Friday, 11 January 2019

The backstop is a symptom, not a cause, of the Brexit crisis

It is apposite that Sky News are now badging all of their Brexit coverage with the label ‘Brexit Crisis’. For the political crisis which has been incipient since, at least, the 2017 General Election is now well underway, and will almost certainly intensify.

At the moment, almost all attention is on the Parliamentary debate and delayed vote on May’s Brexit deal and, within it, much of the focus of complaint is on the Northern Ireland backstop in the Withdrawal Agreement. But this fails to recognize that the backstop is an aspect of, and grows out of, a much deeper set of problems. It also fails to recognize the full significance of the relationship between the Withdrawal Agreement (WA) and the Political Declaration on future terms (PD).

A two-stage process

Brexit was always going to be a two-stage process, because of the nature of Article 50. Thus criticising May’s deal for not including a binding future terms, and especially future trade terms, deal is misguided and, sometimes, opportunistic – although it is legitimate to point out that many Brexiters, and for a time May, said or implied that this would be possible. What can also fairly be said (and, notably, it was the main line of Sir Keir Starmer’s critique in this week’s resumed debate) is that the level of detail and precision of the PD is much lower than it might have been had any substantive phase 2 discussions taken place. And the reason they did not is, entirely, because until the Chequers’ Proposal in July 2018 the UK government advanced no plan for what should be discussed and, when it did, it promptly fell into massive, and still ongoing, infighting.

That reflects what remains the unavoidable, central fact about Brexit. The UK voted for it, and then embarked on enacting it, without having agreed what it meant in terms of a final destination. Even so, it is not the case, as is sometimes suggested (e.g. Starmer, again), that the PD leaves all destination options open. Of course, it is not legally binding. But it should not be dismissed or ignored to the extent that it is being, as if only the WA mattered.

For the PD does set a direction of travel, most significantly in terms of the reference – reportedly at May’s personal insistence – to ‘respecting the result of the 2016 Referendum’ by ending freedom of movement of people and allowing the UK to have an independent trade policy. In other words, it embodies the red lines of no single market membership and no form of customs union.

That this is in the PD is the core reason for the backstop being in the WA. As soon as those red lines were set, the necessary implication was a border around the UK. This is not for some arcane technical reason and still less due to EU or Irish chicanery. It flows from the basic fact that if the UK wishes to set its own tariffs and regulations there has to be a territory within which they apply and so there has to be a border. Indeed, who would want to do a trade deal with the UK if this were not so? This automatically means trade cannot be completely frictionless, and, since no technology exists (yet, and may never do so) to completely remove the need for any new physical infrastructure at the Irish border specifically, the backstop was devised.

However, even if – as the Norway+ advocates* are seeking – the PD were to be written without these red lines being incorporated, that would not make the backstop go away (and they do not claim otherwise). The non-binding nature of the PD is normally talked about as if the issue were simply that it is not a binding agreement between the UK and the EU, and as if the main danger were of the EU refusing to do a deal. More important is the corollary of that, which is that the UK might at any point re-adopt May’s red lines, or new ones; or the UK might continue to fail to agree what it wanted, making the danger that it could not agree to any deal.

Since there is clearly still no stable consensus in the UK about what Brexit should mean, then there is nothing to say that a new government, or a new Prime Minister, or both, would not overturn anything the Norway+ MPs might manage to insert in the PD before the end of March by dint of the crisis. This might have been different had, post-Referendum, a durable consensus around a Norway+ outcome been built, but it wasn’t and there isn’t time to do so before March.

An FTA +++ is an FTA

At all events, as things stand, the PD is as it is, and it reflects the UK red lines for future terms. Yet a bizarre feature of the present debate is that the Ultra Brexiters are in complete agreement these red lines, but they will not accept the consequence of them for the WA, and hence oppose it. It is this which has led to latest iteration of the ‘no deal’ deal fantasy, in a document produced this week by Global Britain and Labour Leave.

Aside from repeating many long-discredited claims or half-truths about trade on WTO terms, its core proposition is that the UK can leave with no WA (going straight to WTO or, as the report meaninglessly puts it, WTO +++ terms) but then seek to negotiate a future terms agreement which they designate as a Canada +++ Free Trade Agreement (FTA).

To call this naïve is to flatter it absurdly, and not just because of the backstop issue; it also embodies the persistent Brexiter misunderstanding that the financial settlement is a down payment for the future, rather than a settling of past accounts. The idea that a viable first step for a new relationship is to renege on what you agreed during the previous relationship doesn’t deserve serious scrutiny, and to present it as if it did is grossly irresponsible. May is right to argue that the WA, in something like the present form, is the necessary gateway to an FTA.

So whereas the Norway+ group try to downplay the two stages of WA and PD by over-claiming what the future terms statement can do, the Brexit Ultras try to circumvent the two stages altogether by imagining there can be future terms with no WA at all.

