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EU or UK: who will blink first?

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Brexit is going to change many aspects of life in ways that I suspect the British public have not fully clocked, but it seems it will not significantly intrude into the sacred continental August summer holiday season.

Michel Barnier was in London this week for a wash-up of last week’s talks and to lay the ground for the next round on August 17, but no one close to the talks is expecting dramatic moves until September — if indeed they come at all.

There remains a widespread presumption that there will be an EU-UK trade deal, both in the financial markets and wider commentariat. 

Mr Barnier framed last week’s talks in this manner when apprising EU ambassadors, noting the overarching constraints on Boris Johnson’s government: the need to appear competent after Covid-19 and not to fuel the Scottish nationalism that once again threatens the union. A no-deal would be a mess on both these fronts.

So the general working assumption is that after a bit of huffing and puffing this autumn a deal will get done. As Mr Barnier said, fisheries and state aid remain the two big outstanding issues, and these will become the fulcrum around which the deal, if it comes, will turn.

That is a seductive and comforting thesis, and one I broadly share given the huge downside costs for both sides (and the hit to the credibility of the European neighbourhood as a whole) of failing to reach a basic agreement ahead of next January.

But just as I’m about to head off on holiday in a relaxed frame of mind, I’m struck by a sudden spasm of doubt about whether this analysis is complacent and built on the assumption that both sides will not ultimately “die on the hill” of their respective hobby-horses. 

Well, they just might.

Let’s put fisheries to one side for the moment, on the basis that this will have to be fixed by a horse-trade at the death: the EU knows it will have to concede some quota (how much tbc) and this will be a big saleable “win” for Mr Johnson. 

But the concession will have to be phased in a way that doesn’t see French fishermen blockading Calais, which they can very easily do. Ultimately a deal is implicit in the fact that 75 per cent of UK-caught fish is exported to the EU: we don’t have the capacity to process it, nor the appetite to consume it.

The really knotty issue remains the dreaded level playing field and particularly state aid which — as this briefing has noted before — is the true proxy for the meaning of Brexit itself. This is the ground zero of the negotiations.

And it starts in London, where it is clear that that debate is not yet settled. Hard Brexiters, led by Dominic Cummings, are still lobbying for a light-touch UK regulatory regime after January 1 with a “watchdog-type” regulator rather than something toothsome, like the Competition & Markets Authority (CMA). 

It remains unclear whether Mr Cummings will win this argument, but as we have seen, until it is settled the UK’s chief negotiator David Frost is unable to advance a position around the EU-UK negotiating table. Even at this late hour, it seems, Brexit still resists concrete definition.

But the outcome to the London discussion is fundamental, because without a plausible regulator it is difficult to see how Mr Barnier can tell the EU27 that he has obtained those “robust guarantees” against unfair competition that are the EU’s price of “zero tariff, zero quota” access to the single market.

British ministers point to the fact that Canada doesn’t have a domestic regulator but has signed a trade deal with the EU, but Brussels has been warning since 2017 that the “size and proximity” of the UK invalidates this comparison.

In recent weeks the UK has pared back its demands for extra “goodies” as part of the basic Free Trade Agreement, largely giving up on more ambitious plans for “diagonal cumulation” of rules of origin or sweeping mutual recognition agreements on professional qualifications.

The slightly depressing question now seems to be whether the UK can broker a sufficiently rubbish FTA to enable the EU to accept a level-playing field monitoring system built around sanctions, not mutual agreement or a “shared philosophy”.

Frame the deal equation this way, and you start to see how an agreement will require one side or the other to compromise on really fundamental, neuralgic points of principle.

Either Mr Cummings will have to give up the full sovereignty “do whatever you want” version of life after Brexit; or the EU will indeed have to accept that such a bargain-basement FTA cannot merit such an unprecedented level of co-operation on state aid, as the UK argues.

The argument that a deal can and will be done remains persuasive, but to delve deeply into the gap that remains feels like peering into the abyss.

To get a deal, pragmatism will need to triumph over dogmatically held positions — on both sides. And yet the truth is that Brexit has never been a practical enterprise. If the chasm cannot be bridged, we’ll say that we should have seen it coming all along.

