On the 2nd March at the Mansion House (MH), the Prime Minister set out, at last, the government’s desired Brexit destination: a bespoke trade agreement with the EU more comprehensive in both its breadth of coverage (scope) and depth of market access, than any other Free Trade Agreement (FTA) existing ‘elsewhere in the world’, including the EU-Canada Comprehensive Economic and Trade Agreement (CETA) template, https://www.gov.uk/government/speeches/pm-speech-on-our-future-economic-partnership-with-the-european-union.
Soon afterwards, on the 19th March the draft EU-UK ‘where we are’ withdrawal agreement was published. It provided for a transitional period, although limited to 21 months with a December 2020 end-date. But a total negotiation period of barely two years simply makes no sense. CETA took over six years to negotiate, even though it is both shallower and more limited in scope than the much more ambitious FTA that May seeks. A cliff edge now looms in 2020, rather than at the end of this year.
As the clock ticks towards formal exit and then to transition end the EU’s negotiating leverage will, unquestionably, strengthen. The earlier experience of Phase 1, on its own, makes it a fairly safe bet that the EU’s negotiating guidelines, focused on the maintenance of the architecture of the single market and/or to an open Eire-NI border, will progressively and substantially prevail over the UK ‘red lines’ of taking back control of its migration, budget, and trade policy, all independent of European Court of Justice (ECJ) interference. That is unless the May government proceeded to take on board, essentially, the same existing CETA-FTA template that the prime minister ruled out as too limited in her MH speech.
The imposition of ‘rules of origin’ customs rules and of non-tariff barriers on both goods and services that are inevitable with a CETA-type FTA arrangement will inevitably increase trade frictions with resulting adverse impacts on production, income, and employment. A UK Trade Observatory report, that modelled the particular impact of Brexit on the manufacturing sector, for instance, concluded that high-tech and medium-high tech sectors, such as car-making and aerospace, are most at risk of a decline in domestic production, with associated losses of local employment, in Sunderland, across the West Midlands, as well as other local authority districts mainly concentrated in the North and the Midlands,http://blogs.sussex.ac.uk/uktpo/files/2018/02/Briefing-paper-16.pdf.
No-one can know or quantify the final damage of choosing an economically sub-optimal option, but the government’s own analysis of the economic impact of alternative Brexit options on indicative UK aggregate growth, projects (taken as indication of the direction of travel, not a forecast) that a FTA-type arrangement is likely to retard future GDP potential growth by an estimated 4.8% to 2030 compared to that of 1.6% if an European Economic Association (EEA)-type arrangement membership was adopted: the ‘Norway’ option. But May in her MH speech also rejected that option, because it would mean accepting future EU directives as a rule-taker, continuing free movement (FOM), and ECJ jurisdiction; as she did continuing customs union (CU) membership in that case because it would mean accepting EU-set external tariff levels, thus preventing the UK embarking on an independent trade policy.
Alternative UK trade deals with the US, led by the mercurial and protectionist Trump, or with India, which will seek the lifting of UK visa restrictions, or with Japan, which has recently finalised a trade agreement with the EU, will take the UK years to negotiate; and, even if achieved, the available evidence converges on the conclusion that their subsequent benefits will prove largely illusory and negligible in comparison to the losses generated by disrupting the trade links and the complex integrated supply chains built up over decades with your closest neighbours. Common sense, rather than detailed economic modelling subject to uncertainty, screams that simply is not sensible.
This cold reality makes the official Opposition and Starmer’s ambivalent position to the draft withdrawal agreement, which he gave an ambiguous and guarded welcome to, on the face of it, puzzling: in effect, tacitly or half-supporting a government that is knowingly following a chosen process that will make not only Britain as a whole poorer, but which will leave some of its core voters reliant on manufacturing industry especially exposed to unemployment and reduced incomes.
