Friday, 6 August 2021

Britain's Brexit slow puncture

At the corner of my road is a display board for local notices and, recently, the council have put one up about a project to support local businesses and community organizations to re-open as Covid restrictions ease. Prominently and, to my mind, poignantly displayed on the sign is an EU logo, for this project is part-funded by the EU Regional Development Fund. I assume it is the very last trickle of money from the 2014-2020 programme.

It’s a reminder that although the Brexit process has been going on for years, we are actually only eight months into being substantively outside of the EU. Not only that, but in many respects we have not yet experienced the full reality of it.

Travel to and within the EU

The pandemic is one obvious reason, because it has curtailed both leisure and business travel to EU countries. The latter will be especially significant for services trade, as Head of Trade Policy at the British Chambers of Commerce explained this week. A particular sub-set of this, which has received much media attention, is the impact on European touring for musicians and other performance artists. A highly misleading government announcement this week implied that some new agreements had been reached on this, but, despite reports taking this implication as if it were a fact, it actually only confirmed what was already known about visas and didn’t address the underlying problems of touring.

In any case, many people who would otherwise have done so have yet to encounter the new complexities and restrictions such travel now involves for British people, with more to come in 2023 when the European Travel Information and Authorisation Scheme begins (inevitably described as “new Brexit punishment” by the Express). Similarly, anyone who in lockdown has watched old episodes of those TV shows about relocating to Spain, France, Cyprus and so on will be in for a nasty shock if they are inspired now to try it for themselves. For whilst it is still possible, it is much more difficult: one of the more incoherent Brexiter ideas was that ending freedom of movement of people would radically reduce the number of EU citizens moving to Britain yet, somehow, would scarcely, if at all, impact on British citizens’ freedom to move to EU countries.

Introducing import controls

Then there is the staggered introduction of so many aspects of Brexit. The various grace periods in the operation of the Northern Ireland Protocol have featured fairly prominently in the media. Perhaps less widely reported is the fact that the UK has yet to introduce full controls on EU imports. This might seem surprising given that the decision that Brexit meant leaving the single market and customs union was taken in January 2017 and, after all, the EU was ready to impose its import controls at the end of the transition. The reason is a mixture of the persistent failure to understand that this was bound to mean border controls, the political problem of admitting it when it seemed conceivable that Brexit might still be reversed, and the stubborn refusal to extend the transition period when it was possible.

So in the government’s desperate hurry to declare ‘independence day’ it ignored its own lack of preparation to be independent. Indeed, in March, it postponed phases two and three of the Border Operating Model so that controls which were due to begin in April and July of this year have been pushed backwards. However, as with the expiry of the Northern Ireland grace periods, in the absence of further postponements the date for these controls to begin is rapidly approaching.

This means that from October 1 2021 - less than two months away - there will be checks on agri-food and feed documentation, with the next and main tranche of controls coming in on January 1 2022, and the final stage, covering live animals and low-risk plant products, being introduced in March 2022. Only then will the Brexit controls on UK-EU trade in both directions be fully in place. One significant problem, which already exists but will be exacerbated once import controls are in place, is a chronic shortage of the vets needed to undertake the necessary checks, itself caused in part by the end of freedom of movement of people.

Still later – in March 2023, it was announced this week – will the much-delayed Customs Declaration Service IT system be fully up and running (in the meantime, the antiquated and creaking CHIEF system [£] will remain in place). It wouldn’t exactly be surprising, given the history of government IT projects, including this one, if there were further delays. All these dates become the more remarkable considering that the entire Trade and Cooperation Agreement will be up for review after five years of being in force, meaning the end of 2025, whilst the Northern Ireland Assembly will vote on continuing consent to the Protocol in December 2024.

Although it may be that introducing import controls results in some significant disruption it would be better, as I’ve argued before, to see the effects of Brexit in terms of a slow puncture than a dramatic tyre blow-out. It will probably be like the immediate and visible effects of export controls (i.e. EU import controls), which have ‘settled down’ in the sense of beginning to make a long-term adjustment to trade being at lower levels than before. This has important political (non-)consequences, because, despite what some have expected and may still expect, there’s unlikely to be any ‘moment of realisation’ when public opinion registers the damage of Brexit.

