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Friday, 22 January 2021

Get ready for 'Long Brexit'

Another week and more stories of the disruption that Brexit is bringing to UK-EU trade in addition those in my recent posts. Fishing continues to be the most high-profile example in the media coverage, with a major protest in London this week, but increasingly the impact on the meat trade is being reported along with numerous others. Inevitably it is perishable goods which are the most obviously impacted by transport delays, but the problems go much wider. More major logistics groups, as well as a host of smaller companies, are now simply suspending deliveries between the UK and the EU.

As mentioned in the previous post, disruption in the form of queues has been muted by the low volumes of goods traffic over the New Year period – about 25% of normal in the first week of the year and 40% last week on the short Channel – so much greater problems are expected (£). I also referred in the previous post to the fact that at the end of March the grace period on applying full certification rules to shipments from Great Britain to Northern Ireland will end, and this week haulage industry leaders warned that when that happens they will face “an abyss”. According to Richard Burnett, CEO of the Road Haulage Association, “these are not teething problems. These are structural problems”.

It’s an almost impossible task to keep track of everything that is going on but there are two useful resources for doing so. One, mentioned in my previous post, is Yorkshire Bylines Davis Downside Dossier. Another is the ongoing Twitter thread being created by Daniel Kelemen, Professor of Political Science and Law at Rutgers University. However, even these listings show only the tip of the iceberg.

The legacy of lies

The crucial point, unsurprisingly being avoided or misrepresented by the government and by Brexiters more generally, is that this isn’t just a matter of ‘teething problems’ and it isn’t simply because Johnson agreed a ‘bad deal’. It is true that, had there been more time to prepare, some of the problems of conforming with the new situation could have been dealt with. But that would only have made the consequences of Brexit less visible and less newsworthy. It wouldn’t have changed the underlying reality of there being new barriers to trade.  

That reality represents the exposure of the lies or misunderstandings, going right back to before the referendum, that a trade deal would more or less replicate the conditions of single market and customs union membership. Associated with that was the monocular focus on the removal of tariffs as being the sole issue. It has not come out of a clear blue sky. It was warned of repeatedly (Dr Matt Bishop of Sheffield University gave an excellent summary with multiple links in February 2020) and those warnings were ridiculed and dismissed. But now we have, precisely, a zero tariffs trade deal and the warnings have been proved right.

The pervasiveness of the lie also (along with lack of time and Covid) explains the lack of preparations because many businesses thought that if there was a trade deal then their terms of trade would continue unaltered. A report in The Times this week (£) – which includes a lot of crunchy detail on the massive problems facing especially smaller exporters – quotes Ruth Corkin, the VAT and indirect tax Director of Hillier Hopkins, reportedly the only British accountancy firm to offer a customs agent service to SMEs dealing with Brexit. As such, it seems a fair assumption that she has extensive contacts with such firms and is right to say that some had assumed that because there’s a trade deal “everything will be hunky dory and like it was before”.

If so, it was an entirely understandable assumption given the last five years of promises and lies. But even firms which did understand and prepare for the new realities have been caught out by the complexities of the new requirements and the inadequacy of the administrative and IT systems they have to deal with. A particular problem (the link in the previous sentence gives an example) is the outdated Customs Handling of Import and Export Freight (CHIEF) system, a legacy system which is still being used because of delays in creating the new Customs Declarations Service (CDS). Another problem now being reported by Joe Mayes of Bloomberg is a desperate shortage of ‘transit guarantees’ and delays in new ones being issued by HMRC, this being due to delays in another IT project, the New Computerised Transit System. (These examples of deficiencies in the systems needed even for a frictive border might also serve to remind us of the hollowness of Brexiters’ claims for technologies which would make borders completely frictionless).

A fundamental shift in the trading economy is underway

There are now daily reports of the damage being wrought, but focussing on each individual one is to miss the point of what is happening. What is underway is a fundamental shift in the ‘tectonic plates’ of the UK trading economy and its supply chains, happening in real time and under our noses, but with little comment on the aggregate picture. And it is going to get worse when all the new rules are stringently applied on the EU side and applied at all on the UK side. It is reaching, or will reach, into every niche of economic life, from business travel to the EU (£) to having to make a declaration if an individual or group takes more than £10,000 out of Great Britain (i.e. including trips to Northern Ireland) to an EU country.

