport services and management of infrastructure). Given that flexibility compared to previous BITs and FTA investment chapters, we do not expect the ISDS issue to be a significant problem with the UK.
The US will be seeking “state of the art rules to ensure that the UK does not impose measures that restrict cross-border data flows and does not require the installation of local computing facilities”. This will be one of the most difficult areas for the UK to agree. Even if the UK leaves the EU without a Withdrawal Agreement or otherwise negotiates a future relationship restoring regulatory autonomy in this area, the attachment to the EU approach to data protection and privacy is strong amongst regulators and larger businesses. This lays down barriers to international transfers of personal data (so vital to financial services, which are specifically mentioned by the US in this context) and the uses of personal data.
The UK has already enacted the EU’s General Data Protection Regulation and as a matter of domestic policy there is no intention to reform or amend it. In a letter to the International Trade Committee, Liam Fox noted that the UK will wish to promote “robust data protection standards and the flow of data internationally” but wishes to “discuss with the US how best to ensure that the current protections afforded to UK citizens can be maintained post exit”, referring to continuing the EU’s Privacy Shield arrangement for data transfers between the UK and the US, which has now been confirmed.
There is deep concern among US firms about the EU’s approach to data protection. The US has long set great store on data flow – it is currently one of its most important trade objectives. If there is to be a global solution to the data issue, it can only come from a global set of disciplines based on adequacy as the US will never accept the EU approach. This will be one of the more difficult areas of the tripartite negotiation between the UK, US, and EU, all elements of which will be moving broadly simultaneously. The UK must be able to move away from the strict territorial requirements of the EU’s data protection regime, but build on and extend the EU’s Privacy Shield arrangement with the US. It should also work to eliminate barriers to the flow of non-personal data. These efforts would deliver huge benefits in services trade and e-commerce.
The discussion of data flow does not take place in a vacuum. The UK also seeks to be part of the new WTO working group on e-commerce, and if it is to play any serious part in this group, it will have to diverge from EU data protection rules and instead seek an adequacy type arrangement both for itself and on a global basis.
The US seeks strong protections for intellectual property rights in its agreements with all its trading partners, and it is duly included here as an objective. While it can be expected that the UK may have broadly similar objectives, given the UK’s interests in pharmaceuticals and technology sectors. The economic literature supports the notion that intellectual property protection is a critical part of economic development. It is a part of the panoply of property rights protection, and the UK and US’s economic interests are relatively aligned on these issues. At the same time, it is important that intellectual property rights are not drawn so broadly as to curtail innovation and the activities of new entrants.
The US objective of preventing “the improper use of the UK’s system for protecting or recognising geographical indications (GIs), including any failure to ensure transparency and procedural fairness, or adequately protect generic terms for common use” will likely come into conflict with the UK’s commitment to protect EU GIs in the draft Withdrawal Agreement and intention in the Political Declaration to continue with “appropriate protection” for GIs. This will be a difficult negotiation as it is a crucial part of the US’s negotiating objectives. US agricultural interests see the vast number of EU GIs as a protectionist tool, and an incorrect application of intellectual property protection. The number of UK specific GIs is relatively small, and some are protected by international agreements to which both the US and UK are parties (such as Scotch Whisky, for example) so if it were possible to renegotiate the UK’s commitment on GIs in the Withdrawal Agreement, UK businesses would not be materially prejudiced.
The EU position on GIs is inconsistent with US negotiating objectives. This will make an EU-US FTA very difficult to negotiate.
Good Regulatory Practice
The objective here is to facilitate market access and promote greater compatibility between US and UK regulations. This has been a persistent problem that has thus far proved to be unsolvable in trade talks between the US and the EU. What constitutes good regulatory practice is left at a high level and includes, for example, transparency, promoting the use of impact assessments and similar methods, and providing opportunities to comment on the development of regulations that includes both trade and competitive effects, and due process. The UK already operates practices that would meet many of these requirements, and provisions covering these matters are common in FTAs, including the EU’s. This objective is a sound one, and one where the parties would be well placed to make significant progress in achieving greater regulatory compatibility, but only if the UK is not bound to EU regulations, which would mean it would not be able to make commitments in respect of regulation that it has no real role in promulgating.
