A moment of truth for the EU in the post-Brexit trade talks

Covid, summer holidays and the usual foreign policy rows have overshadowed the EU/UK post-Brexit trade talks.  A pity because this looks like a – perhaps the – key moment, as the ever astute Wolfgang Munchau points out in the Financial Times.

The issue is the EU’s insistence that the UK conform with the EU’s state aid and competition policy – in broad terms, the regime whereby the authorities arbitrate and ensure consistency between the member states’ freedom of action in industry regulation, promotion and subsidy.

Naturally, this subject area is an important aspect of trade agreements.  But it can be dealt with in many ways without one side surrendering policy autonomy, for example by using WTO rules.

And for the UK, breaking free from an externally-set policy – and one moreover which it judges insufficiently competition-oriented (and increasingly politically-oriented) – is essential.

An important reason for this, according to Munchau, is to let the UK pursue a more open path:

The critical issue is the changing nature of global trade … geography is irrelevant when you trade data. In the long run, technologies such as 3D printing will make existing industrial supply chains obsolete and reduce the volume of physical shipments. If the UK wants to make at least a limited success of Brexit, it should exploit the many high-tech opportunities the EU has missed and still misses. A well-managed Brexit means accepting short-term costs for long-term gain.”

If the British position is credible, the EU leadership has less than two months to choose between two options, neither very close to its current position.  Either a close relationship based on a bespoke-but-not-atypical free trade agreement or something more like bare WTO terms.  Given the pressures on British PM Boris Johnson, you would think that the EU could negotiate attractive terms on the former.  But the latter is certainly better for signalling punishment and disapproval.  

And the EU leadership may still not think the British position is credible.  For an illustration of this school of thought, read Britain’s Meandering Track to Trade After Brexit” at Bloomberg.

The editorial takes Boris and his government to task for not yet achieving ambitious trade agreements with Japan and the US, let alone rolling over the existing relationships.  It argues that this puts Britain in an even weaker position in its negotiations with the EU because:

“minimizing the short-term shock of Brexit — by coming to terms with the EU and rolling over its existing arrangements with non-EU countries — was the crucial goal for this year. Before it’s too late, Johnson needs to recognize this, and focus squarely on maximum continuity.”

Blaming trade negotiations for not going to timetable seems a bit harsh in light of history.  Nonetheless, it is a plausible and in some ways comforting argument. Unless of course you agree with Munchau that the British objective is a break with continuity – ideally with lower, rather than higher, short-term adjustment costs.  In which case, Europe’s leaders will shortly have to decide where on the adjustment scale they want their countries (and the UK) to be.

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