But, in any case, no amount of ‘+’ signs or ‘super-‘ prefixes can avoid the fact that, even if agreed, this would be a FTA which means a border. If it didn’t, the Brexiters would have nothing to fear from agreeing the backstop and the WA. It is presumably because they know it does mean a border that they object to the backstop as being something that would end up being permanent. But for the same reason, the EU could never agree an FTA without first agreeing the backstop and the WA. In short, the whole idea is ludicrous in every conceivable respect, but that is, or ought to be, well-known and is not really the key point.

The backstop is not the real problem with May’s deal

Rather, the key point is that it’s not the backstop in the WA that is the terrible problem with May’s deal, it is that the backstop is a consequence of the terrible problem of making an FTA the best available form of the future terms. And the main reason why that is a terrible problem is, in one word: services. The clear implication of the PD is that it will prioritise “comprehensive arrangements” for goods trade (although, even there, trade is not the only issue – the internal supply chains of goods manufacturers will still suffer) over services trade, where all that seems to be envisaged are more or less standard third country market access terms.

Indeed, this is an inevitable feature of any FTA end state. The latest Global Britain/ Labour Leave document again naively latches on to a sentence spoken by Donald Tusk – taking it out of context and without understanding its meaning - to the effect that an FTA would, like other FTAs, “address services”. But, of course, the reality is that “other FTAs” barely “address services” beyond the limited liberalisation of WTO terms, and certainly far less than occurs within the single market.

Of course, there are good reasons to argue that the UK economy is over-reliant on services, although that is the consequence of 30 or more years of UK policy, rather than of EU membership. But correcting that by yanking the country out of the most comprehensive services trade bloc in the world, and moreover the one closest to us, is not the way to do it. There are good reasons to argue that I should reduce my waistline, but self-surgery with a hacksaw is not a sensible method of going about it.

What is especially bizarre about the FTA model of Brexit is that pre-referendum all the talk was of the negotiating advantage of a trade deficit. But (even if that is an advantage) that deficit is in goods trade, not services trade where the UK has a surplus with the EU-27, so setting up a situation where the EU has much better access to the UK goods market than the UK has to the EU’s services market is, to say the least, perverse. But that is what the PD suggests.

These and other issues are discussed with great acuity in a recent article by Matt Ross – based in part on an interview with former Cabinet Secretary Sir Gus O’Donnell – on the Global Government Forum website. The key point made in that discussion is that almost none of the current UK political debate is really focussing on what would happen next if May’s deal were to be passed. There is an over-attention to the WA and an under-attention to the PD (or, as I have tried to suggest here, insufficient attention to how these are inextricably linked).

What will follow, the article suggests, are years of one-sided negotiation, with UK politics still in turmoil and – at best – a highly disadvantageous final deal, or even, after all that, no deal at all. In the meantime, inevitably, the existing process of business disinvestment and relocation – which is already dramatic and alarming – will continue.

What is Brexit? The still unanswered question

Of course it seems more likely than not that May’s deal will not pass next week. In that case, the Brexit crisis is going to become full-blown and the increasingly ugly public mood will turn uglier yet. The pro-Brexit demonstrators outside Parliament know what they want to happen. It is encapsulated in their monotonous, aggressive chant of “Out means Out”.

But that tells us nothing and simply begs the question that Brexiters, and the government that tried to implement their referendum victory, have never been able agree an answer to: what does ‘out’ mean? From which failure all that has happened since, and is happening now, has flowed.

So if May’s version of what Brexit means does fail, then, possibly after May has wasted even more time, MPs (and it will likely fall to MPs collectively, since there is scarcely a functioning government any more) are going to have to agree what ‘out’ does mean. That seems unlikely given the failure so far to do so. Or they must find a way of abandoning Brexit altogether. And they’ll have to do it quickly, because in less than 80 days these decisions will be made for them and, of course, for the rest of us.

*Norway+ now seems to have morphed – perhaps because people felt there were not enough Brexit models around - into being described as ‘Common Market 2.0’, but the central idea remains single market membership and a customs union, with the immediate route being the WA as currently written but with a “significantly reworked” PD to reflect this idea.
If you have not already done so, please consider completing a short reader survey about the Brexit Blog (not just this post), accessible via this link.

Wednesday, 2 January 2019

Britain is on the brink of an historic strategic decision

What happens in the next three months, perhaps even the next couple of weeks, is going to shape the fate of the country for decades. If Brexit goes ahead, in any form, it will enact a profound misreading of the nature of the contemporary political and economic world and represent an unprecedented failure of British statecraft. Before the next round of political theatre begins, it’s worth standing back to consider just why that is so.