Instead, there will be a gradual decline which, as with the current widespread reports of empty shelves and unpicked produce, causes inconvenience but probably no dramatic crisis (though some warn of it). The underlying issue of labour shortages means it will be the same story across many sectors, from construction to hospitality. But, because this isn’t a controlled experiment, it was always going to be hard to definitively explain the decline in terms of Brexit, and the pandemic makes that even more difficult. Even if it’s true that it is only the UK, and not EU countries, which is seeing these problems, that isn’t going to register with most voters.

Investment and regulation

Still less will the negative impact on foreign direct investment (FDI) in the UK register, although in the long-run that may be much more important than supply chain disruptions. Here again there will be debates amongst commentators and politicians about the role of Brexit but, as with UK-EU trade, the key point is that in what are inevitably multi-factorial issues the contribution of Brexit can only be a negative one. By definition it depresses UK-EU trade compared with not-Brexit, even if there is scope to argue about the precise extent, because it introduces new barriers to trade.

On FDI (not to be confused with overseas acquisitions of UK businesses, often by private equity firms, which is happening apace because of low company valuations caused in part by Brexit [£]) and related issues the only argument that Brexit would be beneficial is based on the creation of a more attractive regulatory environment. But, so far, ideas for what this would consist of have proved elusive, hence the recent TIGRR report was so anodyne.

The reason for this is that, despite years of propaganda to the contrary, neither EU regulation nor regulation in general have been major problems for UK business. Unsurprisingly, therefore, in a key industry often cited as a prime example for the advantages of regulatory freedom, financial services, recent regulatory reforms, whilst extensive, have not been radical (£). And, interestingly, despite the claims sometimes made about the ‘real agenda’ of Brexit, the government, at least for now, is resistant to removing the EU cap on bankers’ bonuses (£).

Conformity assessment

Meanwhile, as I’ve been flagging up since March, manufacturers, far from being freed from ‘red tape’, will have to implement the new UK Conformity Assessment (UKCA) registration and marking system in order to sell most goods in Great Britain from January 2022. This replaces the CE mark which will, however, continue to be needed to sell goods in the EU. The CE mark will also be valid in Northern Ireland, as will the UKNI mark (though not the UKCA mark) which can also be used by Northern Irish companies selling in Great Britain, but not in the EU, including Ireland, which will require a CE mark. There are also rules about the various combinations of CE, UKCA and UKNI markings that are permissible within different markets.

It’s exactly the kind of double (or triple?) regulatory burden that the single market abolished, and it’s also very unclear whether the UKCA assessment system will be up and running in time. Even if it is, it’s equally unclear whether firms will be ready. It is small firms which are most likely to struggle, as with the new trade barriers (of course it is also, itself, a new trade barrier but it will also affect those firms which only sell domestically).

Regulatory issues go beyond the generic one of UKCA registration, so that different industries and sectors face different challenges. A complicated example is the medical devices sector (which has secured an extension on the use of the CE mark until June 2023). An EU-wide system was still under development as Brexit happened, and the UK is set to develop its own system but it is not yet in place and it is as yet unclear how it will work. Another example is the huge cost to the chemicals industry (and, actually, beyond) of creating the UK REACH system in place of REACH, the EU system, which has also often been mentioned before on this blog, and has had quite a bit of media coverage (£). A sub-set of this is the particular problem faced by suppliers of biocidal products, which from the end of 2022 will have to achieve ‘GB Article 95 listing’ to supply the British market.

What all these examples, and many others that could be given, share is the basic issue that the UK/GB market in itself is relatively small, thus having its own regulatory system may simply make that market too costly to service, especially for smaller firms, and more costly for those who continue to do so. This in turn means it will be more difficult and costly – or in some cases simply impossible - for British customers to buy the goods they want. For example, the UKCA mark will be needed to sell goods in Great Britain but will not be recognized anywhere other than Great Britain, so the incentive not just for companies in the EU but anywhere else in the world to register is relatively small, and for some products may be tiny.

The bizarre irony is that, in many and probably most cases, it isn’t that actual product standards are set to diverge from EU standards and, quite possibly, they never will. It is that there are, or will be, different processes (and associated costs) of testing and registration in Great Britain and the EU (and Northern Ireland). Nor is this an inevitable consequence of Brexit or even of hard Brexit: it flows for the most part from the Johnson approach of prioritizing sovereignty above all else. So we pay a massive price – how much is hard to say, but just the cost to the chemical industry of UK REACH is estimated as £1 billion (£) - simply for the theoretical possibility of regulatory divergence.

