In case you’d forgotten

Just​ before the EU referendum in 2016, the American political scientist Andrew Moravcsik wrote in the Financial Times that Brexit should be seen as a kabuki drama – ‘stylised but meaningless posturing’. Four years on, it is clear that nothing could be further from the truth. Even if the UK does manage to strike a deal with the EU, relations between the two have been fundamentally altered.

The Withdrawal Agreement, signed off and ratified earlier this year, settled the rights of EU citizens in the UK and UK citizens in the EU, as well as the UK’s financial liabilities – the Brexit bill. A protocol on Northern Ireland was also agreed. So that a hard border with the South can be avoided, Northern Ireland will continue to follow some single-market rules. This implicitly means putting in place what Boris Johnson had categorically ruled out: border checks. ‘We can do a deal without checks on the Irish border,’ he declared a year ago. The government has since acknowledged that there will be ‘minimal’ checks.

Northern Ireland aside, there is no agreement on any aspect of the future relationship. The prelude to the latest round of Brexit talks was Johnson’s call for the injection of ‘a bit of ooomph’. Both sides supposedly geared up for an intensification of negotiations. But when the talks concluded on 23 July not much had changed: Michel Barnier, the EU’s chief negotiator, said the two sides were ‘still far away’ from an agreement; his UK counterpart, David Frost, admitted there were ‘considerable gaps’. Barnier’s gloomy forecast was that a trade deal was now ‘unlikely’.

Barnier hasn’t sounded positive about any of the negotiations he has been involved in since the referendum. The two sides talk past each other, and make accusations of bad faith. The EU claims the UK has reneged on its commitments, in particular to the ‘level playing field’ – agreed standards on environmental protection, workers’ rights, taxation and state aid – that was in the Political Declaration made at the same time as the Withdrawal Agreement. The UK government, meanwhile, makes clear its irritation at the EU’s refusal to give the UK the sort of deal it has supposedly signed with other countries.

These claims are a mixture of fact and fiction. The Political Declaration was supposed to provide a model for the future relationship, but since then there has been a general election and the UK has a new government, which is entitled to a different view on the issue. The EU might respond that it was Johnson who signed the declaration; certainly his cavalier attitude to it hasn’t made him seem any more trustworthy. What’s more, the notion that the government is merely asking for what other countries have been granted is misleading. Not least, it ignores the claims to special treatment that London is making. Unsurprisingly, the EU’s trade deal with Canada had different priorities and didn’t devote any space at all to, say, road haulage.

Behind the rhetoric, real sticking points and differences of principle remain. The EU at first seemed to expect to retain its current level of access to British fishing waters and was keen to avoid an annual discussion about quotas of the sort it has with countries like Norway. It now appears to be emphasising the need for a ‘sustainable and long-term solution’, and shows signs of accepting that this will mean less access for its boats. Barnier, though, complained on 23 July that Britain hadn’t made any compromises and was still demanding the ‘near total exclusion’ of European boats.

The ‘level playing field’ is another major problem. It is not, as some in the UK have claimed, a last-minute trap sprung on London by Brussels. It has always been one of the EU’s conditions. It is a demand rooted in self-interest: a large competitor economy on its doorstep represents a challenge. If the UK were given access to the EU market, it might succeed in undercutting EU firms. This is why Brussels is insisting on guarantees regarding UK regulatory standards; it’s also the reason it is insisting on stricter rules than it felt necessary to enforce with smaller and more distant trading partners such as Canada. But, as David Frost made clear in a speech in Brussels earlier this year:

It is central to our vision that we must have the ability to set laws that suit us … So to think that we might accept EU supervision on so-called level playing field issues simply fails to see the point of what we are doing. That isn’t a simple negotiating position which might move under pressure – it is the point of the whole project.

The Political Declaration stipulated the need for ‘robust commitments to ensure a level playing field’ in order to ‘prevent distortions of trade’. The EU’s negotiating mandate states that any agreement should ‘uphold common high standards, and corresponding high standards over time’. This isn’t incompatible with Frost’s position. Both sides could agree to a non-regression clause, committing them to maintaining the standards they currently share, without any need to introduce a role for EU law or – worse still from London’s perspective – for the EU’s Court of Justice. Another possibility is an agreement that allows unilateral sanctions if one side diverges on standards.

