Brexit Briefing No.75 - Still Caught in the Backstop?

It was another challenging week for the ongoing Brexit talks as Attorney General Geoffrey Cox and Brexit Secretary Stephen Barclay shuttled between London and Brussels in an attempt to seek fresh concessions on the backstop, while Chief Europe Adviser to the PM Olly Robbins was also spotted in the Belgian capital amid rumours of ongoing technical talks with Martin Selmayr, the European Commission’s top civil servant. Diplomats said that the British government’s attempts to secure a ‘mini backstop’ - a legally binding text that guarantees the UK could arbitrate its way out of the EU’s insurance policy against a hard border on the island of Ireland - were not immediately accepted by the EU.

Media reports suggest that an ultimatum was given for Downing Street to table fresh proposal by the end of today (Friday). While the backstop could potentially be permanent, some on the EU side say they are unhappy with it, arguing it is not sufficiently tough on level playing field issues given the extent of UK market access for goods.  Technological solutions are reportedly not even being discussed, despite the setting up of the Alternative Arrangements Working Group led by MPs from all parties. But in reality this is a strategic move from the EU. Brussels is keen to keep Northern Ireland, or even the whole UK, inside the customs union to prevent the country from diverging too far from EU rules. An ultra-competitive UK economy could be a serious challenge to the EU’s single market and its social market economy vision.

The plan is that whatever changes are made get back to the House of Commons next week in time for another meaningful vote on Tuesday. At the time of writing, it remains to be seen what concrete measures will be achieved by the two negotiating teams, although a tweet thread on Friday afternoon by Michel Barnier suggested the EU was not willing to offer anything really new on the backstop. Talks could however continue over the weekend. Whatever happens, the choice facing MPs remains the same: back the PM’s deal, no deal or no Brexit. An extension is unlikely to solve the underlying issues that have prevented both sides from inching towards a deal. The most likely outcome remains ratification of the Prime Minister’s deal, at some point. The British government hope that MPs from both sides of the House could be swayed by tweaks to the backstop or by fear: either of no deal or no Brexit. If the PM’s deal is narrowly defeated, then she will likely use an upcoming meeting of EU leaders to seek concession and try again to get the agreement through parliament before the March 29th deadline. An extension of the Article 50 makes a no-deal Brexit less likely in March, but it remains the default until there is a deal.

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Leaks this week indicated what Britain’s trade approach would be in a no deal scenario. It was suggested that the UK government may cut tariffs on between 80 percent and 90 percent of goods if the UK left without a deal. Some tariffs would be scrapped completely, including those on car parts, and some key agricultural products. However, 10-20 percent of key products would continue to be protected by the current level of tariffs, including some textiles, cars, beef, lamb and dairy. By cutting tariffs on the majority of imports, the government would potentially be giving consumers a helping hand. However, the headline figure is somewhat misleading because the vast majority of UK tariffs are currently under 5%. Reducing them to 0% would not have a major economic effect, particularly as import VAT (currently 21%) would now apply to imports from the EU. It does however highlight the fear in UK government circles that the potential supply chain disruption of a no-deal Brexit would lead to higher prices.

The tariff policy is tricky as it needs to serve several purposes: ensure consumer prices are low, protect vulnerable industries, and provide an incentive for other countries to do trade deals with the UK. So, whilst sensitive areas such as farming may need some tariff protection, especially when competing against subsidised European products, dropping tariffs elsewhere may provide strategic advantages for some UK businesses, especially those which import raw materials, add value to them and then sell the finished good on.

It would send a message around the world that Britain was open for business, however unilateral free trade does not mean British exporters will get any advantages. It actually provides more opportunities for foreign countries to import into the UK, and perversely will make a no deal Brexit much easier for the EU to manage, as they won’t lose as much access to the UK market.

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British companies however will face global competition on the domestic market against companies who will have their own domestic markets protected. In addition, it may make trade deals harder to agree as the UK is already giving tariff free access to other countries without a deal. Most trade deals focus on trying to break down existing barriers to trade, and so in a perverse way, the more trade barriers you have, the more you have to negotiate with.

However, free trade is vital for an island nation which imports most of the goods and food it consumes. It would be an interesting experiment to see if a unilateral approach to free trade can nudge other countries into following a similar example. It is also worth remembering that tariffs are only one part of a trade policy. Non-tariff barriers, quotas, technical standards are all also used to regulate access to the domestic market and will still be available for the British government.

However, the key point is that under World Trade Organisation (WTO) rules, the UK has to apply the same tariffs to EU countries as it applies to non-EU countries. That, together with the lower tariffs likely to be charged by the UK means that there would have to be customs posts in Ireland, to avoid goods coming into the UK from abroad then entering the EU single market through Ireland.

It is this point which is most uncomfortable for the EU and why still, at this late hour, there is a possibility that the two sides might be able to come to an agreement before the votes in Westminster next week.

Those votes will dictate the immediate future of both the UK and the EU. If the deal fails to pass, the Parliament will vote on taking no deal off the table and asking for an extension to article 50. If we do get to that stage, then a whole new episode will begin and the Brexit saga will continue for many months to come.