Withdrawal agreement – done; Brexit – happening; now for the EU – UK trade deal …

As Britain ticks closer to its formal departure from the European Union on 31 January, attention is focusing on negotiations for a trade and economic treaty.

Britain’s PM, Boris Johnson, has said a deal has to be done before transitional arrangements expire at the end of 2020. European leaders are equally insistent that the deadline is impractical – unless of course the UK falls into close alignment with the EU’s rules and policies.

But the indications are that Johnson is serious, both in relation to the deadline and also the need for the UK to follow a divergent policy path.

This would be consistent with his government’s election manifesto commitments and also with maintaining his own hard-won credibility.  But the signs – for example the recent rejection of European copyright law proposals – are that the government also believes that policy divergence is not simply desirable but is necessary to enhance the UK’s economic growth and encourage the investment needed to achieve that.

A clear and early signal of this intent would be if, as is rumoured, it brings forward its plans to replace current immigration rules, which give privileged and near-unrestricted access to European citizens, with a non-discriminatory skills-based system.

Either way, the stage is set for a ding-dong row between the UK and the EU, not dissimilar to last year’s battle over the Brexit withdrawal agreement.

For a practical example of how the British government might be assessing its negotiating position, take the case of the auto industry.

Britain’s car makers are urging the government to keep the UK as part of a single European auto market, at just about any price (as long as that falls on the British car buyer and taxpayer).

This would maintain frictionless and tariff-free access to European markets.  But Britain is a net importer of volume car production from Europe.  So Europe’s trade barriers to the rest of the world (in the form of the common EU tariff) would ensure that British buyers continue to pay higher-than-necessary prices to subsidise European jobs. In the meantime, the British government would be expected to continue doling out ‘investment’ subsidies to protect marginal UK employment.

Ignoring the car makers and opening the UK automotive market to more competition would not only reduce concessions and payouts, it would be expected to give a net economic boost to the UK over time.  But first there would be painful restructuring, which would impact on constituencies captured by the Conservative party in last December’s general election.

These kind of circumstances – repeated in other industries – do not make for easy political decisions.  But the combination of a large and recent parliamentary majority, a desire to break with Europe, and the EU’s perceived intransigence make deadline-driven reform more plausible than it has been for a long time.

In the absence of a smooth path through the negotiations, expect a year of acrimony, breakdown and accusations of bad faith.  At this stage, neither party looks able to back down from its position.  If so, that would mean exiting the transition without a comprehensive trade agreement.

The most likely outcome in that case would be a clutch of last-minute ‘temporary’ compromises covering the most sensitive sectors, where no agreement is too costly for both parties.  In time, as tempers cool and face is preserved, these mini agreements might be nudged along, eventually coalescing into something which could be described as comprehensive. Stranger things have happened.

 

 

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