Friday 8 January 2021

Brave new world

As trailed in the previous post, this blog is now retitled ‘Brexit & Beyond’ to reflect that we are now in a significantly new stage of the Brexit process, with the UK having left the EU, finished the transition period, and agreed a new arrangement for future trade and cooperation.  As it has since 2016, the blog will continue to provide a broad non-technical analysis of the political, economic and cultural events associated with Brexit, normally on a weekly basis, drawing on a wide range of news sources and expert technical commentaries.

It is a new stage, but the new title is meant to suggest that it is also a continuation, not least because of the numerous loose ends left, and reviews created by, the EU-UK Trade and Cooperation Agreement (TCA). These are helpfully summarized in a diagram created by Professor Simon Usherwood of Surrey University. More generally, there will be a whole new institutional architecture, in the Partnership Council and its sub-bodies, within which the UK-EU relationship will unfold.

Moreover, from now on it will be possible to compare the realities of Brexit with what was claimed or promised for it. I don’t think that doing so amounts to “leap[ing] with glee onto every bureaucratic bump in the road out of Europe”, as counselled against by the columnist Clare Foges in a thoughtful article in The Times this week (£), and it most certainly isn’t, and shouldn’t be taken as, what she rightly calls “gruesome” relish in “businesses suffering or Leave-voting areas getting poorer”. Regular readers of this blog will know that I have repeatedly warned against that on grounds of both principle and political tactics.

Rather, it has two purposes, one being the primarily analytical one of making sense of events and the other the political one that it is legitimate and necessary to hold accountable those who made these claims and promises. Truth matters; at least I think it does, or at any rate that it should.

So whilst it would perhaps be churlish - and, anyway, impossible – to record every such “bureaucratic bump” it is likely that many of them will be relevant to those two purposes if, for example, they are in fact instances of the non-tariff barriers to trade that Boris Johnson has told the public do not exist. For as Professor Ian Begg of LSE writes on the Federal Trust blog “the essence of the [TCA] is the re-imposition of non-tariff barriers swept away in the process of creating the EU single market”. In that sense, “bureaucratic bumps” are a feature, not a bug, of Brexit.

Two kinds of claim for Brexit

It is already clear that assessing those Brexit realities is going to be as fraught with difficulty as it was for the original claims and promises. For already there have been a string of misleading and sometimes downright false statements made by Boris Johnson and others about what those realities are. Yorkshire Bylines have begun a useful register compiling and debunking them.

It’s worthwhile to draw a distinction between cases where there is at least some room for different interpretations with those which are plain lies.

In the former category an example might be the abolition of the ‘tampon tax’ (i.e. VAT on women’s sanitary products) in that it is true that the UK was able to do this when it did – on 1 January – because of Brexit, but it was in train to happen anyway and, arguably, might have happened earlier had the UK continued its previous push for a change in EU rules which fell by the wayside once the Brexit process got underway. Still, it’s not entirely bogus to interpret it as a benefit of Brexit (though strange that some of those most vociferously doing so had voted against it).

In the second category is the statement by Northern Ireland Secretary Brandon Lewis that “there is no ‘Irish Sea border’”. This is simply untrue, because that is precisely what was created by the Withdrawal Agreement yet Lewis is quite shameless in denying it, as he also did last February. It was absurd then, but how much more so now when there is direct evidence of companies in Great Britain suspending deliveries to Northern Ireland, and direct evidence of delays at the border? Lewis’s position is all the more ludicrous because, at the same time, he is extolling the unique benefits of Northern Ireland’s dual status. And apart from the fact that the Irish Sea border is part and parcel of that status, it begs the obvious question of why, if it is so advantageous for Northern Ireland to be in the goods single market and customs union, it makes sense for Great Britain not to be?