State aid – a country’s provision of financial help to domestic companies or organisations, which potentially distorts competition and trade within the EU – is the most intractable sticking point. In part, this is because the EU takes a hard line on the issue. Its opening position is that any agreement should ensure ‘the application of Union state aid rules to and in the United Kingdom’. Given that, as far as the UK government is concerned, the purpose of Brexit is to prevent the application of EU rules to the UK, it isn’t hard to see the problem. Barnier has signalled some flexibility on this in recent weeks: ‘We need,’ he said, ‘to work together to come up with the appropriate toolbox’ to ensure ‘fair, sustainable competition’. But the Johnson government hasn’t yet indicated what compromises it may be willing to make, or what its new competition policy might look like. For many supporters of Brexit, taking power back from Brussels wasn’t supposed to be an end in itself, but a means to the end of rolling back the regulations imposed on the UK by Brussels. Indeed, one reason the EU has been so keen to tie the UK to level playing field conditions, and is so reluctant to believe the UK’s repeated assurances that it has no intention of cutting regulatory standards, is that Brexiters have spent thirty years insisting that deregulation was the prize to be gained from leaving.

There is an additional complication here. Both Article 10 and Annex 5 of the Northern Ireland protocol make it clear that EU state aid rules will apply to the UK where trade in goods between Northern Ireland and the EU is concerned. This means that any UK-wide tax incentive provided to businesses would be subject to scrutiny by the European Commission. EU competition law will therefore continue to have some effect on the UK as a whole whatever is negotiated in the future relationship.

Despite all this, it would be unwise to bet against a deal being reached, for the simple reason that both sides want one. The EU won’t sign a deal at any price, but the Commission and the member states would very much prefer even a limited agreement to no trade deal, if only to limit the scale of economic disruption. For the UK, the argument in favour of a deal is even stronger. Politically, there is more to be gained from signing a deal than from not signing one. Think back to last year. Johnson was hailed as a hero for – as his cheerleaders would have it – defying the odds and negotiating a new withdrawal agreement. In fact, he had done nothing of the sort: he signed up to terms that both he and Theresa May had previously rejected as unacceptable. In fact, because it removed the all-UK backstop that May negotiated, which was unpopular with many member states because it gave the whole of the UK access to the EU market without a commitment to abide by all its rules, Johnson’s deal was actually more popular in Brussels.

Despite this, the simple fact of his having come up with a new agreement contributed significantly to the success of an election campaign centred on Johnson’s ability to ‘get Brexit done’. So much of the current debate concerns the dangers of the failure to reach a trade deal that securing any agreement at all will again be seen as a triumph. This is just as well for Johnson. Given the time constraints and the current positions of both sides, it’s hard to imagine that any agreement will amount to more than a thin free-trade agreement encompassing tariffs and quotas for goods. Any deal likely to be secured by the end of October (the deadline set by Barnier to give the EU and the member states time to ratify it) would exclude a number of areas of current co-operation. The EU provides the framework for cross-national collaboration on issues from foreign policy to defence to operations dealing with terrorism and organised crime. It is hard to see agreement being reached on all of them in the time remaining. Continued discussion will be necessary – either bilaterally with key member states (defence collaboration with France, for example), or with the EU – well after the end of formal negotiations. If talks were to break down in the autumn, trade would revert to WTO terms, leading to disruptions at borders, higher prices, and possibly shortages. In these circumstances, it is hard to imagine how anything approaching constructive dialogue could take place.

Either​ a thin trade deal or no deal at all would have significant repercussions for the domestic economy. Any deal that involves the removal of tariffs and quotas will ease trade in goods. But it will not, even for manufacturers, mean a continuation of the status quo. EU rules of origin were described as amounting to a ‘hidden hard Brexit’ in a recent report for the Food and Drink Federation and the National Association of British and Irish Flour Millers. The report notes that ‘UK and EU food and drink manufacturers may find that the products they make with imported commodities for the current EU/UK market will not meet origin requirements for preferential trade between the two.’ They give as an example such ingredients as tropical fruits, which currently have ‘no bearing on a product’s right to be traded freely between the EU and the UK’, and ‘French wheat used in a UK biscuit’. Rules of origin will certainly complicate trade with the EU and, along with checks to ensure conformity with EU standards, will impede the free flow of trade across the UK-EU border.

These border checks will also mean that the ‘just in time’ supply chains used by the car industry, for example, will no longer be practicable. Honda has estimated that a 15-minute delay at the border will add around £850,000 to its annual costs. HMRC estimates that customs declarations will cost businesses around £15 billion a year, while fulfilling rules of origin requirements will add another £5.5-6 billion. On top of this are the costs associated with ensuring compliance with EU standards – costs in terms of the delays imposed by checks and the need to seek EU as well as national approval. The UK will no longer, for instance, be able to grant type-approval for cars – confirming that they reach specified performance standards – intended for the EU market.