Liam Fox noted in his letter to the International Trade Committee of the UK Parliament of July 2018 that “it is critical… that UK-US FTA is a living agreement. We support the inclusion of a structured arrangement for future dialogue between UK and US regulators, while recognising that such a dialogue should not have a chilling effect on future public interest regulation.” This indicates that in principle the UK and US will be aligned on this objective, although Fox’s letter also cautioned that the independence of regulators in the UK and its partner countries would need to be taken into consideration in the context of regulatory mechanisms in an FTA with the US. This should be welcomed, but, given the commitment the UK has made in the non-binding Political Declaration to consider aligning on regulations and to maintain alignment in Northern Ireland, if Northern Ireland effectively stays in the EU single market for goods, the UK’s ability to negotiate around this objective would be constrained.
The negotiating objectives set out basic requirements in competition policy, in particular some current high profile issues for the US. US authorities have become concerned with the application of antitrust law by the European Commission. The US believes that the EU is interpreting competition law in increasingly restrictive ways and applying it expansively outside of its territory, most notably in the tech sector. The US has previously complained about the Commission’s approach to transparency and due process, and so the negotiating mandate’s reference to these issues is also unsurprising. If the UK is committed to maintaining EU competition policy (as it would be under the current iteration of the backstop in the Withdrawal Agreement and Political Declaration) it would be unable to commit to anything in this area that would entail diverging from the EU. However, the UK could seek to negotiate a competition chapter in the UK-US FTA if it also negotiated similar provisions in an EU-UK FTA.
State-Owned Enterprises and Market Distortions/Currency Manipulation
These objectives do not particularly relate to specific UK challenges, but represent what the US will be seeking in any trade agreement given its current priorities and the situation in the global trading system. The US has been pre-occupied by the impact of China’s state-owned enterprises (SOEs) and market distortions on the US market, particularly in manufacturing. It would like to see strong disciplines in this area in all modern FTAs to put more pressure on China. The US anticipates that the UK would be a strong ally in the fight against market distortions caused by governments and SOEs. As this plays into concerns often raised in the UK, we can be hopeful that this will be the case.
Rules of Origin
The negotiating objectives here are unsurprising given recent pronouncements of the Trump administration. They include ensuring that the benefits of the FTA “go to products genuinely made in the United States and the UK” and that “the rules of origin incentivise production in the territory of the Parties, specifically in the United States”. This is disappointing in that it would likely result in the rules of origin becoming trade barriers. The FTA would then be trade destructive rather than trade creative, cancelling out or annulling the benefits of tariff elimination. Such an approach to rules of origin would present the UK with challenges as it negotiates an FTA with the EU at the same time. The UK will seek very liberal of rules of origin so that it can ensure that products from the UK-EU27 supply chain can qualify for preferences under its FTAs. This is likely to be one of the tougher areas of negotiation.
A core objective of the UK will be minimal restrictions on competition for government procurement, including the US agreeing to waive its Buy America regulations for the UK. Buy America, and numerous other domestic preferential purchasing programmes allow sub-federal authorities (i.e. state and local government) to preference US suppliers and not open their procurement processes to foreign competition. While the US seek to open up government procurement opportunities in the UK, its objective is not to allow these disciplines to cover its own sub-federal entities. Most government procurement is at the sub-federal level in the US, and the UK would be seeking access for its suppliers to compete in that market, as confirmed by Liam Fox in his letter to the International Trade Committee.
In government procurement, the federal government for constitutional reasons cannot compel states to open their government procurement to foreign entities. In the Uruguay Round USTR was able to persuade some two dozen states and some large municipalities to unilaterally make procurement commitments in the WTO, but the willingness of states to do that now is less. The UK will have to convince the states and their municipalities to be more open on government procurement. A critical element of this will be how much market access the UK will be able to give for key exports of products from those states, and much of that will be in the agricultural area.
The UK also has major interests in defence procurement, and would likely seek to ensure its defence industry is not disadvantaged by US rules. There are Buy America provisions in defence procurement, as well as other restrictive rules such as the International Traffic in Arms Regulations (“ITAR”). The UK should seek to be part of the common defence area with the US to which ITAR exemptions can apply (as have Canada and Australia). The US objectives state that it wishes to maintain exemptions for key Department of Defense procurements and broad exceptions for government procurement for national security, so there may be some room for negotiation in this sector.
