Tuesday, December 17, 2019

We’re heading for a Singapore-style Brexit, no matter what Boris does

Published for The Spectator 
Reactions to the landslide victory of Boris Johnson have been rather positive on the other side of the Channel. German Chancellor Angela Merkel for example, stated: ‘To be honest, many are now happy to see a clear result. Boris must be recognised for having managed to convince lots of citizens. Chapeau.’
So what’s next?
First, the Withdrawal Agreement will be ratified by both the UK and the EU. The UK will then formally leave the EU at the end of January.
After that, the UK will enter the ‘transition’ stage, effectively outsourcing its trade policy and regulatory powers to Brussels until the end of 2020, in return for full and unrestricted market access. Nothing will change until then.
Meanwhile, negotiations on the future relationship will commence. There have been some statements and leaks on what the EU is willing to negotiate and how, but the bottom line is that the EU wants the UK to align as closely as possible, fearing that the UK would otherwise emerge as a ‘competitor’, as Angela Merkel has put it. The EU side is also sceptical that the negotiations can be sorted by the end of 2020.
What will the future relationship look like?
One thing is for certain: the UK wants to leave both the EU’s single market and customs union. Theresa May’s great failure was to underestimate the importance of leaving the customs union, and agreeing a Brexit deal whereby the EU would be able to veto whether the UK would get its trade powers back. This stance was inspired by businesses understandably fearing disruption to their supply chains. But it should always have been considered unrealistic for the world’s fifth largest economy to outsource its trade powers to Brussels until further notice. This mistake has since been rectified by Boris.
Is there any precedent for a country leaving the EU’s single market and customs union? Apart from Algeria in 1962, Greenland in 1985, and St Barts in 2012, not really. But there is a precedent of a non-EU country that wanted a close relationship with the EU, but at the same time refused to join its single market and customs union.
That country is of course Switzerland, which decided in 1992 in a referendum not to accept the status of Norway as a ‘regulatory vassal’ or ‘fax democracy’, as former Norwegian PM and current Nato chief Jens Stoltenberg once dubbed his own country (where officials sit by the fax machine waiting for the latest directive from Brussels to arrive). It basically then took five years, from 1994 until 1999, to negotiate which EU rules the Swiss would align with and the degree of market access that would be granted in return. A package of seven sectoral agreements was signed in 1999 – all related to single market access. Like Norway, Switzerland isn’t part of the EU’s customs union. Tariffs on Swiss-EU trade mainly apply to agriculture.
It will be a challenge to negotiate a ‘zero tariffs and zero quotas’ arrangement between the EU and the UK in less than one year, but this kind of agreement would only determine whether tariffs are due on goods that are being traded, not whether those goods are able to enter the market at all. Financial services also wouldn’t be covered.
Therefore, the real question is if there is time for the UK to negotiate a Swiss-style ‘pick and mix’ arrangement for market access? Having five times as many staff working on something – as there would be five times less time available – would speed things up and any arrangement could be implemented ‘provisionally’, meaning it would partially enter into force before national parliaments in the EU have approved it. At this point, Boris should perhaps wonder if the importance of sticking to his promised timetable is worth it – and implementing the exit from ‘vassalage’ in phases instead of in one go could save him face.
Another question is why the EU would relax its opposition to Swiss-style ‘cherry picking’ of market access. Its claim that this somehow endangers the functioning of the single market is quickly debunked by the fact that such an arrangement has been working just fine between the EU and Switzerland for almost twenty years. Whether Switzerland agreed to freedom of movement of persons as well as part of the package is irrelevant. If the UK rejects freedom of movement, it would simply have to ‘pay’ for this EU concession with reduced market access.
Sure, there have been tensions in the EU-Swiss relationship lately, with the EU cutting off market access to the Swiss stock exchange last summer, when the Swiss refused to sign up to a role for the ECJ and to take updates of EU regulations automatically. It must be said that this escalation, which didn’t cause much damage in the end due to Swiss countermeasures, was partially fuelled by the EU’s desire to set an example to the UK. And the tensions weren’t the result of a dysfunctional Swiss-EU model, but because of the EU’s attempt to increase its control over regulations in Switzerland.