Slightly less brazen, but almost equally misleading, is Home Secretary Priti Patel’s claim (£) that the UK’s security is enhanced by Brexit. I briefly indicated in my previous post why this is not so, and it has since been explained in more detail (and with more authority) by Julian King, former EU Commissioner for the Security Union. A key issue, as he confirms, is real-time access to EU databases and, more generally, patching administrative solutions to the gaps created by being a third country. There are also still unresolved issues about whether the EU will grant the UK data adequacy equivalence (which also matters hugely for trade) and about how to replace the European Arrest Warrant. Overall, KIng describes what has been agreed as “a damage limitation exercise”. That is worthwhile in itself, of course, but it can hardly be described ‘making Britain safer’.

Borders and business

Brexiters have been quick to point out that there have not been huge lorry queues at channel ports in the first few days since the end of transition (with John Redwood dishonestly contrasting this with the single market by referring to the pre-Christmas chaos caused by Covid). But few with detailed understanding of the issues had anticipated there would be, partly because firms had been stockpiling in advance and partly because of the new year holiday. Now, of course, there is a new lockdown, further suppressing trade flows.

Nevertheless, there have already been some reports of freight being turned away at the borders because of a lack of correct documentation, and these are likely to increase according to significant new industry warnings of much greater disruption in prospect, especially, though not limited to, Northern Ireland. The long warned of shortage of vets to undertake post-Brexit SPS tests has caused some major delays to fish exports. There have been some supply chain disruptions, a high-profile example being shelves empty of ready meals in M&S stores in France, illustrating that even some very large firms were not fully prepared. There is also some evidence that EU-based truck drivers are unwilling to take on trips to the UK.

Some of these effects will be short-term, as businesses get used to the new customs requirements or adjust supply chains, though that in itself is indicative of the foolishness of having made a deal at the last moment, so that there was no genuine transition or implementation period, and the more so in the middle of a pandemic. In any case, it can’t be assumed that they will have no long-term impact because if customers find that a few of their orders do not arrive they may well switch, permanently, to new suppliers.

This is an aspect of the more significant long-term danger, as suggested in my previous post, being not so much of queues at ports but that trade simply reduces because of the increased burden of customs formalities. EU importers of UK goods now have to do extra customs paperwork, which they will not do if they can source the same or similar products from within the EU. Similarly, several UK firms have already announced (£) that they will permanently or temporarily cease to export to the EU because of the additional customs processes as well as, in some cases, the costs of having to duplicate the UKCA and CE safety marks, an especially absurd consequence of Brexit.

Apart from the re-introduction of customs formalities, new UK VAT rules which started on 1 January have put new requirements on EU exporters (and those of all countries) of low value goods to the UK to register for, collect, and pay VAT in the UK. Already, several have announced it is not worth their while doing so: they will simply cease to offer their products in the UK market, either temporarily or permanently. Edwin Hayward, author of Slaying Brexit Unicorns, has produced a listing of some 140 examples of companies which for this or some other Brexit-related reason are not, at least for now, exporting to the UK. This is undoubtedly the tip of a very large iceberg.

The VAT change is a complex one both in itself and in how it relates to Brexit, which illustrates how, from now on, it will often be difficult to disentangle exactly what is caused by Brexit and what would have happened anyway. For these changes are due to happen on an EU-wide basis later this year so would have applied to the UK as well had it still been a member or in transition. However, crucially, firms in member states will be able to use the EU’s ‘one stop shop’ single VAT return, avoiding the need to register in each country, but that will not cover the trade they do with UK customers which will require a separate, UK-only, registration. So, in that sense, this is a new Brexit impediment to EU-UK trade. Moreover, it creates particular complexities for Northern Ireland because of its dual status following Brexit.*

So we are beginning to see the serious limitations of a free trade deal, as compared with membership of the single market and customs union. Fishermen are learning that ‘taking back control of our waters’ brings with it new barriers to their largest market, the EU. The food and drink industry is discovering (£) that ‘zero tariffs, zero quotas’ does not help when goods fall foul of ‘rules of origin’. Thus when goods arrive from the EU to UK distribution hubs and then go back to customers in the EU, they face full tariffs. It is not just food and drinks companies affected, of course, but at least 50 major UK retailers including B&Q, Boots and Dixons.