Environment, Labour and Anti-corruption
The objectives in these areas are not especially controversial given the approach trade agreements have adopted in recent years. Both the UK and US maintain high standards in both these areas, and negotiation of this chapter should not present major difficulties. Both sides will likely need to include protections in these areas to reassure domestic interest groups and legislatures that the FTA does not start a ‘race to the bottom’.
There is nothing especially surprising in the US’s negotiating objectives. Even in the areas which have attracted the most media coverage, the objectives are as expected and do not materially go beyond what the UK can expect from other trading partners, such as the CPTPP countries. The US does not have adoption of its systems and regulations as an objective, but would require the UK to comply with WTO rules and regulate in ways that are consistent with sound science. This will raise issues in the negotiations between the UK and the EU, as the more goods that the UK allows into its territory that are not compliant with EU rules, the more border checks will be required to ensure that only compliant products are exported from the UK to the EU. This is a particular problem for the border between Northern Ireland and the Republic of Ireland where the parties have agreed that they will not operate physical infrastructure or related checks and controls. This makes the work of the alternative arrangements joint group as agreed between the UK and EU even more important.
There is no question that managing a UK-US and UK-EU negotiation at the same time will be a challenging task, not least because of the legal default underpinning the UK-EU negotiations comprising a customs union under the backstop. Many of the EU and US’s trading partners have found ways of agreeing with both but not from within a customs union or the single market. What the UK has forgotten after more than forty years of its trade policy being subsumed within the Common Commercial Policy is that trade policy is a dynamic process with an ever-changing battlefield. Ultimately it is at the intersection of politics, economics and law – and politics usually wins.
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Following the Easter break, Parliament may soon once again debate our future relationship with the EU. Despite numerous votes against the idea of the UK being in a or the Customs Union with the EU, it appears many still believe that some form of customs union is necessary to break the Brexit deadlock. This seems to be because of the perception that, in a customs union, there are no tariffs or non-tariff barriers to trade between its members. Unlike a free trade area, members of the Customs Union impose a common external tariff on all goods entering the union.
However, a customs union does not, by itself, lead to frictionless trade (only rules of origin checks would be avoided, and in the case of a partial customs union, some checks in the form of movement certificates would still be required) because the bulk of the checks come from other rules to be found in the EU’s Single Market. In the case of Turkey – the non-EU country that does have a partial customs union with the EU – not only are movement certificates required, but Turkey has committed to the EU acquis. The Turkish arrangements were intended as a way-station en route to full EU membership.
But there are strong reasons not to be in a customs union with EU.
Firstly, it is a myth that the UK would have any significant say in the operation of the EU Customs Union if we are not a fee-paying member of the EU. Those who believe we would have a say seem to assume that we would have more of a say than we currently have as one of 28. Since it is unlikely that the Commission has fallen asleep, there is no reason why a departing member state would be rewarded in this manner.
Secondly, the EU would set the common external tariff and the trade policy to suit them, not the UK. They would prioritise protecting French and German agricultural goods, and put in no effort to open up markets outside of Europe to UK financial services or even Scotch whisky.
The UK would also not be able to have its own meaningful and independent trade policy, and this would lead to a huge loss in British influence around the world. Trade is a big part of foreign policy, and the UK frequently uses its ability to change EU trade policy with various asks we might have in security cooperation when talking with other countries. Trade is a vital instrument of diplomacy.
Furthermore, the EU would run our trade remedies (or trade defences) against dumping of goods, most frequently from China. It is very doubtful that the EU would give much priority to defending our industries – those who pay the bills would be the priority.
Finally, and most importantly, in new trade agreements the EU would be able to offer – via the Customs Union – access to Britain’s 65 million consumers, without any equivalent access for UK goods and services. The US and the EU have announced their intention to re-start trade talks with each other. Even though the US is our largest single trading partner, we wouldn’t have a seat at the table. Worse still, if the EU lowered tariffs for US goods, or changed its regulations to allow in particular US goods which were previously not allowed, the UK would have to follow and seek to negotiate for ourselves what we need with no leverage.