It’s very hard to see any alternatives to the Swiss ‘pick and choose’ model for the EU-UK relationship. This model strongly resembles Theresa May’s Chequers proposal, which was previously called the ‘three baskets approach’. Here’s why there are few other options. Suppose the EU sticks to its current stance, and so forces a cliff-edge event, dismissing the UK’s offer for ‘selective rule-taking in return for selective market access’ because the UK refused ‘full rule-taking in return for full market access’ (which would have meant letting the EU regulate the City of London, the biggest financial centre in the world). EU businesses keen to see the chemicals trade and manufacturing supply chains undisrupted would be up in arms. It would also be strange to see the EU, which otherwise goes around boasting about how it is a ‘regulatory superpower’ – because other countries adopt its regulations – dismiss the UK’s offer to do just that, because the UK would only take over part of the regulations. Will the EU risk its £94bn trade surplus in goods to simply avoid making yet another negotiation U-turn? Political gravity is likely to prevail here.
A key question is naturally also whether Boris will reheat the Chequers deal again. Opinion seems to be divided here, with some arguing that Boris will prioritise the timetable and stick to his promise of not extending the transition, at the price of aligning more closely to the EU than one would expect, which will be easier given his comfortable majority. The prospect of possible job losses due to loss of EU market access and regulatory divergence, would push Boris to aligning even more closely.
Others argue that the election result is a vindication of those desiring to diverge in terms of regulation, to fully exploit the benefits of ‘taking back control’ as soon as possible. The thinking here is that prioritising the timetable will actually result in the UK opting for a more divergent approach. This is because there would simply be no time for a ‘mixed agreement’, which basically allows for a deal whereby the UK is more closely aligned, but which would also need to be ratified by all EU member states. An agreement which falls under EU exclusive competence alone is easier to fudge in such a short time period, but only allows a looser relationship.
Both sides make strong arguments and we’ll probably know sooner rather than later what the intention of Boris is. We’ve already seen reports that he will legislate to ‘block’ an extension of the transition period. In the longer term, it is very likely that the UK will opt for more regulatory divergence, which is in line with Boris Johnson’s own strong preference for divergence from the EU.
The reason for that is quite simple: one only needs to take a look at the new European Commission. Dutch EU Commissioner Frans Timmermans, who was responsible for the ‘better regulation’ agenda in the previous Commission and who only achieved disappointing results, is now pushing the so-called ‘European green deal’, which contains a raft of new EU initiatives for more regulation and imposes all kinds of more stringent targets – not to forget wild spending plans.
One example: imagine the UK ends up agreeing to align with EU chemical regulations, like REACH, after Boris listened to the concerns of the UK’s chemical industry, who are keen to keep EU market access (after having made huge investments to comply with REACH) and are wary of competition from outside of the EU. After a number of years, however, the EU may update REACH. That this update is likely to be more stringent, especially after it has gone through the European Parliament, is not hard to predict. If the UK rightly decides not to accept this update, this may well force it to give up part of its EU market access, something that would then need to be renegotiated. Remember: Brexit means perpetual negotiation.
To summarise, even if Boris opts for the softest of soft future relationship models, the EU’s regulatory zeal is likely to drive the UK to diverge in terms of regulation, thereby truly becoming the ‘competitor’ Angela Merkel fears. And so it would be the EU that would drive the UK toward becoming a ‘Singapore on Thames’ (even if Singapore is actually not as deregulated as sometimes assumed).
Last but not least, the regulatory competition resulting from all of this would not only benefit the UK, which would be able to attract new business and research, it is also likely to put more pressure on the EU’s regulatory machine. European companies may urge the EU to abandon regulations similar to its burdensome, unpredictable GDPR data regulation in case the UK offers digital service providers a more comfortable regulatory environment. Prominent European researchers have already warned that an ECJ ruling on gene-editing ‘will end innovation’. In the future, if the UK decides to adopt a more innovation-friendly approach, companies and researchers may consider moving there, in turn putting pressure on EU regulators to change tack.
Forget about the money that the UK will save as a result of no longer having to contribute to the – largely wasteful – EU budget or how the UK will manage to open more markets than the EU. The real benefit of Brexit will be to be released from the burdensome Brussels regulatory machine. Just as Brussels is partly to blame for Brexit, it may well ultimately drive the UK to more regulatory divergence than would have been the case otherwise.

