Wither Brexit and the Trade System under Covid-19?

Apr 6, 2020

Where can the suspended post-Brexit negotiations go from here when the very multilateral trading system, along with globalisation, is on its uppers, under the curse of the CaronaVirus pandemic? What will the negotiators be able to come to grips with mutually as their respective constituents demand protectionism for their industries and their trade relations? It is already a different world

When the post-Brexit negotiations began at the beginning of the transitional period in early March, the UK deadline of 31 December for their conclusion seemed both brave and ambitious. More so given that Prime Minister Boris Johnson unilaterally and categorically ruled out any extension.

Then like a dark cloud, a pandemic descended that not only threatens the lives of millions of the world’s people, regardless of nationality; but like a cancer is eating away at the very underpinnings of world trade, inevitably destroying the currently evolved system of globalisation in its wake.

When their health is directly threatened people turn inwards and to the decision makers closest to them for support and protection – not to elevated international institutions whose rules seem designed to serve the interests of ‘others’ in multilateral bodies. These voices, with severe political consequences, speak for the thousands of businesses – small, medium and large – heading for bankruptcy and unprecedented levels of unemployment. No amount of subsidies and income support will sustain those businesses in their present form and see their economies restored as before. Their currencies, because of unsupported easy credit and complex supply lines, running through innumerable jurisdictions, will depreciate if not collapse. How might a global multilateral trading system operate in those circumstances?

What then will there be for the UK and the EU to negotiate sensibly about? What now are their options given that many standard trade rules whether in relation to the European Union or the World Trade Organisation will have been cast aside or overridden in so far as they impede naked-self interest – meaning massive world-wide protectionism as between the major powers, and the forming of smaller unviable trading groups in the regions. This will not be a consequence purely of trade greed and discrimination as before, which was the case between the two World Wars. It will be a consequence of the breakdown of preventative health systems unforeseen on this scale as never before. Previous death causing plagues and epidemics had finite or containable forms. They had political impact but not so far as being able to destroy whole economic systems. This one may well.

The most the UK/EU negotiators can be expected to do is maintain the best of existing structures with maximum continuities. This will be difficult as fissiparous forces exist not only between them but within each and every one of their national components as they fight to assert parochial interests, including provinces within some of these national structures – several of which have a veto over any agreement concluded by the European Commission. It will be a hard task for the EU majors – Germany, France, Italy, Spain, etc. – to bring those regions on side, let alone bring themselves on-side, without huge mutual support projects, common fiscal and monetary policies well beyond what Germany and the Benelux group would be prepared to support. The future of the Euro itself, with its present membership, must be in question. The European Central Bank (ECB) has offered some 750 billion Euros in new funds for the EU as a whole. Compare that with the US’s pay out of some 2.3 trillion dollars (14 times greater), with more to come, to support a comparable population, economy and geographical area.

As the Economist’s ‘Charlemagne’ put it (March 21), the EU that had evolved to deal with the post-modern world, where borders blurred and markets ruled, was now faced with a Hobbesian-like pandemic – a nasty blast from a long gone ugly past which called then for “the tool that brought order to that brutish world: the modern state”. No more now the failed ‘modern state’ that transcended the nation. The nation must fight for itself as if it were back in the jungle. The combination of the aforesaid European Central Bank, the EU’s Early Warning and Response System, and the Integrated Political Crisis Response arrangements did little to alleviate the North/South and East/West splits over these mutual support issues. So would think the likes of Poland and Hungary, and the East European state’s generally. Whether they are right or wrong, these tensions will run through the Brexit negotiations.

Similarly in the UK the late 2019 elections hoisted Boris’s political status, enabling the Tory Party to re-establish its ‘rightful’ place as the dominant force in the British Parliament. Such is the resulting political confidence that the UK genuinely believes it can push through whatever obstacles it might face in the EU negotiations and is prepared to tell the EU where it could get off. Until very recently this was in a context where it saw itself navigating towards brilliant new trade agreements with the United States, Japan and even Australia. It has already announced an early intention to withdraw unilaterally from several EU institutions as an assertion of national sovereignty. These include the European Aviation Safety Authority and the European Convention on Human Rights as they vest jurisdiction in the much abhorred European Court of Justice (ECJ) – in spite of the fact that it might need to rely on that court or similar as a moderator of inevitable future conflict over certain trade issues, mutual citizenship and residence, product standards, among others.

So what can be achieved in the UK/EU negotiations? We can start from the point where the UK wants out in spite of renewed calls in parts of Britain to extend the cut-off date. That view assumes that the myriad of issues concerning trade and services, agriculture quotas, fisheries (acute), subsidies, WTO Schedules, etc. will be negotiated with goodwill all round. The ease in which critical supply chains have been exposed has convinced many that they had become too extended and overly dependent on a relatively few sources, especially in times of pandemics and given now the restructuring of globalisation. If divergence of product standards and state subsidies delivered competitive advantages to the UK, so what they would say; it is up to the EU to respond, even if that means discriminatory trade barriers against UK products and services. In short the EU will not and cannot deliver what the UK wants in a trade agreement, whether ‘free’ or otherwise, because of the deep and deepening divisions emerging there, as noted above. What is left at the policy level is the unspecific undertaking by both parties in relation to the Withdrawal Agreement that the UK would establish with the EU “a future relationship that is as close and strong as possible”. It comes down to what, in the face of all of the above, is possible.

As for major substantive and technical matters that would confront the UK in a conventional negotiation, see Farran & Sampson: “Brexiting in Brussels- High Noon Awaits” (https://johnmenadue.com/andrew-farran-gary-sampson-brexiting-in-brussels-high-noon-awaits/ – March 5, 2020). Services alone would involve over 80 separate sector negotiations, in particular with financial services, not only as between the UK and the EU but to reconcile their respective obligations with third parties in the WTO. That could take several years at least to settle involving numerous negotiators sitting opposite each other, presumably observing self-isolation against the prevailing virus.

As for its US ambitions, the Covid-19 pandemic is causing a deepening of long-standing protectionist tendencies in the US which will complicate trade discussions more so than they might have been previously. In addition, the British stance on the Huawei 5G issue, and its security ramifications, has alienated it from powerful forces in the US Congress (and the Executive) whose support can no longer be taken for granted.

Then there is Ireland where they have agreed to replace the ‘backstop’ by a subsequent agreement “that would ensure, on a permanent footing, the absence of a hard border on the island of Ireland, in full respect of the integrity of the Union’s internal market and of the integrity of the United Kingdom”. While a mutual agreement to eliminate tariffs and quotas on all physical products might go some way towards facilitating this, an eventual border down the Irish Sea would seem inevitable, as would the eventual union of Northern Ireland and the Irish Republic within the EU.

Given all of the above if the UK were to seek an extension of the transitional arrangements by June’s end, this would only be requested if the UK were sincere in the negotiations. The consequences of not extending will be that finally, and after all, the UK will crash out of the EU. There will be wailing and gnashing of teeth, not least in Scotland and Ireland. But after Covid-19 Boris cannot afford to show any further weakness if he and his cohort are to survive up to and possibly beyond the 2024 Elections when all will have changed politically anyway.

Andrew Farran, former Australian diplomat, senior law academic and trade policy adviser – long now on the Brexit trail.

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