Wednesday, 13 December 2017

Soft Brexit is smart Brexit

Michel Barnier has stated countless times that the UK will not enter substantive trade talks until we have formally left the EU. The latest negotiating guidelines have been published. They detail the framework for the next round of talks where the main concern is the shape of the transition.

The view is that it will take a further two years to come to an agreement. One suspects, for the time being, the EU is politely skirting over the obvious that a trade agreement will take far longer than two years. This is so as not to frighten the horses. The UK can just about agree to two years on the terms outlined above. Beyond that the UK would expect to modify the terms since any longer is a long time to be in the EU without formal representation. We can only speculate. 

In this we have to look at what the UK is seeking to achieve. The UK wants more than Canada, less than Norway, and though it has hinted it does not seek the same obligations, there have been hints from David Davis that we will, on some level, continue participation in a number of EU agencies like the EMA. 

We should not that we will need agreements to cover our participation in the European aviation market through to Euratom. Some areas will be easier than others to achieve. Euratom might very well be a simply copy of the Australian agreement whereas EU members might very well see an opportunity to cannibalise the UK's share of the aviation market and will seek extensive renegotiation. This is where the UK will likely be taken to the cleaners. 

As to the core aspects of trade, again we find the Northern Ireland issue right at the heart of it. If we wish to maintain a frictionless and open border then it will likely require continued harmonisation. The UK government view that we will be able to meaningfully diverge will be one of the first casualties of the talks. 

To have the same level of freedom of movement for goods we will need to maintain membership of regulatory frameworks like REACH. We will also require any number of mutual agreements on recognition of qualifications. There are more than three hundred such areas of cooperation. 

From there is it a matter of deciding what supervisory mechanisms will oversee it. The UK has a choice of associate Efta court membership or direct ECJ application. There are other means available but in all instances there is a heavy bias in favour of the ECJ. Effectively the UK is seeking a deep and comprehensive trade relationship - but it must concede that the level of participation required will necessitates continued budget contributions.    

In this we can expect the EU to cooperate. It has mechanisms for facilitating these kind of relationships. It is though, bound by certain constraints. If we seek only an FTA then it will be governed by the WTO rules on FTAs and therefore any concessions made to the UK could well be transferable to other FTA holders. It may not, therefore, be possible to grant the same level of access for services that EEA members enjoy.

The EU will also abide with its general principle that it will not recreate an EEA style agreement for the sole benefit of the UK so that it can evade obligations on freedom of movement. It will exact a price. The UK will be expected to reckon with the consequences of its choices. We stand to lose considerable market access - and again, where member states see an opportunity to cannibalise UK market share we can expect lengthy asymmetrical negotiations in the EU's favour. 

It is the view of The Leave Alliance that that any FTA negotiated with the EU will result in a far inferior trade relationship with few of the sovereign liberties than many leavers anticipated. Hardline leavers will be disappointed. 

Hardline leavers such as Ruth Lea furiously reject the EEA believing we would be supplicants to the EU. As it happens, were we in a deep and comprehensive FTA outside of the EEA framework it is actually more likely that the UK will be passive recipients of rules without much in the way of consultation or veto. Standard safeguard measures will be available but invoking them comes at the cost of market access. 

We are, therefore, back to our usual conclusion that an EEA Efta arrangement is the more intelligent approach. It has the merit of tried and tested infrastructure, full market access and avoids the risk of UK market share being traded away. The agreement already exists, we are already signatories to it, the terms are already known, and it would massively simplify and expedite our exit. 

What we note about the EEA agreement is that it allows for country specific protocols and is entirely configurable. Over time we can negotiate carve outs. Some suggest the EU would not be willing, but if we can demonstrate that our shift in trade direction in some sectors contributes to the corporate wealth of Europe then we can expect the EU, on occasion, to act in good faith. 

We are then left with the politically difficult issue of freedom of movement. As we continue to point out, this issue is not insurmountable. We would simply have to manage expectations. The choice is stark. The EU, for its own reasons, requires a liberal regime on movement of persons. It will uphold those principles and consequently we are forced to consider our priorities. 

What we would note is that in order to mount an effective post-Brexit trade policy we will have to invest heavily in cooperation programmes beyond the EU, economic partnership agreements and play a full and active role in international organisations. In this domain, multilateral initiatives stand or fall on the level of investment. Money talks. 

With that in mind the greater the hit to our economy by leaving the EU, the less funding will be available to mount the kind of proactive foreign and trade policy we need to deliver the potential gains promised by the leave campaign. Reaching zero tariff agreements is the least difficult part of trade. Maximising utilisation of trade preferences and increasing the profitability of the value chains therein requires a greater degree of engagement and that will require considerable foreign and domestic institutional infrastructure to service such agreements.