Meanwhile, there has been an immediate and dramatic flight of trading in EU shares from the City of London (£) to EU financial centres – not a huge market in itself, but a sign that where business has international mobility it will move to wherever it is most advantageous. A senior fund manager has described this as “a stunning own goal for the UK [which] is only the beginning”, and the consensus view is that it is business which will not return to the UK (£).  Less dramatic (except perhaps for those directly affected), 80,000 UK-run websites with an EU domain name have been suspended. Anyone concerned that this will affect the Leave.EU site need not worry, though, as our patriotic friends took the precaution of re-registering it in Ireland.

The deep roots of these problems

These kinds of problems arise in the first instance from the nature of TCA, but their roots lie very deep within the entire Brexit project. What was concealed, during the Referendum and thereafter, under the meaningless phrase ‘access to the single market’ was a complete misunderstanding of what the single market is, allied with a highly dated understanding of free trade being mainly about removing tariffs rather than non-tariff barriers, and a total ignorance of the nature of modern supply chains. This in turn is reflected in the relative absence of provision for services in the TCA. 

It is of course much too early to know how all this is going to affect the British economy (or, to be less abstract, jobs, prices and tax revenues). Whilst many of the effects already seen were predicted (and dismissed as Project Fear), as were many others which will become evident soon given the inevitable consequence of creating new barriers to trade with the UK’s largest trading partner, others will be unanticipated and will take many months, if not years, to emerge. Often, they will involve highly technical things – VAT rules and rules of origin, for example – that few will understand and which will seem far removed, both conceptually and temporally, from the Referendum vote. Brexit is akin to an economic depth charge, with the effects only slowly rippling out over a wide area.

How do Brexiters respond?

Brexiters have three inadequate and also contradictory responses to all of this. The first is to say that it is entirely irrelevant and simply an example of ‘remainers’ failing to understand that Brexit is about taking back control and the reassertion of sovereignty. Their sovereignty argument does not stack up even in its own terms, as was once demonstrated once again this week in an elegant essay by Public Law Professor Mark Elliott of Cambridge University. But even supposing that it did, this isn’t at all how they are ‘selling’ Brexit. If it were, they would not be making all the bogus claims about how much Brexit is, or will, improve things. They would honestly acknowledge the costs, economic and non-economic, but say they were worth paying.

The second response is an extension of the first, which is to deny the problems that Brexit is creating, or to downplay or trivialise them. In effect, this is to reprise the Project Fear narrative, but with the added dishonesty of denying demonstrable facts and not just well-informed predictions. Almost inevitably, such denials are accompanied by irrelevant (and usually inaccurate) reference to some of the macroeconomic forecasts of 2016.

The third response is to make claims about how, in the future, any immediate negative effects will be overcome (what we might call ‘Project Hope for the best’). Domestic production will increase to substitute for imports from the EU (which it may, but to what extent and with what implications for cost and/or quality is questionable) and/or new global markets will be developed (which they may, but the gravity model of trade, which applies almost as much for services as for goods, suggests limits to the extent of that). Not only are such claims dubious but, again, they give the lie to the line that the case for Brexit is one of sovereignty, regardless of the economic cost. Brexiters still can’t decide whether their project is one of political principle or economic pragmatism or, more accurately, they flip opportunistically to the one whenever the other is discredited.

The demand to accept Brexit, or to move on

But I think there is a much deeper aspect to such arguments and counter-arguments, deriving from the complex political psychology of Brexit. Ever since the Referendum it seems as if Brexiters have both expected and needed those who disagreed with them to recant and to acknowledge that, after all, Brexiters had been right. Of course, it can be said that remainers have also sought to convince their opponents that they made a mistake. But I don’t think that, had remain won, anyone would have expected Brexiters to suddenly say that staying in the EU was the right decision or even tried to get them to do so. In any case, asking people to accept an unwanted status quo is very different from asking them to support an unwanted radical change.

