Brexit Briefing No.71: London calling...with a message for Brussels

JUNCKER

The UK is due to leave the EU in less than 50 days. In the absence of an agreed withdrawal deal, every week is now crucial in shaping what kind of Brexit will emerge.

This week the Prime Minister came to Brussels with a clear message: the withdrawal deal, as it stands, will not get through the British Parliament. There needs to be changes to the backstop, the most controversial element, in order to ensure its safe passage through and an orderly Brexit.

She met with Jean-Claude Juncker, the head of the European Commission, Guy Verhofstadt the European Parliament negotiator, Antonio Tajani, the Parliament’s President and Donald Tusk, the president of the European Council. Tusk had tweeted earlier in the week that there would be a special place in hell for those who backed Brexit without a plan, sparking controversy in the UK media.

There was no expectation of a breakthrough this week. However, the lines of communication have reopened after the votes in the British Parliament last week on the Brady amendment, which directed the government to seek changes to the withdrawal agreement.

The challenge facing both sets of negotiators is the same that has continually delayed the negotiations over the last year: how to ensure the border in Northern Ireland remains open whilst ensuring no border between Northern Ireland and the rest of the UK, as well as the ability for the UK to have an independent trade policy.

The backstop was designed to address the first of those issues in the period between the end of the transitional period (until the end of 2020) and the entry into force of a new EU-UK relationship.

However, the fact that it mandates the UK staying in the customs union and Northern Ireland following single market rules, therefore meaning both an internal border in the UK. The lack of an independent UK trade policy means that it is imperative for the UK that the backstop lasts for only a short period.

In the current agreement, there is no provision for this. The backstop will remain indefinitely until the UK and the EU agree a future relationship. This new relationship will not be easy to negotiate; it can be vetoed by any EU government and will almost certainly not be as effective as keeping the border open as the customs union is.

Therefore, there are fears that the UK will be stuck in the backstop indefinitely. To address this the British Prime Minister has offered three potential paths for a change to the backstop agreement.

These are: 

1. Giving the UK the ability to unilaterally exit the backstop.

2. Having a fixed end date to it.

3. Offering technological solutions to negate the need for the border.

CARS

So the path forward for the Prime Minister looks as narrow as ever. To narrow it even further, question marks have been raised over whether keeping Northern Ireland fully aligned with EU rules (as per the withdrawal agreement) would be a breach of the Good Friday Agreement as it creates barriers between Northern Ireland and the rest of the UK.

Lord Trimble, one of the Good Friday agreement’s architects, said this week that will go to court over the backstop. His lawyers will argue that the Northern Ireland Assembly must give its consent to remaining in a regulatory and customs union. This is challenging as the Assembly is not currently sitting. It has been suspended since the last assembly elections in 2017 because it has been impossible to get a governing agreement between the DUP and Sinn Fein.

So there is very little room for manoeuvre for the government. There is no easy path to a deal, to getting the withdrawal deal ratified or to finding a new deal in the six weeks left before the UK leaves the EU.

Despite parliament also having voted against no deal, this option remains the only one that is easy to deliver, being the default scenario if nothing happens between now and the end of March.

As a result, the EU has started ramping up its no deal preparations, although it appears impossible to properly prepare for such a scenario. In many areas the EU doesn’t have the relevant rules and procedures in place to exclude the UK from EU programmes. In the UK a no-deal Brexit gives the government one very big headache - which tariff policy to follow?

There were suggestions this week that the UK should just unilaterally reduce all tariffs to zero in order to allow EU goods to continue coming into the UK tariff free. (Under WTO rules, in the absence of a trade deal, if the UK offers 0 percent tariffs to the EU, they have to also offer the same tariff rate to the rest of the world)

This would have the benefit of ensuring that consumer prices don’t rise substantially overnight (which would be the case if the UK applied their WTO tariff as the UK imports so much from Europe)

However, British industry would not be on a level playing field with the rest of the world. British companies would have to compete with the whole world in their domestic market.

The British market would be flooded with products from countries with very cheap production costs, against companies who are protected on their domestic markets by tariffs, which would keep products from the UK out. Those countries would also have little incentive to negotiate a trade deal with the UK as they would already have tariff free access to the UK market. The UK would have little more to offer in return for getting access for British products.

The end result would be cheaper consumer prices (probably) and a significant reduction in British manufacturing output. The British government could probably use rules about standards to keep some foreign products out (as for example the Japanese do with cars). This may provide some negotiating capital in trade deals.

Companies which import raw materials from abroad and then them into goods to export may also benefit from the cheap imports, but the overall reality would still be highly disruptive for the British economy, in addition to the general economic shock of a no deal Brexit. It is therefore extremely unlikely that the government will take this option if a no deal Brexit did happen.

However, the fact that these issues are even being discussed shows how close we are now getting to that outcome. We have six weeks to go, all the paths to get a deal are difficult, and narrowing fast. Next week the focus will return to London with a series of new votes on Brexit options and we may or may not have a clearer idea of where the next six weeks work take us. For now, it is impossible to predict what happens next.