Spending our own money

Apart from regulatory freedom, Brexit also promised freedom to spend ‘our money’ as we wished. So, going back to that notice about EU regional funding, the Brexiter response would be that it is only our own money being (partially) returned to us. This, of course, was the Leave campaign’s central economic case - the £350 million a week for the NHS. The idea was that all the EU funds for regional development, farming support, science and so on would still be available, plus a dollop on top. It was always (even stripped of the dishonest conflation of net and gross payments) a lie, because it treated the budget deficit as an entire cost-benefit analysis of EU membership. So, in fact, because of the overall effects of Brexit, none of that promised money exists. Instead, as for example Wales is currently finding, replacing former EU funds is a hit-and-miss battle within the context of general government spending allocations, as it was always going to be, for a share of a smaller pie than there would otherwise have been. Some may get lucky, others won’t.

Away from economics (although not without an economic dimension) it is only gradually that things like the end of participation in the Erasmus + scheme will be felt. A rather boosterish piece in the Sunday Times (£) extolled the “wider opportunities” of the UK’s replacement Turing scheme. But, aside from the perhaps limited attractiveness of some of the destination countries, the key fact that the scheme doesn’t guarantee tuition fee waivers means it is a far from adequate replacement. And whilst the UK will continue to participate in Horizon Europe, the EU science programme, the post-referendum experience of Horizon 2020, its predecessor, suggests that here, too, the UK will be in a worse place.

All of these impacts are to some degree tangible and measurable, even if that doesn’t translate into public awareness. And as the extraordinary ‘Kelemen Archive’ (the link is to item #754, currently the latest entry) documenting Brexit damage stories shows, they extend to almost every sector of British society and economy. Yet they do not exhaust the slow-burn damage of Brexit. That includes the many ways in which political conventions have been strained or broken, and political discourse made more toxic. It also includes the erosion of geo-political status associated with Brexit itself, as well as the reputational cost of the government’s serial dishonesty, especially as regards the Northern Ireland Protocol.

As regards the latter, having written at such length about it in several recent posts, and with events having temporarily quietened because of summer holidays, I’ll say no more except that playing with the stability and security of Northern Ireland is one of the worst aspects of what Brexit is doing. But, again, how much does it register with the electorate in England, at least?

Judgment day?

Although they didn’t mention it at the time of the referendum, it has become common now for Brexiters to say that the benefits of Brexit will not reveal themselves for years. That is convenient cover in all kinds of ways, including how it falsifies another Brexiter claim – made again recently by Dominic Cummings - that, by ‘taking back control’, the public will hold MPs accountable for systemic failings. There’s little chance of that if we have to wait 50, or even 100, years before passing judgment on Farage, Johnson, Gove et al.

Even if that judgment comes sooner, there seems very little prospect of some cathartic moment in which it becomes ‘received wisdom’ that Brexit was a colossal, historic blunder. It’s true that things can change – public support for Munich, Suez or Iraq dissipated more or less quickly – but it is possibly easier to recognize and admit foreign policy failures than those deeply embedded in domestic politics and cultural identity. It’s also true that these are, indeed, very early days and something – more likely something political, like Scottish independence, than something economic, like declining trade – could jolt England out of its apathy.

But for the time being I think it’s more likely that we will get gradually poorer than we would have been, living more restricted lives than we would have had, having more complex and burdensome regulation, and with our standard of living - in both economic and more extensive senses - slowly slipping behind those of other North and West European countries.

To re-iterate, no one lives in the counterfactual world in which Brexit didn’t take place. So although those of us who recognize what is happening will mourn our losses and rail against them, just as many, if not more, will deny the reality or be unaware of it, or simply – in one of the more endearing of English ways – mutter ‘mustn’t grumble’ and ‘it could be worse’ and settle down with a nice cup of tea.

That assumes that there is still tea in the shops, of course, despite supply chain disruptions. It would be strange if after all the World War Two nostalgia surrounding Brexit, Johnson found, as his hero Churchill knew only too well, that lack of tea might be the one thing to spell real trouble for the government.

 

I may not post every week over the summer – it will depend on whether there is any important or interesting Brexit news. If you want some holiday reading in its place, and haven’t read it yet, you might consider getting hold of my book! It’s called Brexit Unfolded. How no one got what they wanted (and why they were never going to) and was published by Biteback on 23 June 2021. It can be ordered from Biteback, or via other online platforms, as a paperback or e-book. For reviews, podcasts etc. see this page.

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