Many say that we could agree a customs union with the EU and have a greater say than we have now. This is pure fantasy. The EU would not give the UK a greater say outside the EU than the member states have themselves. We will not be able to defend our interests better in a customs union than we could as members of the European Union. If we are also to align our regulations closely to the EU’s in a number of areas, we will certainly not have a say in how those regulations are made.
Currently, in the European Economic Area, members must accept the EU’s acquis in the relevant areas and do not have the ability to veto or change those regulations. Norway discovered this to their cost when they refused to implement the third postal directive and found themselves punished in unrelated areas like fishing. Even the Swiss, who are not even EEA members but have a series of agreements with the EU, have found themselves at the short end of EU negotiations. It would be this way for the UK in these types of arrangements – and the UK would be powerless to resist.
The real solution to the Brexit impasse is this: to find alternative arrangements on the Irish border; and to negotiate a deep and comprehensive Free Trade Agreement between the UK and the EU as equals. The UK and the EU can remain friends, while the UK also has its own independent free trade policy going forward, to take advantage of growing markets in Asia and around the world.
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In the below article, Patrick Minford writes in a personal capacity.
In the latest discussions on the Brexit Withdrawal Agreement and Political Declaration (WAPD), two views have emerged about the UK’s future choices. One, which I will call the lawyer view, is that once signed, the WAPD binds the UK indefinitely; this view is held by many of my friends and Brexit allies who are largely lawyers and as such tend to believe that the letter of the law will prevail. The other, which I will call the realist view, is that it can be ‘evolved’, to use a word popular with some politicians, in line with the mutually evolving interests of the two sovereign parties, the EU and the UK. The latter view is the one generally adopted in the economic analysis of international treaties, as the following quotation from a recent paper in a leading economic journal makes very clear.
At the national level, such conflicts [over payment for/usage of public goods] between individual and collective rationality can be resolved by the intervention of the government (Demsetz, 1967). At the international scale, however, there is no supranational authority that could coerce states into adopting efficient policies if they run counter to national interests. Filling the void are international agreements. Under the terms of the Vienna Convention on the Law of Treaties, a state that ratifies a multilateral treaty chooses partially to surrender its sovereignty and to subject its policies in a specific domain to the rules and prescriptions of the treaty. In so doing, sovereign states agree to coordinate their policies in mutually beneficial ways. By the very nature of sovereignty, however, the agreement is fundamentally non-binding and states can always withdraw from it. Therefore, the fact that public good provision is implemented through an international agreement should not change a country’s incentives to contribute per se — unless the treaty alters the country’s incentives to cooperate in other ways. (Wagner, 2016)
The point of economic analysis of treaties therefore is that a sovereign state only continues as a party to any treaty if it remains in its interests to do so. Therefore one must analyse treaty development over time with reference to how these sovereign interests evolve; and how at any time the sovereigns reach an accommodation based on their mutual interests. The basic reason, as explained in the quotation, is that there is no supranational power that enforces treaties in the way that a national state, with a monopoly of force, enforces domestic law.
The realist view is therefore asserting that once the UK is out of the EU, how it deals with the WAPD is a matter of subsequent choice and negotiation with the EU, which also has freedom of the same sort. Anyone supporting the lawyer view must therefore demonstrate that the WAPD remains an agreement that it is in the interests of both sides to maintain in the same form. It is not sufficient to say that because it has been signed it is indefinitely binding; this would only be sufficient if there was a supranational power that could enforce this, and I shall assume it as obvious that indeed there is no such power. In a recent posting on the Lawyers for Britain website my old friend and longtime Brexit ally, Martin Howe, argues that the Treaty of Utrecht binding Spain into Gibraltar’s status illustrates that treaties bind long-term. However, in fact this well illustrates the point about self-interest. Spain, like the UK, has had a strong interest in Gibraltar not accidentally becoming a casus belli, much as the Falklands, with a population similarly determined to remain British, became, at great expense to both the UK and Argentina. Ceaseless ongoing diplomacy on both sides to accommodate mutual complaints has found the Treaty a useful figleaf.
In the rest of this piece I will discuss what the interests of the UK and EU are and how, if at all, they might evolve, and with them the UK/EU future Treaty relationship. This type of analysis is a branch of game theory, which can involve highly complicated mathematics, as in the paper cited, but fortunately not in this case here.