Brexit in numbers

The government this week announced details of how businesses can apply for £50m worth of grants to help try to incentivise growth in the customs brokerage industry — but has been criticised by trade groups for failing to grasp the economic realities of the freight-forwarding marketplace.

As this Institute for Government’s Brexit readiness report shows, the Dover-Calais “short strait” is the “windpipe” of EU-UK trade that now risks being constricted by the new customs and regulatory requirements that will come into force from January 1.

The problem for ministers trying to hasten the industry to prepare for coming changes is that the government’s incentives and those of businesses are nothing like as aligned as you might think.

The government wants industry to pile in with new hirings, but many companies will not take investment risks until they see the shape of EU-UK trade, and whether it will survive in its current form after the end of the transition period. 

Much of the new work will be focused on specialist areas around animal and plant products that require expertise and carry higher risk. To expand, businesses need cash flow and confidence, both of which are currently in short supply. Indeed, the British International Freight Association says many brokerages have hiring freezes in place because of Covid-19. 

So you might think, sitting in Whitehall, that the coming EU-UK border would precipitate a stampede to take up the new customs jobs. But it turns out it isn’t that simple. The market will no doubt adapt to meet demand over time, but it looks very unlikely to have done so ahead of time.

Readers respond

Each week we’ll single out elements of two or three of your emails to give a flavour of the discussions. If you don’t want to be mentioned by name, then please make that clear in your email.

On EU unity: Isn’t it remarkable that the EU27 seem to have developed an institutional framework, between 27 sovereign states, to agree a clear and coherent negotiating position, even for fraught negotiations such as those with the UK, whereas the UK, with a unitary government, a large parliamentary majority and a centralisation of power in 10 Downing Street, has great difficulty in doing so? Piet Eeckhout, dean, Faculty of Laws, University College London

Peter says: True. British incoherence on Brexit has been fuelled by the fact that our politicians have spent more time ducking choices than making them on the basis of facts. All those breezy, best-of-both worlds promises from leading Brexiters have pretty much come to nought. That said, the EU27 unity you identify leads to what I call “highest common denominator” negotiating in order to preserve EU unity. This has often led to very maximalist positions that arguably haven’t helped the negotiation at times and may yet contribute to a no-deal. 

On rejoining: Many that voted leave did not envisage a scenario with its now clearer outcome of a significant competitive disadvantage . . . the number of imminent redundancies once the furlough scheme ends next month should be a clear enough signal that we are much less robust than we thought. Going from this into no deal in a more insular world would be catastrophic, if indeed we have shaken Covid by then, which is doubtful. It’s too much. When the goalposts move this much, shouldn’t the question be asked again? Kevin Pollard, London.

Peter says: In a word, “no” — is my personal view. Unless the government makes an unnecessarily spectacular hash of leaving, the effects (negative, but with the frictional costs accruing over time) will not precipitate a sudden change of heart in the British public. My guess is the Swiss experience is a more likely guide to the future. Switzerland rejected EEA membership in 1992 by just 50.3 per cent, but after nearly 20 years of grating up against Brussels, voted against EU accession by 76.8 per cent. My guess is that the frictional relationship to come will harden British attitudes towards the EU, not soften them.

On Brexit trade costs: Might more be said of the likely cost of Brexit, with or without an agreement, to a representative range of businesses in the UK and EU counterparts? Some pro-Brexit business supporters claim the additional costs would be minimal, but I suspect that such a finding cannot be extended to most businesses doing significant business with the EU. What reliable, independent studies have been made and published on this issue? Michael Clarke, Herzele, Flemish Ardennes

Peter says: I’d refer you to the government’s own research on this which points to 215m new customs declarations at between £15 and £56 each, taking into account wages of freight forwarders etc. It will be interesting to see how much these charges rise if, as expected, demand for intermediaries outstrips supply. More generally, businesses are waking up to a huge range of duplicate costs, from the new UKCA mark (CE mark equivalent) to registering chemicals at the UK version of REACH, a move the Chemicals Industry Association estimates could cost £1bn for no extra benefit to business.

This article was first published at https://www.ft.com/content/1eb017cd-2a80-4749-8f6b-202f4f532219

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