Thursday 9 January 2020

Trade: who do we think we are?

The visit of Ursula von der Leyen and Michel Barnier to London yesterday was another opportunity for the EU to remind us that we are not as special as we think we are. Before meeting Brexit Johnson in Downing Street, von der Leyen gave a speech at her old university, the LSE - you can watch it HERE. What came across to me was the same underlying message that Barnier has been sending for three long years and it's this: the EU is pretty powerless and has very limited scope for flexibility in the trade talks.

The EU is hemmed in by its own treaties, the ones that form the constitutional basis of the organisation itself, by the 600 or so agreements that it has signed with other countries including around 40 free trade deals and by the rules of the WTO.

Every recent FTA that the EU has signed, with Canada, Japan, Mexico and Mercosur, further locks in what the EU can offer us. They cannot agree better terms for the UK otherwise these other deals, plus Switzerland and even the EEA itself, would come under scrutiny and changes will be demanded. We cannot have more rights without more obligations. All of these agreements will contain elements of regulatory alignment and convergence while we demand divergence.

So, all of the hard choices that are coming up will be on our side or as Frau von der Leyen put it, 'choices have consequences'. 

The EU will not be 'negotiating' but simply offering a more detailed menu not unlike Barnier's stairway to Brexit. You want Canada +?, then here are the extra obligations you must sign up to. What we are asking for is Canada + with fewer obligations and with the added bonus of being able to diverge whenever we wish from the level playing field requirements. Not only will this not happen it cannot happen.

Brexit Johnson thinks the EU have already committed to a tariff free, quota free trade deal but I don't believe even this bare-bones arrangement will be available without the UK signing up to regulatory alignment in many if not most areas.  Our PM has long believed the EU has poked its regulatory nose too far into national business but we are about to find out if that's true or not. We will see which areas the EU are relaxed about diverging from their rules and what the cost of it might be to the UK economy.

Von der Leyen said a comprehensive deal by the end of the year is 'impossible' and says the two sides must 'prioritise' with Brexit Johnson telling her again later that the deadline will not be extended, thus handing the initiative to Brussels and limiting himself to be hardest possible Brexit while still getting some sort of a deal.

She said in December: "In case we cannot conclude an agreement by the end of 2020, we will face again a cliff-edge situation. And this would clearly harm our interest - but it will impact more the UK than us."

The only question now is which sectors of the economy will be tossed over the cliff in December and when they will be told to brace themselves.

I noticed elsewhere the full import of the PM's humiliating climb down in October has still not sunk in since a No 10 spokesman has said they will not accept the usual EU dictat that 'nothing is agreed until everything is agreed'. Oh I think they will.  Brussels and the EU parliament are never going to ratify any half-baked agreement. Even sector-by-sector deals, assuming the EU would consider the idea, a heroic assumption itself, will be complete treaties by themselves with no open ended loop holes.

And it is impossible to see how any FTA can be agreed that allows each side to diverge without limit after it's signed. Why would anyone do this? It would mean reaching a settlement on fair competition with alignment on regulations, anti-dumping clauses and so on, but then one side or the other cutting its employment, environmental and social standards in order to out compete its co-signatory.

Barnier himself said in December the fundamental question will be, "Does the U.K. wish to distance itself, and to what extent, from our regulatory model?" Until this is agreed and set out in a binding legal text nothing can even be discussed let alone settled, because it impinges on everything else.

Katya Adler tweeted a long thread before the von der Leyen/Johnson meeting which spells out some hard truths:
Examples:

"EU aware world (incl future trade partners for the bloc) will be watching these negotiations. Brussels fearful of setting precedent that could weaken  value of its lucrative single market. Eg Emmanuel Macron yesterday urged Michel Barnier to negotiate with UK ‘in cold blood’"

And what about this:

"When UK ministers complain that’s too long to wait [talks starting in March], EU response is that UK always pushed for bigger role for national governments in EU decision-making to make it more democratic."

The dilemma:

 "Expect red-line drawing with smiles today between PM and von der Leyen. Presented as ‘friends telling each other truths’. EU position is i)PM’s timetable to get ‘ambitious, comprehensive’ trade deal agreed and ratified by December is unrealistic. Bare bones deal possible BUT
·
"ii) only if UK signs up to following EU rules and regulations (eg on environment or workers conditions) as prerequisite to having good access to EU market HOWEVER 

 "PM will counter with ‘truths’ of his own: i) that negotiations have to be done by December bc he won’t extend the ‘transition period’ UK enters into after leaving EU on 31 Jan. And why? Politically v difficult for him to defend eg paying into EU budget after #Brexit"

 Note Brexit Johnson's 'truth' that he can't extend the transition is an arbitrary red line he has drawn himself. He would rather condemn sectors of the economy (that's people's jobs and livelihoods to you and me) to a bleak long term future than pay anything into EU coffers.

We really do think we are very special where rules either don't apply to us or can easily be bent. This is all based on the UK being the world's fifth or sixth largest economy by GDP and the fact we buy a lot from our EU neighbours.

But the relationship between customer and supplier in any close long term arrangement is complex and symbiotic. You mutually rely on each other. It's not like a one-off order or occasional ad-hoc contracts. And trade deals are even more complex because each side is both customer and supplier at the same time.

Brexiteers look at the coming trade talks with the simple mindset of a customer. They think because the EU has a trade surplus in goods we can dictate terms. But the strengths and weaknesses of each side are not that simple. It depends on your relative size. For example, you are unlikely to get Apple to bend very much if you happen to buy a phone from them occasionally as an individual no matter how good a customer you are.  

Moreover, the EU is not a country and doesn't have anything like the flexibility of a nation state. It is a legally constituted trading bloc, perhaps the premier trade bloc in the world. They are not going to change for our benefit because they can't.

Finally, I saw Lewis Goodall on Newsnight seemed to think both the government and Labour have a strong incentive to keep Brexit out of the headlines in the coming year. I see this. It has become a national embarrassment for both sides.

It's perfectly possible that a great majority of leave voters will accept on February 1st that Brexit is 'done'. After all if you didn't really know what you voted for, if it was something totally nebulous, being told you've now got it could well be enough to satisfy the average simple-minded Sun or Express reader. They'll cheer and wave the union jack and believe they've got their sovereignty back.

It may well seem to them that Brexit is indeed done. This might be laughable but not impossible. We must make sure we do all that we can to keep it firmly in the public eye. Brexit Johnson cannot be allowed to forget his role in the fiasco.
Posted by at