Current UK and EU interests and the Withdrawal Agreement
Based on economic analysis within a rather standard World Trade model and other models described in Should Britain leave the EU? An economic analysis of a troubled relationship by Minford et al (2015) I suggest the following broad interests of the EU and the UK:
The EU: for the EU the status quo is optimal. The UK contributes 10% of the EU budget. Its food and manufacturing industries sell to UK consumers at 20% above world prices because the Customs Union places trade barriers of this tariff-equivalent value against products from the rest of the world. EU regulations prevent UK practices that would reduce UK costs and so undercut EU competition, driving down margins. Unskilled EU workers can be exported to the UK labour market where their wage is supplemented by the UK taxpayer by about 20%.
The UK: for the UK the optimal policy is abolition of protection against the non-EU; this ‘free trade’ policy eliminates the 20% premium paid to EU producers of food and manufactures and it also lowers consumer prices, pushing up productivity via trade competition. At the same time the UK would want to sign a Free Trade Agreement with the EU that keeps the current free access with zero tariffs between them; nevertheless it turns out that any tariffs or equivalent that are imposed will benefit the UK and be paid by EU traders, because UK prices of both imports and exports are set by world prices, so UK tariffs must be absorbed by EU exporters while EU tariffs must similarly be absorbed by EU importers. It follows that although the UK would be willing on the ‘good neighbour’ principle to sign an EU-UK FTA, it would strictly speaking be better off under WTO rules with no deal.
These descriptions of economic interests take no account of current political pressures. A natural question is: given its interests why on earth did the UK Government sign up to the WAPD? This effectively makes the status quo the most achievable agreement, given that the backstop endows the EU with effective veto power over anything it dislikes; under the backstop the UK effectively stays in the EU as now until the EU deems there to be an agreement.
The only way to account for this is in terms of the votes in Parliament. With a part of the Tory party led by Philip Hammond having a Remainer view of UK interests – that is wanting protection for reasons of preserving current jobs (notice not gaining the most jobs in the long term as would occur under free trade etc), following vested interests like the CBI – the Government of Mrs. May seems to have assumed that only the ‘soft Brexit’ WAPD could get through Parliament. Similarly, it assumed that Parliament would not support No Deal, because this too would sacrifice some current jobs to a free trade strategy under WTO rules; as a result the Government did not prepare for No Deal and so lost its only bargaining counter with the EU so that the WAPD failed to favour UK interests. As a result, the WAPD too cannot get through Parliament because the ERG Conservatives and DUP votes oppose it.
Now Mrs May is trying to get Labour votes to push through some even ‘softer’ WA, with a PD promising EU customs union in some shape or form. Hence the EU have not had any difficulty achieving a WAPD that favours its interests, because of parliamentary politics. Add to this that the EU was in any case determined – due to its own politics – to show that exiting countries get a bad deal, to discourage others. It is clear that the politics of the divorce situation was bound to produce a bad deal from the UK viewpoint. One does not need to go further and accuse Mrs May of being a closet Remainer, which she may well be, to account for what has been agreed.
The Economic Analysis puzzle
How those Remainer ideas took hold in the face of strong economic arguments to the opposite effect, as set out above, for the long-run gains of Brexit, is rather baffling. As I explained in a recent paper in World Economy, Remainers and their economist allies (e.g. Breinlich et al, 2016) used ‘gravity theory’ to argue that leaving the EU would be damaging to the UK and that gains from free trade with the rest of the world would be small. However, the ‘gravity models’ they used did not obey the canons of good general equilibrium modelling, in which all causal factors are simultaneously analysed for the effect of a major policy change like Brexit. All the gravity models were ‘partial equilibrium relationships’ in which trade, GDP, FDI and productivity were separately related without any overall inter-linking.
This approach was originally – in 2016 – also adopted by the Treasury; but at the end of 2017 the Treasury for this reason finally abandoned it, in favour of a full general equilibrium model, the GTAP model, bought in from the Purdue University Trade Modelling Project. This was used to reevaluate Brexit in the Cross-Whitehall Civil Service Report of that time. Given the strong Whitehall bias against Brexit the new model was given assumptions that produced similar negative results to the previous ones. These consisted of a) few and limited FTAs with the non-EU world; and b) large border barriers, even with an EU FTA, between the UK and the EU.