As Shane Brennan, CEO of the Cold Chain Federation puts it “the big worry here is that ‘not trading’ becomes the habit”. My view is that this is an inevitability, partly because some trading firms will simply give up as things are too costly or too complex (for SMEs, in particular), but mainly because of the impact on customers. If they experience even a short period of disruption leading them to go to an alternative supplier then, very likely, they will stick with the new supplier.

This is evident in an example in Joe Mayes’ report where the Managing Director of Sealight, which exports LEDs, explains that “[EU] clients will say: ‘Forget this, it is just too much”. He expects his firm’s annual sales to drop by 25%. In the same report it is suggested that some 20% of SMEs have suspended exports to the EU. Those affected include companies selling via platforms like Amazon and Ebay.

Meanwhile other businesses, both large and small, are struggling to get the imports they need – hair salons being just one example – and they will surely face price rises, if not now then down the line, because EU hauliers are now charging €10/km to carry freight to the UK, up from €1.50/km. That aside, British purchasers of EU goods are finding that they face charges (due to customs, VAT and handling fees). These are not necessarily known in advance and are demanded at point of delivery by couriers. Again, after the initial ‘disruption’, the long-term effect is likely to be that customers cease to order such goods.

Most of the current focus is on the impact on goods trade, because it is this which is affected by new customs formalities and, when falling foul of rules or origin, tariffs. A huge additional, and so far under-reported, problem is the impact of regulatory duplication caused by Brexit, an important example being the £33 billion a year UK chemicals industry. Moreover it shouldn’t be forgotten that new non-tariff barriers are, under the surface, affecting service businesses. An illustration is the report that some 2,500 jobs and £170 billion of assets had moved from the UK financial services sector to France alone up to the end of 2020. That was before (though of course in anticipation of) the end of the transition period and is expected accelerate now. There are also new warnings of significant threats to the UK’s huge fund management industry.

Today’s announcement that Nissan will continue its Sunderland operations is great news for its workers and suppliers there. It’s an important example of why having a trade deal with the EU is better than ‘no deal’ would have been. It’s also an example of the ‘shifting tectonic plates’ in that Nissan will move production of the battery for the Leaf model from Japan to the UK so as to ensure it meets the rules of origin for tariff free export to the EU, including the three year window provided for by the TCA for electric car batteries. But it doesn’t follow that the rest of the auto industry will stay, nor does it negate the fact that other damage is occurring. In terms of assessing Brexit it is ‘not bad news’ rather than being a positive achievement. For despite what Brexiters will be saying loudly today, it is not a demonstration of the success of Brexit to retain companies that were already here, and are staying despite the new trade barriers that Brexit has erected.

Overall, it will take a long time before the full effects of all these new trade barriers are known, but Dr Thomas Sampson of the LSE, writing in a new UK in a Changing Europe report (p.106), suggests that over ten years UK exports to the EU will drop by 36% and imports by 30% compared to EU membership. These are big figures, and it shouldn’t be forgotten – as Brexiters sometimes do – that they will have knock-on effects on firms and individuals who don’t themselves engage in trade with the EU. These may be firms that supply goods and services to traders, individuals employed both by such firms and by trading firms, or customers experiencing higher prices or less choice/ quality in what they can buy. And, as mentioned in my previous post, trade deals with non-EU country are not going to go very far in compensating for all this.

It’s important not to focus solely on economics and trade. Brexit is going to have multiple, short and long-term impacts on almost every area of British life. The UK in a Changing Europe report I just mentioned – by happy coincidence entitled, like this blog, Brexit & Beyond - is a superb new resource assessing just about every conceivable one of these areas, each written by a leading academic expert. It is well worth taking the time to digest it. Equally worthwhile are the (sometimes less high-profile) writings of industry experts. One example this week is a blog this week by Clive Simpson, a journalist specialising in the space industry, on how Brexit it set to affect that (one of the few topics not directly covered by the compendious UK in a Changing Europe report).

Assigning – and evading - responsibility

Simpson also proposes the term “long-Brexit” (analogous to ‘Long Covid’, so perhaps ‘Long Brexit’ would be better) to apply to the ways that short-term Brexit impacts will morph into chronic problems. It is a useful idea because the very elongated timeframes of Brexit should not deter us from linking the effects of Brexit to the decisions (and indeed promises) made going back to 2016.