That’s just for goods. Services make up 80 per cent of the British economy and 40 per cent of the UK’s services exports go to the EU. Here, the impact looks likely to be even greater. To facilitate trade in services, governments generally have to agree to align their domestic regulations: ‘passporting’ allows British financial services firms to operate across the Continent. Mutual recognition of qualifications means a British architect can get a job in Lisbon as easily as in Liverpool. Freedom of movement allows firms to send their staff to work in other member states. All these arrangements will come to an end on 31 December. As Frost intimated, regulatory alignment is anathema to a government that sees regulatory independence as a principal reason for leaving the EU. Ending freedom of movement was one of the central demands of the Leave campaign. The EU, meanwhile, has made it clear that it sees no reason to allow the UK to keep the bits of the existing system it finds useful – such as the mutual recognition of qualifications – while opting out of others. Documents recently published by the European Commission outlining preparations for Brexit make it clear that while Brussels will continue to allow the City of London access to European customers where there are ‘possible risks to financial stability’, its aim is that such business will sooner or later be based within the Union.

The modelling done by my institute, UK in a Changing Europe, estimates that the negative impact over ten years of the kind of deal currently being negotiated would be of the order of 6.4 per cent of GDP. This is in contrast to 4.9 per cent for May’s deal and 8.1 per cent for no deal. Our most optimistic scenario suggests that a Brexit deal will leave the public finances £16 billion worse off (£49 billion in our most pessimistic scenario, about the same size as the budget for the Ministry of Defence, and more than twice the long-term increase in funding for the NHS announced in 2018).

The pandemic itself will of course have an enormous impact on the economy. And there are some who see an opportunity here. The scale of the problems caused by Covid-19 might help disguise the impact of Brexit. With supply chains already badly affected, a steep rise in unemployment widely expected, and the focus being on restarting the economy as quickly as possible, there couldn’t be a better opportunity to mask the disruption caused by the end of the transition period. It may indeed make sense to bundle the private sector adaptations needed to cope with the pandemic together with those required to adjust to a new form of trade with the EU. Yet it’s something of a gamble. For one thing, Brexit will affect the economy differently from the way the virus has affected it. The retail and hospitality sectors have suffered the brunt of the impact of the virus, but sectors such as the pharmaceutical industry are the ones that stand to be worst hit by Brexit. Although some areas of economic activity, such as food supply chains, weathered Covid-19 impressively after early problems, the border checks imposed by Brexit may well achieve what the pandemic could not, and cause disruptions to supply.

Economic policy will be the single greatest concern of both the government and the electorate for some time to come, but Conservative MPs are far from united on the appropriate response. The new chancellor, Rishi Sunak, claims to be ‘unencumbered by dogma’, but his predecessor, Sajid Javid, has admitted being concerned about the level of national debt; and Andrea Leadsom, until recently Johnson’s secretary for business, energy and industrial strategy, says that current levels of government spending make her ‘uneasy’. While the voters who propelled Johnson to power last December were mostly socially conservative Leavers, they weren’t in agreement about economic policy. Of the voters – many of them in ‘red wall’ seats – who switched in 2019 from Labour to the Tories, 84 per cent believe there is ‘one law for the rich, another for the poor’, compared to 22 per cent of Tory Party members and 5 per cent of Conservative MPs. Asked whether management will take advantage of workers, 78 per cent of Labour to Tory switchers agreed; the figure for Conservative MPs was again 5 per cent.

Expectations in those new Conservative seats have been raised by Johnson’s rhetoric about ‘levelling up’ the country. Even if this ambition is sincere, it’s hard to see him making any progress with it. For one thing, Covid-19 will have an unevenly distributed impact on the economy. The parts of the country worst hit by post-pandemic job losses are likely to be in precisely those ‘left behind’ areas with lots of low-skilled jobs in retail and manufacturing. And then there’s Brexit. Here too there is likely to be a significant correlation between the scale of the economic impact on regions and their relative wealth. Some forecasts suggest that Leave-voting areas will be the worst affected by Brexit because their economies are disproportionately dependent on trade with the EU. Meanwhile, support for Scottish independence is up to 55 per cent. It may yet turn out that this is the consequence of Brexit that consumes the largest amount of the government’s time over the next few years.