But with Brexit, of course, politics trumps economics. In order to survive the government needs to keep the Democratic Unionists, the 60-odd diehard hard Brexiteers, and the 10-20 committed Remainers, all on board. Jacob Rees-Mogg, the standard-bearer of the hard Brexiteers has already declared the draft withdrawal agreement to be ‘unacceptable’ as it gives too much away, and went on to link his grudging tactical acceptance of its current status to the implicit threat that ‘the final deal is the important one’, echoing the EU rhetoric that ‘nothing is agreed until everything is agreed’. Leading Remainers by tabling an amendment, back in February, in support of continuing CU membership – which could well have passed, forced the government to postpone consideration of the relevant trade bill until such time that it can be sure of mustering the necessary parliamentary majority.
Labour, in turn, does not want to be painted as the party that disrespects the referendum vote and/or that undermines the negotiation position of a government that is actually ‘getting on with the job of delivering the people’s verdict’. To do so could well lead to electoral punishment, insofar that the 2016 result was rooted more on social demographic-based culture and psychology than it was on economic cost-benefit analysis. The opposition’s comfort zone is to sit back and to leave the government squirming in their own Tory-created mess, rather than taking a definite alternative position, such as continued membership of both the CU and SM, which could then open-up the opportunity for the government to turn the spotlight towards them.
And Team Corbyn certainly does not want to come into power facing the continuing distraction of negotiating Brexit; it would much prefer the government to do the heavy lifting itself and then take the electoral consequences of negotiating a deal that Labour could then claim with evidenced justification will cost jobs for the sake of illusory freedom of the UK being able to negotiate its own trade deals. After all, promoting the SM is neither a socialist clarion call nor an electoral vote-winner, when a third of Labour voters supported Brexit back in 2016, and which some Labour MP’s representing Brexit-voting constituencies might themselves reject.
Starmer, last year, set six tests in order to assess the acceptability or not of any Brexit deal in a future parliamentary vote. Their cornerstone is the second test that it should ‘offer the “exact same benefits” as the UK currently enjoys as members of the Single Market and Customs Union’. In a speech this March, he reaffirmed that Labour’s commitment ‘to negotiate’ a new comprehensive UK-EU Customs Union, alongside a strong new relationship with the SM that must include ‘full access to European markets with no new impediments to trade and no drop in existing rights, standards and protections’. He also outlined two amendments to the EU Withdrawal Bill that Labour intended to progress. One would prevent checks, controls or physical infrastructure of any kind at the NI/Eire border. The other – should the government’s proposed article 50 deal be defeated – would insert a statutory provision requiring the government ‘to proceed on terms agreed by Parliament at the time, if necessary’, https://labourlist.org/2018/03/we-need-a-new-and-credible-approach-to-brexit-keir-starmers-full-speech/.
Is Starmer’s approach just tactically opportunistic or is it canny political management of a raft of complex interlocking issues that could in the end achieve the national interest by ultimately minimising the economic damage connected with Brexit, or by creating the conditions conducive for it to be to cancelled through a second referendum?
His demand, parroting David Davis (DD), that any deal should ‘offer the “exact same benefits” ‘ as the SM and CU, of course, is impossibilist, short of staying in both. Clearly designed to embarrass the government and DD in particular, it is made even though Labour shies away from advancing the outcome – other than cancelling Brexit altogether – that is most consistent with the passing of his own second test: that is continued de facto UK membership of both the CU and SM; the position that many Remainer Labour MP’s want the party to adopt.
Starmer’s amendments to pass require the support of at least 12 Remainer Conservatives. They will almost certainly not lend support to Labour amendments directed against their own government that are designed to embarrass or to bring it down, in contrast to using their potential voting power, if and when with Labour support, as a means of internal influence with May to secure the least damaging Brexit. Defining amendments that are aimed squarely at the government’s weakest points and which potentially could command a parliamentary majority does, however, add pressure on the government to come back to Parliament for article 50 approval with a package more aligned to a progressively softer Brexit outcome. Providing Parliament with the power to guide negotiations subsequent to a failed article 50 vote, in effect, would strip the authority of the government and would likely result in a stalemate, possibly conducive to a second referendum or a postponement of the Article 50 exit date.