Will the EU be divided during the trade negotiations?
This question is easy to answer. The EU is divided in every single trade negotiation. There always is a protectionist camp and a free trade supporting camp, and sometimes when a ‘pro-free trade’ country happens to host an industry which may face more competition after a trade deal, that country quickly jumps into the protectionist camp. There is little reason to believe it would be different here.
What would be different from a classic trade negotiation is that the purpose of this negotiation is not to open up new markets, but instead to protect ongoing trade as much as possible and reconcile this with the UK diverging in terms of regulation. The stakes for companies in an ordinary trade negotiation tend to be lower. Then, it’s about gaining new possible business or defending a market against new competition. In the EU-UK negotiation on the future relationship, it will be life and death for some companies, as they may need to lobby against being partially or fully shut out from the market where they currently operate.

In an ideal world, the UK would have remained a member of a trade-friendly EU, focused on its core business of scrapping trade barriers. But if there is one great benefit of Brexit, it is how regulatory competition will eventually enable an environment where different regulatory zones can experiment with their own approaches for the great challenges of today.
It’s likely that the UK will have to rethink the timing set forward by Boris, while the EU will eventually need to grant it Swiss-style selective rule-taking in return for selective market access. That would still closely align the UK to the Brussels regulatory machine, but due to the EU’s apparent willingness to continuously give in to its instincts favouring ever more regulation, the UK will ultimately end up as what has been described as ‘Singapore-on-Thames’.

Wednesday, December 04, 2019

As Britain goes to the polls, the EU is preparing a brand new list of 'Brexit Unicorns'

Published in The Daily Telegraph

As Britain prepares to take to the polls next week, the European Union is gearing up towards its own negotiations on the future EU-UK relationship. If, as the polls currently suggest, Boris Johnson gains an absolute majority and Brexit happens at the end of January, these will begin right away. But what will the EU will be demanding? Statements and leaks from Brussels suggest the following.
Their first demand will be that Boris Johnson breaks his promise not to extend the eleven months transition period if he wants a proper trade deal. As one EU diplomat put it, “the choice is either no deal Brexit 2.0 or to extend the transition period.” Another senior EU diplomat added that “not in my wildest dreams would I imagine" the possibility of the EU agreeing a zero-tariff, zero-quota deal by 2020, which would permit divergence from EU rules on workers’ rights and environmental protections.
The EU's chief Brexit negotiator Michel Barnier has said that trade and security will be prioritisedbut “we cannot do everything in 11 months, we will need more time.” It would be possible, he conceded,  to negotiate “the principle elements” of a free-trade agreement to avoid an economic cliff edge before the end of 2020. Only covering part of cross-Channel trade, however, this would be expected to hurt UK services access.
Even if the UK did request a transition extension, it would be on the extra condition of paying a “proportional” contribution to the EU budget. Though there are potential ways to fudge this, for example, by amending the Withdrawal Agreement itself by retroactively changing the provisions for transition extension, the EU’s cooperation will still be needed.
A second EU demand is that the UK agrees to grant the EU access to British fishing waters before the end of June, and it sees this as a pre-condition for any trade deal. An EU diplomat adds that the fisheries issue, where the UK is seen by many to have a strong negotiation position, “needs to be resolved by June, so in four months.” According to the withdrawal agreement, the decision on whether or not to extend the transition is also due by then.
Thirdly, the EU will demand so-called level playing field commitments to guarantee that the UK will not undercut European social, tax and environmental standards to gain competitive advantage after Brexit. If not, the UK should expect a response in kind; Barnier has warned that “access to our markets will be proportional to the commitments taken to the common rules”. He even redefined a refusal to copy the EU's failing model of excessive regulation when exporting to continental Europe as "dumping".
And what of finance? The EU’s Commissioner for financial services has specifically warned that the bloc will restrict market access if the UK diverges too much from EU financial regulations. This threat isn’t as straightforward as it may seem - the City of London is just too important to the EU. Moreover the use of similar tactics against Switzerland has so far failed to deliver a result, with the Swiss able to contain the effects by reciprocal protectionism. 
Fourthly, security cooperation will be a further condition of an EU-UK trade agreement, specifically, finding an alternative to the European arrest warrant and providing access to crime-fighting databases.  
In this regard, EU officials have pointed out that if the UK becomes a competitor and diverges, this will not only result in reduced EU market access, but it will also hurt cooperation in other areas. One official explains “We want leverage in these areas", “to keep the UK in the continental Europe's orbit”. In the past, the EU and the UK have cited aviation, carbon pricing, anti-money laundering, illegal migration, data protection and sanctions on rogue states as areas of post-Brexit cooperation.
A fifth demand is that the new relationship should be governed by a single overarching deal, instead of a patchwork of bilateral agreements, which is for example the case in the EU-Swiss relationship. The latter has been rocky lately, due to EU attempts to push a single framework onto the Swiss, which would force them to accept the power of the European Court of Justice and to align with EU rules in return for market access.
The EU does consider there to be separate areas of cooperation and roughly sees three key ones: trade, security and research. It however wants everything to depend on everything else. They will likely demand some kind of permanent framework in place to govern the relationship, with a coordinating body and two EU-UK summits per year.
There's more. The European Union will also attempt to make the UK sign up to freedom of movement in return for tariff-free market access. Barnier has repeatedly spoken of the link between the frictionless movement of goods and people. Never mind the well-documented exceptions to this rule; the EU for example carved off free movement of people from its trade deal with Ukraine.
This is an extraordinarily ambitious wish list, and one which seems especially ludicrous given EU officials' tendency to accuse the UK of "unicorn thinking". Still, it is Christmas I suppose...