However, plausible alternative assumptions reverse the Brexit effect on GDP under a WTO No Deal for example from highly negative (-7%) to firmly positive (+3%).These assumptions are that the UK uses FTAs with the non-EU to eliminate all trade barriers on goods against them while also gaining wide market access; and that it signs an FTA with the EU that prevents any new barriers, or if it goes to WTO rules then only tariffs spring up at the border, other interferences being illegal under WTO obligations.
As this debate has unfolded between our critique and the Treasury, academic economists espousing the previous gravity methods have stayed strangely quiet while the Treasury dropped their methodology. Meanwhile we published another paper in which we tested a full ‘Computable General Equilibrium’ (CGE) model with gravity mechanisms against a plain Classical CGE trade model without them, to see how well each matched the UK trade facts. Using an elaborate and thorough Indirect Inference test we found that the gravity version was strongly rejected while the Classical one fitted the facts. Furthermore when we did the Brexit policies on the Gravity version the effects were much the same as with the Classical, our main tool; this was because Brexit gives gains with the rest of the world while not much disturbing our relations with the EU and so stirring up the negative gravity effects. Therefore it is clear that the anti-Brexit claims based on the gravity approach are invalid.
Unfortunately in the present fevered atmosphere, calm academic debate cannot take place; it is reminiscent of wars of religion where each entrenched side only wants to hear confirmation of its prejudices. One of the side benefits of Brexit occurring is that people may move on to normal technical discussions about optimal UK policies.
The way forward in Parliament
There are now three main parliamentary scenarios. In two of them, one or another WAPD – Mrs May’s or some even softer one agreed with Labour – gets through Parliament. The UK then leaves the EU in these two scenarios, initially for the transition period, as soon as either gets through.
In the third, there is no WAPD agreed and the possibility strengthens of a second referendum with Remain on the ballot paper, leading to either no Brexit or a renewed demand for Brexit. This third scenario is one in which Brexit uncertainty continues for a year or more, with unknown political consequences, given that the Leave voters in the first referendum would feel betrayed. This third scenario will only be welcomed by Remainers determined to reverse the democratic referendum decision. From a Brexit viewpoint, the only hopeful outcome would be a new Conservative leader and government determined to change the WAPD and get it through Parliament before exit. But how could this be achieved without an election to change Parliament’s composition? Also, what would be the odds on the Conservatives winning such an election, given the fury of the populace with the Conservatives for failing to deliver Brexit? Such hopes look forlorn.
Scenarios 1 and 2, if Brexit occurs: What of UK and EU interests post-Brexit?
In this section I ask what, given we have a WAPD as described, opposed widely by Brexiteers, is likely to occur if, as seems probable, Mrs. May steps down and is succeeded by a Brexiteer Conservative leader? Such a leader is likely to agree with my account above of UK interests. If so, what can such a leader do, if saddled with the WAPD?
Under the realist view espoused by economic analysis, this leader’s government moves to re-open bargaining with the EU. This would be done via normal diplomatic processes, in which the EU would face a possible general lack of UK political cooperation in a wide array of areas, including key ones like security and military matters; also the WTO option would be reactivated as a ‘walk away’ trade strategy, should the EU be unwilling to move away from its status quo aims.
The UK having left the EU after resolving basic administrative issues such as citizens’ rights, aviation/transport/visa agreements, there would probably be little appetite to revisit these issues; and the focus should be on the trade relationship quite narrowly. Nevertheless were it to be widened, the new government would make active preparations for a breakdown in these areas.
At the same time the UK would proceed to negotiate FTAs with non-EU countries, informing them of their aims on EU relations. These would be widely welcomed, as we already know.