That is why the government will, in all likelihood, use its best endeavours to fudge and kick the can down the road in order to avoid a political crunch point where they could lose a key vote in Parliament.
Successive iterations of an evolving framework of a deal that could allow it to claim that the UK has ‘taken back control’, even if in semblance, rather than practical practice, can be expected. In practical terms that would mean at the end of the day the UK progressively ceding the substance of the EU negotiating guidelines, either by accepting diminished market access or by loosening its other red lines, such as conceding ever-widening areas where the ECJ retains jurisdiction in return for better market access : an Emily Thornberry ‘blah-blah-blah’ or ‘fudge’ line of least resistance deal could well be cooking in the Cabinet Office kitchen.
The mutual need of the EU/UK to avoid the UK being left with a Hobson’s Choice of either a politically unacceptable deal or of falling down a 2020 cliff edge, in any case, means that the prospect of an extension to the transitional period, during which the UK will have to accept as a rule-taker Single Market (SM) and Customs Union (CU) obligations and continuing budget contributions, is already looming on the horizon. In that light, even a pro-Brexit organisation, such as the Institute of Economic Affairs, recognise at least the possible benefits of remaining in a modified customs union until after March 2019, https://iea.org.uk/publications/the-uk-can-do-better-than-the-eus-customs-union/.
Such a ‘fudge’ deal is consistent with the Article 50 ‘meaningful’ vote actually turning into one where MP’s are asked, rather, to accept an outlines of a deal on the basis of aims and objectives not commitments, focused on the principle of EU exit, rather than its detail or consequences, and one which will still lead to economically sub-optimal outcomes. The danger of such a ‘fudge’ approach for a government facing the milestones of a March 2019 Article 50 EU exit, a 21 month subsequent transitional period ending in December 2020 – if not extended, and a Spring 2022 general election, is that the hard Brexiteers seeking their ‘real’ Brexit could still precipitate a leadership contest in the intervening period between the EU exit date and the next election.
May, no doubt is banking that the fear of such a decisive leadership election that could then lead to a premature election that could then, in turn, put Corbyn in 10 Downing Street, will prove enough to keep both the hard Brexiteers and Remainer factions on board, however reluctantly. On the other hand, her interests are aligned to Team Corbyn to the extent that both want Brexit put to bed prior to a 2022 election. The unknown is just how much ‘fudge’ the two different factions will respectively tolerate before rebelling.
But her more immediate problem is that the NI border issue will prove impossible to fudge given the Phase 1 agreement and her own commitment to no hard NI border. Most commentators concur that the government’s negotiating alternatives of ‘a’ new customs ‘agreement or ‘partnership’ will either not be accepted by the EU or realistically cannot be put in place by 2021. The UK has, in effect, therefore, committed NI to remain part of the CU and SM but rejecting that for the UK as the whole, and the logical corollary of such a combined position: a post-2020 EU-UK Irish Sea border.
Avoiding a hard NI border and Starmer’s second test alone requires him to seek and secure effective common ground with Conservative Remainers in support of a parliamentary commitment to an ‘equivalent’ CU arrangement. This would need to avoid ‘rules of origin’ impediments to frictionless trade and to ensure that future EU trade deals continue to apply to the UK.
By requiring the UK to adhere to the EU’s external tariff wall, it would rule out an independent UK trade policy, at least with respect to goods. But an independent UK trade policy is a chimera, as was discussed above. Nor is it likely that the UK would wish to introduce reduced or nil tariff trade with non-EU countries without reciprocal benefits accorded in return within bilateral FTA’s.
Such an equivalent CU could possibly be combined with UK participation in a hybrid-EEA arrangement, where the UK would, in effect, opt-in desired industries or sector to the SM, and be ‘docked’ to the European Free Trade Association (EFTA) Court for jurisdictional purposes, for example, with reference to the interpretation and compliance of the Withdrawal Agreement. Some Conservative commentators have noted that May’s ‘pick-and-match’ aims in terms of maximising market access would be more likely achieved by such an arrangement, as it is based on existing EU precedent, and that it is an option that many Conservative MP’s are interested in, for instance, https://www.telegraph.co.uk/politics/2018/03/25/creative-brexit-compromise-neither-leavers-nor-remainers-can/.