Because of the nature of the multiple compromises the UK will inevitably have to make, many of the assumed silver bullets will not be available to us. Though we are most certainly leaving the customs union we will have to stay closely aligned with it - not least to maintain open borders in Ireland. That means our future trade policy will depend more on economic partnerships rather than classic EU model FTAs. A lot will also stand or fall on how successfully we can navigate the many global forums in trade where standards and regulations take centre stage. This is something else that does not come for free. 

The danger of leaving the EEA is that Britain finds itself substantially poorer and unable to mount an effective trade policy and in so doing will gradually creep back into the EU regulatory ecosystem and like Switzerland will trade away sovereignty for market participation with none of the representation or consultation enjoyed by Norway. Exactly where we didn't want to be, and largely making the whole exercise pointless. A voluntary self-immolation for no discernible gain. 

Ultimately we have to safeguard European trade on the best possible terms simply because it is still where our geographical and cultural interests lie. Enhanced trade relations with our neighbour is essential and trade is unlikely to be replaced otherwise. UK-EU trade is on a wholly different level to everyone else in the world. For instance, how many ro-ro ferries are there plying the Atlantic, delivering perishable goods for immediate consumption and JIT components for retail sale and to supply manufacturing plants?

This kind of trade is only made possible by way of having no formalities at the borders. This is how goods arrive at their destination only a few hours after dispatch. This is not just a question of conformity to standards. Even fully compliant products shipped from the United States are subject to lengthy and sometimes intrusive border controls. Fortunately, with the longer shipping time, document checks can be made while the goods are still in transit, but it is still the case that trade with the US and other distant partners is in containerised or bulk cargo.

The nature of our trade with the EU, though, is the vast bulk (well over 70 percent) is in driver-accompanied loads. It's through the Channel tunnel or by short sea shipping, with no customs formalities of any nature. That trade was built up after we joined the EEC, and is basically a child of the Single Market. The trade relies on speed of throughput at the ports. There are not the facilities or infrastructure to deal with border checks. It couldn't survive the uncertainties of a rigorously policed border where lorries are routinely delayed by hours and can be held for days.

The issue at hand here is separating the political from the economic. As a leaver, I simply do not want to be in the EU. I want the UK to be a distinct customs entity where the decisionmaking over areas of economic cooperation stay under the direct control of the UK government and are not bundled into treaties which transfer authority. The EEA, though suboptimal, to me represents an adequate firewall against creeping EU federalism.

Now that we have left the EU we can see all the stops are pulled out to accelerate the EU's federalist agenda. Critics of Brexit argue that were we to remain a member we could continue to block these developments. What we would note, however, is that such measures are never blocked. The UK can only ever really slow it to a glacial pace - which is actually worse because the integration is then done by stealth and so slowly that it meets little direct opposition. 

We are, therefore, tasked with remaining part of the community of European nations in the same regulatory ecosystem, but in a framework which allows the EU to consolidate and form up around its Euro currency members, while Efta and the UK seek out relationships more befitting their cultural and political preferences. It would be curious for the UK to be entirely out on its own.

Internationally we are seeking to be part of a genuinely multilateral trading system. The constraints of the Common Commercial Policy are an obstacle to that. Brexit remedies this, but it need not be an either/or estimation between enhanced European cooperation and acting as a global citizen. Efta is entirely compatible with our ambitions of independence and to my mind a natural destination for the UK. 

Looking at the many compromises and difficult choices of Brexit it would be tempting to cave into the nihilism of hard Brexiters. It avoids a great many of the complexities but in so doing would be to embark upon a wholly destructive course with no idea of a destination, likely souring relations internationally and presenting us with some miserable consequences down the line. 

Hard Brexiters believe there are sweeping gestures and silver bullets in the domain of trade, but no such solutions exist. Intelligent trade policy takes patience, skill and determination and requires that we build, not destroy. We can either resort to unilateralism which can only blow up in our faces or we can look to enhance and democratise what we have already built as part of the EU - a regulatory framework extending well beyond the borders of it.

We are told by remainers that being an EEA member means having no say. This has never been an accurate depiction of the EEA option but we would note that Efta with the addition of the UK would be a power in its own right and one able to leverage far better terms under the EEA agreement. In this we can work toward a genuinely collaborative Europe and a single market encompassing the UK's non European allies. The single market is in part our creation so why should the EU be the sole controllers of it and why should it be an exclusively European affair?

Britain stands at a crossroads. Should we cut ourselves off from Europe entirely we will find ourselves adrift and at the mercy of global forces we cannot control or even mitigate. Instead we can maintain much of what is valued about the EU while disentangling ourselves from the political integration. From there we can build and develop our new position in the world. It makes zero sense to make the job harder and more expensive than it has to be. 

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