Several factors lie behind this Brexiter need for affirmation. It is in part an insecurity, based perhaps on a lurking knowledge that what they have brought about is so damaging. Related to that, for some it is ‘remainer negativity’ which is the cause of any damage or, at least, which has soured what was supposed to be a moment of triumph. A stronger version of that is, to the extent that Brexiters believe themselves to have been a ‘resistance’ movement that has enacted a national liberation, they expected the whole of the country to welcome it, and are genuinely bemused that at least half the country does no such thing. And at least for some of the most vociferous Brexiters that links to a populist authoritarianism, in which opponents are derided as traitors and saboteurs.

So the early jibes that remainers should ‘suck it up’ and accept ‘the will of the people’ morphed into the expectation that they bestow ‘losers’ consent’ and now into the demand that they at least ‘put Brexit behind them’ or at most ‘get behind Brexit’ so as to, as ERG leader Steve Baker suggests, ‘move forward together’. Lurking behind these escalating demands lies an implicit and much darker accusation than that of being ‘bad losers’. It was evident this week when numerous Brexiters, including public figures, equated those who had campaigned peacefully for a second referendum with the insurrectionist mob which stormed the US Capitol building on Wednesday.

Apart from being a morally contemptible and intellectually vacuous false equivalence, it is hardly likely to engender ‘togetherness’ and is ironic given that it was Nigel Farage who once threatened to “pick up a rifle” if a “proper Brexit” was not delivered, and that numerous Brexiters talked of riots and civil disorder in the event of another referendum. And, in case anyone has forgotten, the only example of lethal violence in relation to Brexit was the murder of Labour MP Jo Cox by a far-right terrorist.

Even apparently reasonable calls for unity are all too often couched in divisive ways. For example, as a letter to The Times (£) put it this week, “we should all of us be looking forward to the future and how we can now help our country succeed. This includes ‘remoaners’ who wish to wallow in the past.” It hardly needs to be pointed out that to express that aspiration in such heavily loaded and pejorative terms makes it unlikely to be realised.

Even so, it is the force of such demands which, I think, explains why Keir Starmer has been and still is so reluctant to even talk about Brexit and its effects. I don’t think that is a viable stance, politically, for how can so central a policy be treated by the official opposition as taboo? It has only been just about feasible because of the urgency of the coronavirus crisis. Certainly for society more widely it is unrealistic because, like it or not, the referendum result – partly because of its closeness, partly because of the way it was achieved – could never be enough in itself to create a widespread endorsement of Brexit. That was compounded by the failure to create any process to develop such an endorsement and, on the contrary, to pursue Brexit in a way which maximized alienation amongst its opponents.

In that sense, too, this new phase of Brexit is not a radical break with what has happened over the last five years, but grows organically out of it. Of course everyone must ‘accept’ Brexit and the TCA in the specific sense that these are established facts, but that doesn’t preclude people from actively working to deepen the TCA or, for that matter, to rejoin the EU. Nor does it stop people passively resenting what has been done and deploring its consequences for themselves and others, or mean that they will refrain from pointing these out. And this will not be assuaged, but rather exacerbated, if the Brexiters continue to lie about what those consequences are and even further inflamed if, as Daniel Hannan proposes, they now proceed to use Brexit to enact the deregulatory agenda that, undoubtedly, has always been the motivation of some of them.

Far from Brexit being over, we are at the beginning of the very long and hard road that lies beyond.


*I am extremely grateful to Richard Asquith, VP for Global Indirect Tax at Avalara, for patiently answering my questions about the new UK VAT rules. He is not, of course, in any way responsible for what I have said about them, nor for any errors I have made in what I have said.

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