There may sometimes be problems of causality when looked at over such timeframes, and the Brexiters will use that to try to gaslight us about what is happening and why, as well as about what they originally said. Indeed this week saw a spectacularly egregious example, with Jonathan Saxty in The Telegraph (£) lachrymosely complaining that “Brexiteers” (sic) were wrongly being blamed for the problems they had warned of all along. To those who have been on the end of the ubiquitous ‘Project Fear’ dismissal it had a hollow ring, to say the least.

The main lines of the Brexiter rebuttal of responsibility for the policy they urged are clear enough. Adverse effects will be denied or downplayed; admitted but with a denial that Brexit was the cause; admitted but blamed on the EU for acting unreasonably; or admitted but blamed on Brexit not having been done properly, with this in turn blamed upon ‘the remain establishment’. What can be assured is that they will never take responsibility. It will be important to continue to challenge this, and it continues to be disappointing that the Labour Party is not taking the lead in doing so. That is a great error, as former Labour MEP Richard Corbett has cogently argued this week.

But there is a more insidious problem, which is that many – by no means all of whom will be Brexiters – will slip into saying that the problems caused by Brexit need to be ‘sorted out’ by the government, perhaps by means of discussion with the EU. That won’t always be misplaced. It is certainly for the government to sort out its customs IT systems, for example. And there may be areas where discussion with the EU can clarify features of the Trade and Cooperation Agreement (TCA), or where this or that extension of grace periods on certain measures can be agreed. However, the fundamental architecture of the deal, and therefore its effects, is a direct consequence of the policy of hard Brexit, and we have that policy because the (hard) Brexiters insisted upon it. To use the ‘Long Brexit’ analogy, the cause of the symptoms is the virus.

From this point of view the provisions of government compensation and support, which have been offered in the case of fisheries and are being considered for the music industry (£), are palliative rather than curative. And where does it end? Compensating all businesses for all the costs of Brexit would involve huge sums, especially coming on top of the government support rightly and necessarily being provided because of coronavirus. It’s ironic, too, that after all the promises, including that of extra money for the NHS, Brexit should now be revealed as something requiring compensation.

UK and EU relations

Meanwhile, as the early effects of Brexit play out, the wider context of the EU-UK relationship shouldn’t be forgotten. The TCA set in train a complex set of decisions and deadlines which have been mapped by the Institute for Government. An immediate issue is that the European Parliament has yet to ratify the TCA and the deadline for doing so looks set to be extended to April. Ostensibly this is to allow translation work but what lies behind it seems to be continuing concerns about the robustness of the governance mechanisms, which are also due to be discussed today by EU Ambassadors.

This in turn reflects the now embedded distrust in the UK’s intentions, a distrust that can only be fed by fresh mutterings in the undergrowth (of which I suspect we will hear more) about the possibility of the UK reneging on parts of the Withdrawal Agreement, as well as the rather more high-profile talk of ‘reviewing’ workers’ rights. The latter may, as Mike Buckley argued in a piece in Byline Times this week prove more difficult to enact than the government think, not least because of potential sanctions under the TCA but, as he astutely observes, may prove to be an example of the UK constantly pushing at the boundaries of EU patience in terms of what might or might not be allowable under the TCA. Hence continuing EU concerns.

In any case, although the British Parliament settled for a “farce” in its scrutiny of the TCA,  it’s not unreasonable that the European Parliament intends to scrutinise it diligently and seriously. Boris Johnson’s reported “rage” and “warning” that ratification must occur by the end of February is unwarranted but also irrelevant as there’s not much he can do. But it illustrates that neither he nor the Brexiter press are going to allow any good grace to be introduced to how the UK interacts with the EU.

That gracelessness is especially evident in the story that emerged yesterday that the government is refusing to grant the EU’s new (and first) Ambassador to the UK full diplomatic status. It is petty, reflecting how, even having got Brexit, Brexiters are determined to sour and antagonise relations with the EU, and it is foolish in the context of the ongoing negotiations deriving from the TCA.

But beyond that, it reveals an extraordinary irony, because the government’s justification is that full diplomatic status is not warranted as the EU is ‘not a nation state’ but simply an ‘international organization’. Yet for years the Brexiters’ core complaint was that the EU had become a super-state, making the UK’s membership sovereignty-sapping in a way that was quite different to its membership of other international organizations. So as the costs of Brexit rip through our country, revealing all the lies told of there being no costs, it is tacitly admitted that this was another lie. Indeed, it was the foundational lie.

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