Indeed, the most recent, and internally contested, the House of Commons Select Committee on the The Future of the UK-EU relationship, narrowly passed an amendment proposed by a Conservative MP, Richard Graham, that should the negotiations on a deep and special partnership not prove successful, in effect, the ‘Norway’ option, EFTA/EEA membership, remains as an alternative that would offer the advantage of continuity of access for UK services, as well, https://publications.parliament.uk/pa/cm201719/cmselect/cmexeu/935/935.pdf.
But EEA/EFTA membership, by itself, would not adequately address the NI/Eire open border issue: remaining outside an equivalent CU would mean that the resulting rules of origin checks on goods would require some sort of border infrastructure there.
Crucially, taking the needed full cognisance of the NI/Eire open border imperative requires – at the very least – a combined hybrid EFTA/EEA/equivalent CU – hybrid, due to the exclusion of services. This would avoid the frictions connected to the imposition of non-tariff barriers on goods caused by being outside the SM, and to rules of origin checks caused by being outside the CU. Both, otherwise, will almost certainly stymie an open border.
Remaining in the SM for goods would also render the need to secure mutual recognition agreements relating to standards – which are almost certainly unlikely to be forthcoming within CETA++, unnecessary. It could allow the UK to negotiate its own trade deals for services, and fisheries, to avoid direct ECJ jurisdiction, and to possibly provide it with some wriggle room on migration, if the EU was so minded.
In effect such an arrangement would be a Norway-minus (services not covered)- plus (supplemented by an equivalent CU) arrangement, customised to the UK’s status as a major trading partner of the EU. It would need to include farm products as they constitute an important component of the movement of goods between NI/and Eire.
Certainly it would offer a better prospect than would CETA++: indeed, on the face of it, the only means of avoiding a hard NI border. The treatment of any goods, such as fish, carved out of the arrangement, as well as border controls on people, would remain to be resolved, however.
And, insofar that the UK participation in an equivalent CU appears to be a necessity in terms of avoiding a hard NI border and that EFTA is a free trade association outside the CU, UK membership of both appears to be a contradiction: one that, at least to a lay observer, calls for consideration and resolution.
That said, politically, Labour could take the initiative and signal that it would support an Article 50 deal along such lines, presenting it as ‘workers’ Brexit, but in a way best tailored to secure the needed support of Conservative Remainers. Timing issues arise, however. Given that CETA-type arrangement is incompatible with both an open NI border and with May’s current partial opt-in approach to EU rules for UK industries most integrated to European supply chains, Labour could just wait for growing pressure from her own MP’s to shift towards an alternative negotiation hybrid EFTA/EEA/equivalent CU negotiation template.
An Article 50 vote on an evolving withdrawal framework that fudges or clouds the reality of that incompatibility could, however, postpone that point of reckoning too far down the road. As was noted above, the practicalities and feasibility of a combined hybrid EFTA/EEA/equivalent CU requires focused consideration in order for it to properly and successfully presented and pursued with the EU. Political attention on the desirability of the UK shifting to a combined hybrid EFTA/EEA/equivalent CU in comparison to CETA++ needs to crystallise, before the moment has passed.
Therefore, at the earliest opportune time, Labour should prioritise the facilitation of amendments across the floor that would ensure the establishment of an equivalent CU that would avoid damaging the same integrated supply chains, as May in her MH speech noted, that UK industries depend upon as well as a politically unacceptable Northern Ireland border, as was argued in http://www.asocialdemocraticfuture.org/time-labour-protect-national-interest-voting-cu/. For that reason, the acceptance of principle of an equivalent CU should precede or accompany that of hybrid EEA membership. Remainers across the parties could then unite to push the government to move along a road towards de facto EEA membership that will cause the minimal economic and social damage. At the same time, it would not involve a Labour commitment to full SM membership and hence free movement.