Don’t expect a sudden breakthrough on Brexit

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So after the “big bang” of Boris Johnson’s move to grant himself powers to override the withdrawal agreement on Northern Ireland if it suits him, a grudging truce has settled back over the Brexit talks.

David Frost, Mr Johnson’s EU adviser, and Michel Barnier will meet in London this week ahead of a formal round on September 28, but it seems no one is holding out expectations of a sudden breakthrough. For all the hullabaloo, we are where we were before the UK’s internal market bill was tabled, except now with even less trust on both sides.

Last week the Briefing outlined the broad parameters of a potential deal that would unlock the door to a “zero tariff, zero quota” free trade agreement that is the key to massaging away UK concerns over the Irish protocol.

From an EU perspective, the door is still open to that trade deal: the only question in Brussels’ mind is whether Mr Johnson will walk through that door to avoid a heap of unnecessary additional trade disruption in January, overruling the most sovereignty-focused members of his own party in the process. 

But for Mr Johnson to grasp that prize, the EU still seeks the triple lock of a detailed “shared philosophy” on subsidies: a solid domestic regulator with enforcement powers and robust dispute resolution mechanism to resolve differences — something viewed as even more essential now that Mr Johnson has shown himself capable of treaty-breaking.

The EU may have softened its original red lines on state aid, no longer requesting dynamic alignment and the oversight of the European Court of Justice. But it remains clear that the price of a “zero tariff, zero quota” FTA is still the UK offering level playing field guarantees that the EU views as commensurate with the “geographic proximity and economic interdependence” of the UK with the EU.

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This was the EU position in 2017 and remains so now, however you might now look to sugar the pill — and the basic problem might still be that Mr Johnson is simply not willing to swallow that pill. 

Those who believe that Mr Johnson will fold at the death, and that talk of borders in Kent and the muscle-flexing on the internal market bill are just cover for the inevitable U-turn, may be misreading his determination to forge a truly independent relationship from Brussels. 

The UK has systematically stripped back its requests for market access to the EU since January to the point that the deal on offer is, arguably, already not worth any encumbrance with the EU’s regulatory regime.

When it comes to state aid and subsidies, the UK is clear that it rejects a “shared philosophy” but seeks an entirely independent regime based on WTO principles of subsidy, with a UK regulator to manage its internal market issues and any disputes with the EU resolved after the fact through the imposition of tariffs.

This week a group of eminent state aid lawyers, drawn from across the Brexit spectrum, offered to help Mr Johnson craft such a UK regime, in the hope of at least opening a discussion on the topic, but they did not minimise the gap between the two visions.

James Webber, a partner at Shearman & Sterling, is clear that an independent UK system based solely around measurable distortions to trade would be a huge stretch for the EU. As he put it: “What we ultimately need is a system to stop a ‘race to the bottom’ on subsidies.” That is a world away from a “shared philosophy” on subsidies.

So if the negotiation fails, it will be because this is not about finding some semantic fix — as is often the way in intra-EU negotiations with which we are long familiar — but a search for a substantive, enduring new equilibrium between the EU and a third country, when neither side can accept the other’s vision for that relationship. 

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There is talk in Europe of giving Mr Johnson a “ladder to climb down”, but the decision may already have been taken in Downing Street that slipping back into the warm embrace of the EU’s regulatory orbit for the sake of convenience is not worth it — either politically or, so skinny is the FTA deal on offer, economically. 

The political declaration says level playing field commitments should be “commensurate with the scope and depth of the future relationship”, and the UK argument is that the “scope and depth” of its requests cannot justify the scale of commitments the EU is asking for.

The EU disagrees, and going back on its level playing field philosophy would be as big a volte-face for Brussels as accepting a shared philosophy on subsidies would be for Mr Johnson and many Brexiters in his party. 

In which case, if Mr Johnson really does want a Canada-style deal — which includes tariffs, quotas and very little on services — then no deal is one way to get it. And the internal market bill will have been a brutal, unilateral “fix” to the problem of Northern Ireland. 

If that is what happens at the end of this year, this government’s real strategy — so often the subject of involved speculation and rune-reading — will have been hiding in plain sight.

Brexit by numbers

Covid-19 has led to a steep economic downturn, but Brexit risks causing  longer term damage

One argument against the above analysis — and one you hear a lot on the EU side — is that the costs of a no deal are so prohibitive for Mr Johnson that he won’t dare to do it. 

There have been an increasing number of reports looking at the costs of a no deal, including this one from the UK in a Changing Europe, which is very balanced and not as dire as some narrower sectoral analyses, like this from Arla, the dairy co-operative with the LSE.

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So yes, the hit to gross domestic product from a no-deal Brexit is three times that of Covid-19 “in the long run”, but in the short term (politicians think in five-year cycles) the coronavirus crisis has demonstrated the UK’s capacity to absorb disruption.

Talk to industry — chemicals, pharmaceuticals, food and drink, logistics — and it is striking how difficult it is to make hard, short-term predictions of the knock-on consequences of a no deal. That’s why modellers always make these long-term predictions. 

Which is why the government can always argue to itself that business is innovative to sort out any immediate problems soon enough. The long-term hit to the UK’s overall attractiveness and competitiveness, when swaddled in Brexit red tape, is tomorrow’s problem and can be wished away with dreams of Global Britain.

Food prices could rise 4 per cent overall, and hit some products such as dairy harder than others. But as Michael Gove made clear this week, border and business preparations are so far behind (see this dashboard from the British Chambers of Commerce) that disruption is now inevitable, deal or no deal. 

As Shane Brennan, chief executive of the Cold Chain Federation, put it to me this week. “We’re now in the operational phase of managing the crisis, no longer in the phase of trying to avoid it.”

None of which is to underplay the effects of no deal — indeed most immediately troubling will be the impact politically in Northern Ireland and in wider neighbourhood relations with the EU — but merely to ponder how this particular government could convince itself the short-term pain was worth the price of future “freedom”.



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