Demystifying hard Brexit – a summary of the issues facing the UK and EU

LONDON CORRESPONDENT:  One of the irritations of the Brexit debate is the triumph of media virtue-signalling over analysis.  So its well worth reading a piece on Bloomberg which superbly summarises the issues of Britain and the EU trading under WTO rules (ie, after a ‘no deal‘ Brexit) and then thinking about how this might influence the outcome of the current negotiations.

  1. Tariffs

First, the article acknowledges that tariffs are generally low (typically 2 -3 %) and therefore are not really an issue, except in some “critical” sectors of the economy, such as “cars, dairy and chemicals“.  “Critical” is useful journalistic shorthand, in this case probably meaning a politically and media-sensitive but numerically modest part of economic output.

  1. Non-tariffs

Secondly, it posits that the biggest challenge will come from non-tariff barriers.  It rejects the argument  that non-tariff barriers such as arbitrary health and safety inspections and borders are prohibited under the WTO’s Sanitary and Phytosanitary (SPS) and Technical Barriers to Trade (TBT) agreements on the grounds that WTO members can’t be forced to recognise each other’s standards and the evidence of non-porous barriers around the world is that they often don’t.

Impeccably realistic.  But at Brexit, the UK and EU will – uniquely – share identical standards.  Either party imposing non-tariff barriers could find it tricky to use the usual trade equivocations.  As President Donald Trump has shown, this doesn’t preclude a statement of raw power – one can imagine EU bureaucrats saying “we are protecting European values” at a safe distance from the laid-off workers.  But it would make for a very different political environment and ongoing negotiation. It might also have consequences in WTO trade dispute resolution proceedings.

  1. Border bureaucracy

Thirdly, even if individual EU governments want to recognise British goods as compliant, the EU Customs Code imposes more onerous paperwork, procedures and checks on third-country goods. UK exporters would have to complete a 54 part Single Administrative Document with each declaration and might be excluded from the EU’s trade transit IT system. These friction costs are real.  A Financial Times colour piece dwelt on the extensive paperwork (including EU movement permits) and long delays (up to 30 hours) for the 60,000-odd trucks crossing the EU border from Turkey into Bulgaria each year.

The Bloomberg article concludes that given the EU – UK supply chains which have built up in the absence of such requirements, the disruption would be massive and sudden. Perhaps so – understanding the extent of these chains and their ability to adapt is surely keeping policy makers awake at night.

But it’s also necessary to examine the context. All goods in transit inside the EU have paperwork (down to the invoice on your Amazon shipment) –  internal value-added taxes and duties alone require this. All the information required for third-country goods crossing borders exists – much of it in an EU-specified format in company IT systems.  Looking at the Turkey example, the problem for most businesses seems less existential and more like one of adjustment at the margin.

Notwithstanding the posturing, both EU and UK would have strong incentives to ease that adjustment quickly, particularly for those most affected. Indeed, the principles underpinning the EU’s transit system include the simplification of entry and transit procedures and the encouraging third countries to join and accept EU standards (including some like Ukraine and Moldova not recognised for the quality of their administration). The EU (and the UK) would have to choose whether to apply these principles at the border or something more restrictive.

  1. Bilateral agreements

Trade under WTO rules isn’t just under WTO rules: the EU’s trade with China and the US is also governed by a myriad of supplementary agreements, for example open skies and data protection. The article assumes that the EU and UK would eventually negotiate such agreements, and the costs would be those associated with the delay.  This is as useful an assumption as any (some would say too optimistic).  However, the question to ponder is what pressures would bear on the negotiators, given the no-doubt frantic desire of affected businesses and voters to return to the status quo ante.  The EU appears more indifferent to the cries of its base than the UK government, but it is not fanciful to think this might equalize under pressure.

  1. Duplication delays

The fifth argument is that the UK’s trade (current and potential) with non-EU countries may suffer because it will take time to roll over existing EU trade agreements and WTO schedules into UK-specific documents, for substantive reasons (eg, replacing references to EU treaties, regulations and approval processes) and required negotiations, some contentious (eg, division of New Zealand’s export quotas).

Assessments of the impact are speculative.  The firm point to grasp is that trade will suffer (or prosper) to the extent that negotiators permit it to do so.  Officials, and even more decision-makers, in third countries like New Zealand should have a clear ambition for their long-term trade relationship, and avoid the risk of bogging down on issues like the precise division of export quotas, if they want to make the most of what might be abrupt and hurried negotiations.

  1.  Services are key – and mostly outside the WTO

The Bloomberg article makes two strong points: first, that the UK can’t use the WTO to “get the EU to open its markets to UK services (the lion’s share of the UK economy)” and secondly, if it did negotiate such an agreement, the EU might have to grant similar terms to countries with which the EU has free trade agreements, such as Canada and South Korea.

However, these may not be the decisive issues.  The global services trade is the main driver of the UK’s future prosperity. It will be profoundly affected by global services regulation – which is more irregular and idiosyncratic than global goods regulation – and is often rooted in the domestic sectoral, licensing and immigration regimes.

It might, therefore, be instructive to consider two further questions.

The first is static: how far will the EU restrict the UK’s current services trade?  While this is to be negotiated, the EU has been trying strengthen European champions in areas like tech and finance, even while recognising that global providers need to operate in global markets.

The second is dynamic: will UK policymakers use post-Brexit freedom to create an even more attractive environment for international services businesses.  In the long run, the second question is going to be more important than the first.

  1. Lots of other stuff 

Many areas (the EU has a long list of Brexit preparedness notices) are governed by rules predicated on a vanishing relationship and there will be costs if these are not modified.  Bloomberg gives the examples of pilots and planes flying from the UK (or presumably not?) because they could not rely on existing certificates issued by the European Aviation Safety Agency or drivers of trucks into Europe having invalid EU certificates of professional competence.  File most of these arguments under MAD (Mutually Assured Destruction) threats.

While there are serious issues about how the UK replaces regulatory capability in some areas (and equally serious issues about current European regulatory capability when you think about it), grown ups know that you need to replace expiring legislation in time to avoid public inconvenience.  Playing chicken is common in negotiations but explaining the consequences is less effective in winning elections.

  1. And so

The more a “no-deal” Brexit is critically examined by outlets like Bloomberg, the less of a hobgoblin it seems.  In the UK, in both the remain and leave factions (and both of those labels needing replacement), there seems increasing understanding that a “no deal” Brexit is getting likely and may even be necessary.  The next conclusion to be drawn is that the only realistic basis for negotiations, both before and after the actual Brexit, is one of reciprocity.

The painful realignment of British elite opinion does not seem to be matched by similar movement in Brussels.  Perhaps the EU’s negotiators will come under more pressure as March 2019 Brexit day approaches.

And finally, while of little consolation to politicians, British prosperity will be primarily determined by British markets and British policy setting in the long run, rather than the minutiae of a European deal.

 

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