It has become commonplace to see Brexit as a backlash against globalization and/or to bemoan it for failing to accept globalization. In fact, it would be better to see it as a failure to understand the regionalization of economics and the multi-polar nature of international relations.

Brexit as a failure of economic strategy

Economic regionalization is most obvious in relation to trade, although trade is only one of its manifestations. On the one hand, and there is nothing new about this, countries tend to trade more with their closest neighbours than with those that are more distant (the so-called ‘gravity model’ of trade). Dominic Raab recently tweeted a strange comment to the effect that the difference between remainers and leavers is that the former believe UK prosperity to be dependent on its location, whereas the latter believe that it is dependent on our character. It’s an absurd notion. There are obvious cost and logistic reasons for location to matter in terms of goods trade, but it also applies to trade in services. National ‘character’, whatever that may mean, doesn’t enter into it.

On the other hand, and which is newer, that basic reality has been institutionalised via the creation of regional trade blocs of various sorts – MERCOSUR, AEC, CPTTP, NAFTA and so on. The European single market is not only one example of this, but is an example of a particular sort. Being a single market rather than simply a free trade bloc or area entails a far more extensive deepening of economic integration.

Amongst other things, this accounts for the fact that there is far greater services trade liberalisation in the single market than in any of the other regional blocs. It also accounts for the highly integrated supply chains running across national borders, and for the fairly integrated labour market by virtue of freedom of movement.

These facts, taken together, mean that alongside the general propensity of trade to be geographically skewed to close neighbours, UK services and also its most advanced manufacturing industries are very deeply embedded in the European market. It is not necessary to make or accept economic forecasts, only to understand basic institutional realities, to see that detaching a country from its regional bloc and then seeking to re-attach it on unknown, but by definition worse, terms to that same bloc, in an unknown time frame, is going to have adverse consequences for businesses and trade, and hence for employment and tax revenues.

The limitations of globalization and the naivety of Brexiters

However, the deeper issue about regionalization is that although it is not the reason for the foundation of the EU it has emerged as one of its key functions because of the failures and limitations of globalization. This is most obvious in the way that the WTO has made relatively little progress in providing a comprehensive architecture for global trade in, especially, services and agriculture. The stasis that has been evident since the ‘Doha round’ can only be exacerbated by Trump’s anti-WTO positions. In this way, regionalization makes a mockery of both the globalist and the nationalist cases for Brexit.

The naivety of globalist Brexiters

The naivety of the globalists is evident in their repeated call for Britain to trade on WTO terms as if these provided anything other than the most basic and limited participation in global trade. By exiting not only the regional single market but also the EU as a gateway to preferential trade deals around the world, the Global Britain agenda is, as a Foreign Affairs Select Committee report put it, a meaningless one. Indeed, its irony is very obvious in Liam Fox’s recent delighted announcement of the value to Britain of the new EU-Japan trade deal – a deal which Britain is due to fall out of once Brexit is completed.

The naivety of nationalist Brexiters

No less naïve are nationalist Brexiters of various hues, both right and left wing. For they fail to recognize that whilst the WTO doesn’t provide a comprehensive and deeply-developed trade system of the sort found in the single market, nor does it allow the pure ‘sovereignty’ of national self-determination. Thus it makes no sense at all for right-wing nationalist proponents of such sovereignty to be so enthusiastic about being bound by WTO rules over which Britain will have far less say than, as a member, it has over EU rules.

Equally, ‘Lexiters’ who imagine that Brexit will bring, or is required to allow, freedom from state aid rules are entirely wrong, as competition law expert George Peretz QC explained in a recent article. More generally, the Lexiter vision of ‘socialism in one country’, which seems to inform Corbyn’s approach to Brexit, is rooted in pre-regionalization economic thinking: national economies are no longer discrete, bounded entities and could only be made so by mass immiseration.

In short, different kinds of Brexiter share a fundamental misunderstanding of the nature of the contemporary economic world. The globalists don’t understand that globalization has taken the form of a series of regionalizations. There’s no realistic way of being global without also being regional. The nationalists don’t understand that nationalism has been embedded within regionalism. There’s no realistic way of being national without also being regional.

It’s no good Brexiters saying ‘but Britain managed perfectly well before’: even if that were true, which is highly questionable, Brexit isn’t a time machine. The world that existed in 1973 has disappeared. In this sense, Brexit represents a profound strategic error for the British economy: if the most basic feature of a national (like an organizational) strategy is its fit with the realities of its environment then Brexit is certain to have a poor outcome because it is incompatible with the realities of regionalization.

Brexit as a failure of geo-political strategy

But the strategic error goes well beyond trade and economics. It is also based on a complete misunderstanding of contemporary geo-politics and international relations. In the aftermath of the collapse of the Soviet Union there was a brief period when the idea of the ‘end of history’ gained ground. Western capitalism and liberal democracy had ‘won’ and were now the only game in town. That analysis was bound up with the idea of economic globalization, but it also implied a uni-polar geo-politics and a trend to ideological homogeneity. In Britain, that analysis was most obvious in the politics of New Labour.

