Being a trade journalist working on Brexit has so far has meant having a frustrating time . Since 23 June 2016, there hasn’t actually been anything substantial to properly report on. That could soon change.
Since the UK’s referendum last June, in which a majority favoured leaving the EU, there’s been a sense that the Britain and the EU are in a ‘phony war’, a term often heard in cocktail receptions and seminars, in particular in London. Brexit is strongly covered in the media. But there is more noise than actual substance, in particular as to the future trade policy of Britain and its future trade relationships with the EU.
The last fortnight has been punctuated with statements from both the British government and the EU on their respective aims and positions on the United Kingdom’s planned exit from the EU. This indicates the heavy machinery of Brexit is likely to soon start moving.
An opening in Westminster
Since Theresa May took the helm at Westminster in July, Britain has given an image of “having no clue” – as outgoing New Zealand prime minister put it – about what they want to achieve, nor what London is up against. But the government and business, academia, and society groups have started thinking seriously about the matter and have started investing time and resources in devising what Brexit means for them, and what they want out of the process. The government is slowly building up ‘capacity’ in terms of recruitment and training of experts and is having at times vehement internal debates and disagreements over the direction of travel.
The fact that the UK parliament will have a greater say over what the government does could be a further complicating factor for any future negotiations and in defining a clear UK position in talks with Brussels. Regardless of the outcome of an expected Supreme Court ruling in January on whether the parliament will need to vote on triggering Article 50 of the Lisbon Treaty to activate the exit process, there are signs it will have more say regardless. A successful Labour party-led resolution passed this week by a large majority, including with a large chunk of Tory represenatives, means that the government will have to say more about its intentions to MPs. In return the latter agree to stick to the timeline given by the Prime Minister to trigger exit negotiations by March 2017.
Now that we know the parliament will have more to say, and that the UK will do all it can to stick to its stated timeliness does not mean we know yet the actual direction of travel.
The government’s fundamental problem is its internal debates and divisions about where it wants to take its relationship with the EU over the long term. On this hinges all the rest: its future domestic laws, its future trading arrangements with the WTO, and its future trade free trade agreements – if any – with third countries. Until then, not much can be said about UK trade policy.
A fundamental choice the UK still needs to make is whether it wants to stay in the EU’s single market and whether it wants to remain in the customs union with the EU. The decision has not yet been taken.
Quest for trading continuity
Signs are that Liam Fox’s department for international trade is slowly getting its way: Britain will not likely want to stay in the customs union with the EU, so as to be able to strike trade agreements with third countries. This means the UK needs to establish its own tariff and services trade regime over time. London is already actively working on this issue with the WTO and the EU in Geneva.
It has become evident that the work of simply defining what is the UK’s status quo is difficult: the EU’s services schedule under the GATS and its tariff rate quotas in agriculture are messy and outdated. This means the work involves both clarification within the EU and with the UK. This is regardless of whether and when Britain will notify to the other WTO members that it wishes to ‘rectify’ its trading arrangements with them, a required procedure that could be simple but turn out to be very complicated in practice.
What is clear now is that in this regard London is trying not to rock the boat too much. Last week Liam Fox has indicated he wants the least possible disruption in trading arrangements in the WTO and would, to start with, see the UK replicate the EU’s schedule. His boss, Prime Minister May, has also indicated that London is interested in keeping up existing free trade agreements the EU has already in place with non EU countries.
What we don’t know is how far the UK wants to remain in the single market. Indeed this involves doing what Brexit proponents do not want – accept free movement of people, the jurisdiction of the ECJ, and paying into the EU budget. Politically this is a difficult choice to make, and it is becoming clearer to London that the EU will not compromise (at least not much).
The consensus economist view is exiting the single market would be very damaging and disruptive for the UK – at least for many years, until it has found its new grounding outside the EU. In the face of government paralysis, extremist views have been aired in the Tory party (and in UKIP), calling for a sudden and hard departure from the EU and a ‘clean Brexit’. With Parliament now on board, the latter option is less likely to materialise.
The man in charge of Brexit negotiations, the arch eurosceptic David Davis, has indicated he does not seem to prioritise remaining in the single market. Last week, he has indicated that he would consider making payments to retain selective access to the EU single market.
This is perhaps less a concession to the single market than a sign that the UK wants to buy off some member states. There are indications that the UK government is trying to gauge whether it could provide more funds to EU regional development funds to go to Central and Eastern Europe, in return for these countries accepting restrictions on the rights of their – many – migrants in the UK .
Davis is not receptive to the idea of pleasing London’s banking sector to retain ‘passporting’ rights in the EU, a fundamental issue for the future of London as a financial sector. Davis is also not very keen on a transition period by which the UK would remain in the single market for several more years before a new arrangement with the EU is in place.
But Davis is not alone. Philip Hammond at the Treasury and surely the parliament will seek closer ties to the single market.
EU hardball – but little on trade
In the EU itself, we have mostly heard about muscle-flexing from Paris and the scrambling of various governments or city authorities – Frankfurt, Paris, even Milan – to attract more financial business (Dublin is overwhelmed with demands to set up offices), which is one of the top UK sectors and one of the likely biggest losers of Brexit.
Over the last six months, we have seen a process by which the other 27 member states have seen their view harden on negotiations with Britain, and – a rare occurrence – converge. Berlin in particular has hardened up. EU members aim to maintain the integrity of the four freedoms that underpin the single market, and of the legal order of the EU, which is under the guardianship of the ECJ. This week, the EU’s chief Brexit negotiator in a first press appearance, brought home the point.
The government and organisations – such as the Financial Services Negotiation Forum – are trying to work on how to increase the UK’s leverage in negotiations with the EU bloc that most observers believe will be highly asymmetrical, to the detriment of Britain. One such argument is that if the EU rejects financial services business from London for the sake of preserving the integrity of the single market – notably clearing activities for the Euro – this could bring further financial instability to the Eurozone.
Barnier has said the EU and the UK would need to have a basic exit agreement in place by the autumn of 2018, so as to allow for a timely ratification in the first half of 2019. That deal would not be about trading arrangements, however. Barnier has indicated he was open to the idea of a transitional agreement with the UK, but that the UK needed first to make up its mind on what it actually wants to transition to. The Frenchman spoke in terms of models such as the trading arrangement the EU has with Norway (EEA) or with Switzerland (a dense web of trade agreements).
Guy Verhofstadt, the rapporteur on Brexit in the European Parliament, which will have a lot of say on the trading arrangements of the EU with Britain, is preparing to submit a report to the plenary that suggests that the UK could become an ‘associate’ member of the EU, and that there could be a transitional arrangement. The draft Verhofstadt report does not say anything about trading arrangements, however.
Theresa May has said she would seek a “bespoke” outcome with the EU and not want to think in terms of pre-existing ‘models’. At the same time the need to be fast and to maintain legal certainty for businesses would involve going for a specific model.
There are signs that the reality of Britain’s relatively weak bargaining position vis-à-vis the EU and of what Brexit entails for the UK, is slowly sinking in with many politicians currently in power in London. That was not evident until recently.
The task is momentous and will remain with us for many years.