How would the EU/UK bargaining go from here? We can think of the ‘game’ now as a series of proposals and counter-proposals. Start from the opening WAPD ‘proposal’ for the status quo. This violates UK interests radically, breaching its basic ‘red lines’. The UK counter-proposal is to walk away to WTO rules and No Deal. This UK counter-proposal damages EU interests radically, as we have seen: they face world prices in the UK market and tariffs in both directions are paid by EU traders. In order to counter this the EU now offers an FTA: Canada+ which consists not just of zero barriers on goods (Canada) but also the plus of mutual recognition in services where EU interests are served by free trade, given a wide reliance on UK service industries. The UK wants either Canada or Canada+ more or less indifferently as its service industries are all highly competitive around the world. As noted earlier, while No Deal gives strictly better gains, the UK is likely to agree to this proposal for the sake of neighbourly relations.
The bargaining round, which may well take a few years to play out, is therefore likely to be resolved by Canada+. We can essentially rule out any other resolution because all other alternatives leave one side unacceptably badly off – beyond its red lines – or can be improved on by one side without making the other worse off.
What I mean by ‘unacceptably’ is literally that it will not accept it in the long run, when by walking away or co-operating it can avoid it. The EU can avoid No Deal by co-operating. The UK can avoid the status quo by walking away.
All this is illustrated in the following diagram: the top line shows how the UK ranks all options, with No Deal the best; the second line shows the EU rankings, with the status quo the best. Each side’s red lines of unacceptability are marked out on each side. Any resolution must be inside these. Canada+ within these is better than Canada for the EU and an equals with it for the UK. So Canada+ gets chosen.
Notice that all this diplomacy is carried out between ‘consenting sovereigns’. Neither will bring in outsiders because no outside power has jurisdiction or indeed wants it. In so far as third parties have preferences, they tend to favour the UK as they typically want to agree FTAs with the UK. As for the WTO, it allows states to negotiate FTAs freely; and in general favours all agreements that in net terms reduce trade barriers, just as will occur under the EU-UK renegotiation.
The need for a new Conservative leader and government
In order for this new diplomacy based on the UK’s true economic interests, not sandbagged by Remainers within the tent like Hammond and Co., there plainly needs to be a new Conservative leader and government, fully seized of the Brexit case for free trade and so on. The current leadership/government has proved that it has neither the understanding nor the will to pursue the UK’s true interests. Without it changing no progress along the lines discussed here is possible.
It is now very likely that the Conservative Party will change its leadership, if only for reasons of pure survival. With the agreed extension, the Conservatives face carnage in the local elections and if the European elections take place, annihilation in those. This will inform the party of how unpopular its failure to deliver Brexit has made it. Its best hope then is for Mrs. May to go and for a new leader to chart a new direction, while making it clear that the new government rejects and regrets the old government’s failed Brexit agenda.
What are the implications of the realist view for parliamentary votes?
MPs now have some time for reflection during their Easter recess. They need to ponder the effects of their votes. Any MP that wants to avoid the chance of that third scenario of possibly No Brexit needs to consider voting for one or other WAPD. With either of them, Brexit occurs and the renegotiation can be launched under a new Prime Minister.
An ERG Brexiteer will prefer Mrs May’s original WAPD since it does not contain extra ‘soft’ commitments put in to satisfy Labour. These become yet another element to be renegotiated. In principle that too will be jettisoned; but it adds complication.
A DUP Brexiteer will remain nervous about the backstop in Mrs May’s WAPD; and could be less nervous with a softer one including a customs union because with that the backstop does not come into play. Nevertheless a DUP MP should reflect that none of these will survive renegotiation and should not therefore be unduly concerned. What it really needs from Mrs May and her potential successors is a guarantee that whatever is renegotiated it will never include differential treatment for Northern Ireland, or indeed any other devolved part of the Union. But they should feel confident on this: the Conservatives have been robustly and consistently a unionist party.
It should be noted by both these groups that in opposing any WAPD they are playing the role of ‘useful idiots’ to Remainers who want no Brexit, leading to a second referendum.
When one turns to Labour MPs and Mrs May, both involved in negotiations over a softer WAPD, they should reflect that their new WAPD causes both sides difficulties – Mrs May because it infuriates most Conservatives, Labour because it will infuriate the substantial Labour group that wants a second referendum rather than any sort of Brexit; but at the same time achieves no extra long-term ‘softness’ in the outcome, as the added-on soft elements will simply be the first to go in the inevitable renegotiation.
Reflection on all sides should therefore have the effect of terminating the May-Labour negotiation while logically inducing ERG and DUP Brexiteers to push the May WAPD over the line.