Thirty years on from the fall of the Berlin Wall, and we can see how, again, naïve that analysis looks in almost every respect. The world is not uni-polar, nor is it any longer bi-polar in the way it arguably was during the Cold War, but multi-polar. One aspect of that, in part because of the impact of end of history type-thinking on reshaping the post-Soviet space, is that Russian nationalism is resurgent, of which more shortly. The rise of Chinese global capitalism – China joined the WTO in 2001 - has not been accompanied by liberal democracy and in many respects, most obviously state involvement in private enterprises, is completely different to the neo-liberal model of capitalism that had supposedly triumphed.

At all events, there are now three military superpowers (the US, China and Russia) and three economic superpowers (the US, China and the EU). And of course there is also a string of regional power brokers – India and Iran being examples, albeit of very different sorts.

This would always have been a complex and unstable world within which Britain had to operate, made far more so by a US administration so radically different to those we have been used to. Adding to that by fundamentally shifting geo-political positioning – not for strategic reasons or with any planned or desired end-state in mind, but simply by the series of political accidents and miscalculations that led to the Brexit vote – is folly of the highest order.

Russia and Brexit

That is true both in a general sense but in at least two more specific ways. First because it entails repositioning Britain within an international order which almost universally sees Brexit as incomprehensible, if not downright crazy. And second because about the only international player who gains from Brexit is Russia, a country currently routinely hostile to the rules-based international order in general, and to Britain in particular.

Indeed, it is extraordinary that Brexiters should see ECJ rulings as a threat to British sovereignty when there are regular aggressive Russian incursions into British airspace and waters and when the Russian state “almost certainly” made a chemicals weapon attack on British soil in Salisbury.

It is not necessary to believe that Russia directly or decisively interfered in the 2016 referendum – although there is evidence for this - to see how destabilising both Britain and the EU is firmly in the interests of Putin’s Russia. And the flip side of that is the way that – as the Salisbury attack showed – Britain relies on the EU as one part of its diplomatic defences in relation to Russia in that case, but also more generally.

At all events, Putin’s recent statements about Brexit are abundantly clear. The 2016 Referendum, he opined, expressed the will of the people and a further vote would be a betrayal. That is, ironically, precisely the line that Theresa May is taking. It is obviously also a gloating taunt, mocking Britain, and more especially Brexiters could they but see it.

Brexit is a huge victory for Putin. It damages Britain, it damages the EU, and it presents possibilities for Russia in the Baltic and Balkan states. If Brexit is a strategic disaster for Britain, it’s a triumph for Russia.

The abandonment of strategy

As with economic regionalization, the lesson of multi-polar geo-politics is that few countries, and certainly not Britain, can operate outside of power blocs. It doesn’t matter if a country is the fifth (or sixth, or seventh) biggest economy in the world, or one with, relative to many countries, considerable military, security, and soft power assets. Outside of the big three or four economic and/or political blocs is a chilly place to put yourself by choice rather than necessity.

Current attempts to retro-fit a geo-political strategy to Brexit, notably Jeremy Hunt’s notion of an Asian pivot, underscore this. Not only is it incoherent in its own terms, not least for being predicated in part on Britain having a close relationship with the EU, it also contains nothing that could not be done, and done more effectively, whilst remaining an EU member. The exception to that might be the idea of adopting the ‘Singapore model’, but not only has this been debunked by the PM of Singapore as a non-starter it is also completely incompatible with maintaining a close relationship with the EU (for whom it would be an evident act of economic hostility) and, needless to say, is nothing remotely like what leave voters were promised.

The reality is that Brexit was never conceived of as a strategic project, still less a strategically desirable one. It was always a protest campaign not a plan. Now, it has really come down to just two justifications: to end freedom of movement and to honour the result of the referendum. Without even discussing, yet again, whether or not these are good political justifications for Brexit, the point to make is that whatever else they are, they are not a strategic basis for Brexit.

So if Brexit goes ahead it will mark not just a failure of economic and geo-political strategy – and, after all, such failures are common enough – but something much more unusual: the abandonment of any serious attempt to have such strategy. The difference between May’s deal and no deal in this respect is only one of how quickly and how dramatically the effects of that are felt. If MPs vote against May’s deal, then that will be the first step away from the brink – not enough in itself, but a necessary pre-condition for avoiding disaster, as well, of course, as risking the even greater one of no deal.

However, if it were then to come about that - by virtue of a referendum or some other route – Brexit is abandoned it will be vital to understand and make a case for that not on the basis of returning to 2016 but as a long-term strategic decision about Britain’s future, mediated by its regional position and recognizing the fraught complexities of a multi-polar world.