Monday, 31 July 2017

The easiest deal in history?

As the British Government disintegrates over different approaches to a ‘transitional deal’ the question of what would be being transitioned to is almost forgotten (and, rather crucially, neither that nor any transition have even been discussed with the EU yet). It should not be, because all the warring positions within the government are variants of hard Brexit in which the end point is a UK-EU Free Trade Agreement (FTA) – or no deal at all. The factions hoping for an FTA differ only about timescale in which it might be reached.

Liam Fox, the International Trade Secretary, recently opined that a UK-EU FTA should be one of the easiest in history. This is a fantasy, but it is a more complex and superficially more plausible fantasy than is the norm amongst Brexiters, so it deserves some consideration.

The reason why Fox makes this claim is that because the UK is currently part of the single market not only does it enjoy tariff free trade with the EU but also it is in regulatory harmony with the EU and, therefore, there are no non-tariff barriers (NTBs) to trade. Fox’s argument was made before the Referendum by Nigel Lawson (although subsequently he decided that a trade deal was in fact highly unlikely) and the same argument was parroted by Owen Paterson recently (although he, by contrast, was an advocate of soft Brexit before the Referendum so didn’t think a trade deal would be necessary).

Confused and inconsistent as the Tory Brexiters making this argument are, they are at least ahead of the woefully inadequate position of the Labour Party which is still talking in terms of ‘tariff-free access’ to the single market. By contrast, Fox’s position does at least recognize NTBs which are in fact much more significant than tariffs.

In a normal trade negotiation it is indeed the case that reducing or eliminating NTBs is by far the most difficult thing to deal with. So it is true that if the UK were currently a third party seeking single market membership then it would be easy to achieve because of existing regulatory harmonization. The complexity is that the Brexit situation is the other way around from a normal trade deal. The UK is a member of the single market and is seeking to become a third party. Which means that predicting ease of negotiation on the basis of existing harmonization entirely misses the point. This will be perhaps the only trade negotiation in modern times which is about diminishing rather than extending free trade.

In concrete terms what this means is that regulatory harmonization at this moment in time isn’t the issue. What is the issue is regulatory harmonization in the future. What happens when EU rules change (as, in minor ways, they do on a daily basis)? Who decides on those changes and who adjudicates in the event of disputes? The answer is the EU and the ECJ. But the UK is leaving both of these.

Brexiters might argue that ECJ jurisdiction is not a pre-requisite of other EU trade deals, that with Canada (CETA) being the most often cited. But the CETA deal is not remotely comparable to what the UK would be seeking if anything approaching the current UK-EU situation were to be replicated because it does not include services. And services are both central to the UK economy and entail the most ferociously complex NTBs.

At a deeper level, any form of single market access via an FTA is wholly different to single market membership, something which Brexiters have persistently misunderstood, as I have written about elsewhere. And one way of looking at that is that free movement of people (and goods, services and capital) is about the removal of one of the central NTBs that no FTA touches. But avoiding free movement of people is a red line for Brexiters because of the UK politics of immigration. This means that from day 1 the UK will, in fact, be out of kilter with a key part of regulatory harmonization. Understood this way, Fox's argument is just a convoluted version of the 'have our cake and eat it' strategy: trading as if a member of the single market and yet not bound by its core principles. If Brexiters have learnt anything at all yet, they will surely have learned that this is not going to happen.

So it is ironic that Fox thinks that the only barrier to a UK-EU FTA would be if politics trumped economics. Ironic because by that he means the politics of the EU, whereas in fact the barrier is the politics of the UK. First because it is those politics that have made ECJ jurisdiction and freedom of movement red lines and second because, of course, the only reason the UK is giving up the perfect trade relationship it currently has as a member of the EU is because of UK politics.

Fox’s assertion of the easiness of a trade deal is all of a piece with the claims Brexiters have been making about every aspect of leaving the EU – from trade to air travel to the Ireland border – for years. But he is out of step with what is now emerging as the dominant Brexiter narrative, namely that they had always said it would be painful and difficult for years but in some way it will be worth it. Of course, during the Referendum campaign they said nothing of the sort. It is difficult to know which is more shameless: the continued repetition of the old lies, or the hypocrisy of the new lies. What can be said is that neither will survive contact with the realities of the negotiation with the EU.

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