ANDREW FARRAN. Brexit: How to get it done!

Feb 26, 2018

According to a leaked Treasury document, which the Remainers claim was fiddled, the UK would be worse off in any alternative trading arrangement to the present – varying from two to eight percent of GDP over the next 15 years; and that none of the possible third country alternatives, including with the US and Australia, taken cumulatively, could be expected to make up for those reductions. What outcome might ameliorate these losses the most?

The situation with the UK and the EU over Brexit isn’t much better than earlier reported. In fact, it would appear to be even worse with some nasty exchanges between the sides over the past week or two.

Britain has taken offence over schoolmasterly threats by the leading EU negotiator, while for its part the internal ructions within the Cabinet were getting louder and louder. The Cabinet includes almost equal numbers of Remainers and Leavers.

One senses that the negotiators and their governments are losing perspective on what should, in theory, not be an insurmountable task.

There is little point going over all the ins and outs at this stage as like with a handful of duck feathers being thrown into the air we won’t know where they will land until they do. PM May has undertaken to disclose her government’s objectives for Britain after Brexit within the month while in the meantime is sending six Ministers out into the public to explain how Brexit will affect their respective portfolios. Cabinet was being embedded at Chequers also to force agreement on its objectives and detailed negotiating points – or should one say, red lines.

These are scheduled to be presented to the now impatient EU negotiators on 8th March. Foreign Secretary Boris Johnson gave his public address in London on Wednesday 14th – which was stirring about being British but did little to clarify a British position on the key issues.

It is clear that no faction can or will get its own way. The Leavers seek to remove all institutional entanglements with the EU, in particular, the free movement of labour, even ditching the idea of a two-year transitional period from 2019 for fear that they might be left as a ‘vessal state’; while the Remainers cling to the idea of preserving as much of the common or single market as possible “in the national interest” – recalling recent remark of a leading Japanese industrialist who stated that if tariffs and quotas were to be reintroduced by the EU he and others, considering their potential loss of profitability, would leave the UK.

It would seem however that the government has, and has for some time, ruled out

both retention of the single market or a customs union. The rump of the Tory Party may accept nothing less. Whether Parliament as a whole, including the Labour Party, would take a different view at the end of the day remains to be seen. That would bring down the government. Mr Corbyn is again being coy as the Party (Parliamentary and rank and file) is split pretty much down the middle. Certainly, they expect a second referendum before the package is adopted.

What then might the package or outcome look like if negotiated by sensible people with their common interests foremost in mind?

The starting point for all must be, as recognised since the inception of the GATT and the emergence of numerous bilateral and multilateral agreements thereafter, that trade is good for all parties, and the fewer the restrictions on trade the better. There is nothing in principle, between the UK and the EU, that would contradict this. But as a leaked Treasury document has revealed – which according to celebrated Leaver, Jacob Rees-Mogg, described by an FT writer as the ‘cartoon aristocrat’ of the Pariament, the document contains “fiddled figures” – the UK would be worse off in any of the alternative arrangements possible after leaving, varying from two to eight per cent of GDP over the next 15 years; and that none of the possible third country alternatives, including with the US and Australia, taken cumulatively, could be expected to make up for those reductions. The adverse effects would vary from area to area, with the industrial Midlands – where support for Brexit was strongest – being the worst affected by far! The EU itself can be expected to experience comparable reductions from the UK’s departure. The incentive for all to preserve as much as possible of the single market, whilst not crossing red lines, must be strong. So what approach might achieve the best of all worlds for all?

As a free trade in goods and services is already well established, with settled access benefits for both sides, why eliminate or reduce those benefits or impose fresh barriers? The existing supply chains for already high levels of industrial integration remain critical to both the UK and the rest of Europe. If German car manufacturers need full and free access to Britain both for components and to sell finished products the withdrawal of that access and the imposition of new impediments will make them worse off. And the converse is true for Britain. And both would be without a common court to appeal to for the settlement of trade disputes, other than the GATT/WTO process which is time-consuming. There would be no good reason then not to create an EU/UK Trade Disputes Court to deal with these bilateral issues. That would get rid of the European Court which the UK no longer accepts.

This points to a ‘pure’ free trade agreement without commitments to the free movement of labour and externally imposed labour standards that is so unacceptable to Britain – though how they will get the skilled Europeans, who now staff much of the NHS and provide essential seasonal farm labour and a host of other services, would be its problem. With regard to financial services, if the existing operations in this sector require cross-channel cooperation that should be achievable in the mutual

interest. Where competitiveness requires separation that would take care of itself. London has always had a worldview in this area so going it alone if they have to, shouldn’t be too difficult. There would still have to be a deeper negotiation over financial services per se – and sorted soon as major firms anticipate relocation.

A free trade area requires ‘rules of origin’ in order not to circumvent the comparative advantage principle which would be offended if one or the other incorporated third- country components in a product then exported to the other, undermining the latter’s market and existing profit margins. This is not a new issue and is routinely handled in all extant free trade arrangements.

That could also deal with the Irish border and would not require anything like a roadblock. Existing off-road and port inspection centres need not inconvenience the common traveller or tourist as they cross the border. If the margins in the respective tariff and quota regimes for goods were negligible there would be little to gain from smuggling. Alcoholic drinks would be an issue. Excise is as much a tax as a controlling mechanism and rates will vary. A hard border is not negotiable but without a solution, the border in that respect could become the new Calais. As for the movement of people, it is up to both jurisdictions to enforce their immigration controls as now. There may be some pressure on Ireland in this regard but no more than is presently the case.

As for the expenses the EU incurs in areas such as product standards, health and safety, research, etc., Britain would be doing and enforcing much the same. Their respective contributions should be complementary and mutually recognised.

A settlement on the above lines would involve minimum dislocation for the future once all outstanding financial commitments have been discharged between now and March 2019 – with an extension over a transition period not exceeding two years if some of the necessary adjustments require extra time. Meanwhile, the two could continue trading on the present basis without new barriers or regulations being imposed, recognising that these will be adjusted down to the levels prescribed in the free trade agreement, in a manner that serves the common interest.

They should get this done. If they don’t, the squeals will be heard from the Channel to the Russian border, with consequences. Realistically, there cannot be a second referendum as the on-going 27 EU members won’t recognise the outcome. The shutter came down when Britain triggered Article 50 of the EU Treaty.

After the transitional period, if there is one, Britain would be free to negotiate and effect independent free trade arrangements with a host of third countries, including Australia – with possible add-ons for the EU – as is the game plan of the Leavers. But there would be a lot of ground to be made up!

As for the rest of the world, those with treaty agreements with the EU will need to

come to terms with Britain’s inability to uphold its end on some 700 separate commitments which presupposed its continued participation. Could they seek compensation for loss of benefits? That really is a tricky question.

Andrew Farran is a former diplomat, trade policy adviser, and international lawyer.

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