The realist view of post-Brexit affairs clearly implies that the UK, once it is out of the EU will behave like any other sovereign power and see that its foreign relationships evolve to suit its interests. So far, these have been stitched up in talks with the EU due to a Remainer group of Tories who have opposed the Government’s Brexit policies in favour of industrial vested interests, in alliance with Labour opponents, and undermined its bargaining position vis-à-vis the EU which was in any case politically determined not to agree a good trade deal. No sovereign state could put up with this sort of stitch-up in the long term. This piece has described how a new government, fully seized of the UK interest in free trade and domestically set regulation, besides control of borders and the ending of budget transfers to the EU, will have both the incentive and the scope to achieve a logical renegotiation that reaches an EU agreement tolerable to both sides.
Under this view the key aim for Brexiteers should be to get the WAPD in some form – it does not much matter what form – over the line, so that Brexit definitely happens as demanded in the referendum. Policy in the future will then evolve to meet UK interests.
The Prime Minister has ignored the views of the majority of her Cabinet and ruled out No Deal. The reason, we are told, is that No Deal might lead to the re-imposition of direct rule over Northern Ireland, and might lead to a second Scottish independence referendum.
That either of these considerations should outweigh the independence of the United Kingdom from an increasingly decrepit but increasingly autocratic empire is bizarre. If No Deal causes a second referendum in Scotland – we were told that the vote itself would cause that too, remember, but it did not – then we will win that too.
But more bizarre is that these worries have existed all along. If the Prime Minister thinks the risk of direct rule in Northern Ireland (which is happening in practice anyway) trumps all other considerations, and rules out No Deal, then why did she not say so more than two years ago or at any time since? Instead, she said 108 times that we would leave the EU on 29th March, whatever happens; 50 times that she would not extend that date; and 32 times that No Deal is better than a bad deal. Not once did she say it was impossible.
The supposed reasons for rejecting No Deal have been constantly changing. It was going to lead to queues at Dover; or Calais; or a shortage of Mars Bars or cut flowers or insulin or water… In each and every case, the scare was shot down. The truth is that these latest scare stories were dreamt up by civil servants at the last moment and leaked to a newspaper this week to bounce the Cabinet – on the same day that a letter from Sir Mark Sedwill was leaked complaining about criticism of civil servants.
It appears that all along the Prime Minister never contemplated allowing us to leave without an exit permit from the European Union. Yet she allowed £4 billion of taxpayers’ money to be spent on preparations and she encouraged businesses all across the country to prepare at vast expense.
She also allowed the tariff schedule to be published for the eventuality of leaving with no Withdrawal Agreement, revealing that 90% of tariffs would be cut – to the great benefit of consumers. That might be part of the reason that YouGov found this week that by 44% to 42% people prefer a no-deal Brexit to no Brexit. The British people have been magnificently determined to keep plugging on despite the endless bias of the BBC.
Mrs May should have ruled out No Deal at the start of the negotiations, if that is what she thought, or she should have meant “No Deal is better than a bad deal” when she said it. As it is, the combination of threatening No Deal until the moment when it might actually matter in the negotiations, then dropping the threat on the feeblest of latest excuses, is about as foolish as one can imagine. And now rushing off to hand the initiative to an apologist for totalitarians, anti-Semites and terrorists instead. Thanks.
The Prime Minister and her allies are now chanting that it is all the fault of the European Research Group for rejecting her deal and are saying they have no alternative than the dismal choices of supporting her deal or no Brexit, as if amnesiac about the third option: their recent promises to leave with No Deal if necessary. Yet the truth is that ever since the debacle at Chequers in July, when everybody from half the Cabinet to the Democratic Unionists to the media to the people themselves told her quite clearly that she would never get the Chequers plan through Parliament, she has been the one at fault.
Hard as it has been, I have loyally supported the Prime Minister throughout this process, never once voting against the party whip in the House of Lords, unlike many Remainer colleagues who have done so repeatedly. I have worn out shoe leather at both the last elections to get support for manifestos that promised a referendum and then promised that the result would be respected. The Prime Minister has repaid my loyalty with betrayal.
The post Theresa May has betrayed those who loyally believed she meant what she said about No Deal appeared first on BrexitCentral.
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