Brexit and Covid-19 – the connection is tenuous, really

Perhaps the only benefit of Covid-19 is that it seems to have scrubbed Brexit almost entirely from the media lexicon.  A generation of pundits must retool or face redundancy.

However, the issue of what new trading (and political) relationship can be negotiated between the UK and EU before the end of the year has not gone away. 

Some have been saying that a process delay is necessary.  But such arguments tend to issue from inveterate remainers and lose credibility as a result.

Now we have commentator James Forsyth saying in The Spectator that he believes the British government has decided not to request an extension to the current Brexit transition period.

The thinking, as he sees it:

“ … is that a delay would not solve the fundamental policy problems and that a deal is either possible or not. Another factor … is that the government worries about the cost of any extension.” 

At this stage it’s not at all clear how the epidemic and the response will influence the post-Brexit process and outcome.

But some things have not changed.  As Forsyth hints, the economic and political battlelines are still drawn as they were before Covid.

So in the current negotiations for an ongoing trade arrangement, Europe is still offering a variant of the status quo: some privileged access (compared to WTO terms) to a large market but at a high price: smothering regulation, border protection, political compliance and cash subvention.   This aims to tie the UK into the European model, stultifying the political implications of Brexit.

The UK counter is to make the case for reciprocal access, particularly for the sectors where markets are now highly integrated, in areas like food and consumer products.  The goal is to win back the UK’s freedom to reshape its regulations and open (some) markets to non-EU competition, while minimising disruption to the existing EU market arrangements.

In the absence of agreement, the default is assumed to be a reversion to WTO trade terms, with trade subject to each party’s standard external procedures and tariff schedule.

The ongoing tension for the UK negotiators is that while there are long-run economic benefits to exposing UK industries sheltering behind the EU’s protective barriers to more competitive pressures,  there are political costs in the adjustment process.

Take the car industry.  UK buyers pay high prices to subsidise a relatively small and dwindling volume car assembly industry.  Lower tariffs and a break with Europe would most likely accelerate decline. But consumers would benefit and subsidy could be directed to more worthwhile causes, including the less marginal bits of the sector.

But what has changed since Covid – and changed a great deal – is the environment in which a trade deal will be struck.

The new reality looks like an economy in which workers in the private sector have to adapt to disruption and new patterns of demand; in which public sector workers are surprised to find that their terms and conditions are not as insulated from these effects as they might have hoped; and in which the political demands for special treatment are multiplying.

Paradoxically, this could drive the UK government’s approach to negotiations in two different directions.

First, it could drive them further from the European model.  The UK will benefit (eventually) from forcing adjustment on formerly protected industries. The exchequer is certainly less well placed to prop them up. The weaknesses of the Eurozone economy are becoming more apparent. And pleas for special treatment will be less audible and less credible in the general cacophony.

But at the same time, British politicians will be feeling strong pressures to trim.  In the midst of a wider economic adjustment, it is hard to be seen pushing more tottering businesses and their workers towards the edge.

Our guess is that the former effect is more likely to predominate because the UK has built up substantial political momentum towards a break with Europe, and the temporary safety blanket offered by Europe is looking less attractive in both the shorter and longer runs.

So our money remains on the British government forcing negotiations to a conclusion and on a failure to reach a ‘comprehensive’ agreement (because it would require one side to lose too much face).

The most likely outcome then would be a hodge podge of WTO terms combined with a package of ‘temporary’ and ‘interim’ measures in sensitive areas like food, cars, banking and Ireland.  As the current inter-Irish border was itself established as a provisional measure in 1921, such devices have a long pedigree.

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