Getting that Brexit Deal

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Hi Excited Leaver,

Note: originally this was written during a discussion with a leaver (Rod, I hope you are out there and doing well) but was then turned into a more generic post.

So, you’ve won the referendum and you’re excited about that great new deal we’re going to do with the Europeans. Let’s just recap the deal you’re after:

Access to the single market – basically it’s trade more or less exactly like we have now with the EU.  BUT you want to drop some of the extras:

• No EU contribution
• No Freedom of Movement
• No pooled sovereignty

Seems simple enough, just a free trade deal? And of course you’ve been told we’re in a strong position, there’s that huge Trade Deficit as we buy far more than we sell so you’re confident we can drag the EU to the table and get the deal the UK deserves. “The Germans will still want to sell us their cars, the French will still want to sell us their wine” the line goes, the Europeans can’t afford to walk away from the UK as a market. Can they?

There’s just a few minor problems….

 

Access to the Single Market?

The first problem?  What does “Access” mean?  According to the IFS Access to the Single Market is a “virtually meaningless” phrase.  They say:

Any country in the World Trade Organisation (WTO) – from Afghanistan to Zimbabwe – has ‘access’ to the EU as an export destination. Single Market ‘membership’ by contrast involves elimination of barriers to trade in a way that no existing trade deal, customs union or free trade area achieves.

Access, despite what Brexit supporters will tell you (6:50 mark), doesn’t define anything because every country already has it.  What we are talking about here is a specific trade deal that goes beyond default access.  And this is the 2nd problem.

 

Its all the Single Market

It’s not Single Market + free movement + pooled sovereignty + EU contribution, where we say we want only the first of these.  The Single market includes all 3 of these, they are an intrinsic part of it, at least in terms of any reasonable membership level.

There are certainly varying levels of trade with the EU but the further we go to the right, the more difficult and more limited trade gets.  Of course anyone can trade with the EU however clearly there are benefits to being further to the left otherwise  why would anyone bother with even being in the EEA?

OK, so clearly we need some unique deal that gives us as much free trade as possible but without the things you don’t like (free movement, pooled sovereignty, EU contribution).  A deal that doesn’t as yet as exist with anyone, but one that the UK can get because of our unique situation.

So what are our chances?

 

We buy more from the EU than it buys from us

As already stated this is the major argument from Leave, that they need us more than we need them. This is apparently our ace card. Again however, there’s a problem.

We don’t “Buy from the EU” we buy from 27 other countries and 4 more in the EEA.  And we don’t have a trade deficit with all of them.  Some countries buy more from us, and for most of the rest, there’s not much in it.  As this report (quoted by Vote Leave) says:

Most EU members have only a comparatively modest trade surplus with the UK. Although these absolute amounts will be relatively more significant for some of the smaller economies, it would be fair to say that a number of the other EU members have a comparatively smaller incentive to make concessions to Britain.

So yes, Germany, Italy and Spain sell a lot to us, but for most of the EU countries, the UK market is just not that important.  And they have other priorities.  And frankly, by the time we clear Article 50, the trade deficit may not even exist.

 

The “Mixed Trade Deal” Veto

Again, as said, we don’t sell to the EU, we sell to 31 EU/EAA countries and anything of any complexity will almost certainly be defined as a “Mixed Trade agreement”.  These agreements (the Canadian EU deal is one example) are not under the control of the EU parliament.  Instead, these types of deals must be put before the parliament of every single EU country, every EEA country, the European parliament and possibly 11 regional parliaments, and they all have to agree the terms.  Once more with feeling, they ALL have to agree.

42 potential vetoes, a lot of local debate, a lot of bargaining. If just one says no, we get no deal.  And Poland may not care about German car sales nor may Malta care about French wine imports.

But they may care about other things.  The French are after our banks, the Italians might think our cheese is too cheap or may want to take over our car sales, the Spanish want Gibraltar.   Every country will be using this as an opportunity to get something in their interest.  We are playing hardball with our demands for a unique deal, why shouldn’t they?

 

The Negotiation

So as it turns out we only have 2 cards:

• Our trade deficit, and most countries won’t care or will have other priorities.
• How long we drag out triggering Article 50, in other words, how long are we prepared to put up with mutual uncertainty and economic damage.  And of course, the longer we drag out triggering Article 50, the more we annoy our EU partners

That’s it.  Once we fire A50 its out of our hands.  We have 2 years (nowhere near long enough) to complete our exit negotiations, never mind negotiate a new EU trade deal.

So the question is how likely is it that the Europeans will give us this unique deal?  Answer, not very:

There is absolutely no will in Europe to give us the kind of deal you are after, and as Brexit causes more instability in the EU that attitude will only harden.  In fact let’s turn it around,  you’ve seen how this vote has gone in the UK,  you know how we would react if backed into a corner.  What are the chances that the average Swede or Finn will change their mind, especially after our behavior, and be open to the deal you are after?  If we represent less than 5% of their export market, frankly why should they give us a “better” deal than they have?

So we have a trade deficit that perhaps isn’t the big bargaining chip that we thought it was and the one shot gun that is triggering Article 50.  And of course bear in mind, A50 is not the Trade agreement, its the exit agreement.  The trade agreement is something entirely different.

 

But won’t the new Trade Deals save us?

OK, how about those new trade deals you’ve been told are just around the corner?  Well, although we can have informal chats with countries outside the EU, the following 4 issues need to be remembered:

1. It is technically illegal to negotiate trade deals whilst we are in the EU.  Legally the EU could fine us if we start negotiations before the end of the 2 years.
2. Even if this was not the case, until other countries know our EU status they will not carry out any meaningful negotiations.  A UK in the Single Market is completely different from a UK on WTO (World Trade Organisation).  Nothing can start properly for 2-3 years at least.
3. We have a very deregulated economy, we are very easy to sell in to.  But we principally sell services, which require extensive regulations agreement in other countries.
4. Once we start negotiations, every country will know we are desperate to make deals, any deals.  Some will offer us very poor deals,  others might well say “well for our trade mix, we don’t want your services and we can sell into your deregulated economy so actually, we don’t NEED a trade deal thanks, we’ll stick with WTO”

And all of this presupposes we are a member of the WTO.  But we aren’t yet, and negotiating the terms of membership won’t be straightforward.  As discussed here:

… the new British schedules would need the approval of all 163 WTO members, since the organisation’s decisions require consensus. So if one member (for example, Argentina or Russia) wanted to create difficulties, it could block the British schedules

As an example, Argentina could block our WTO agreements over the Falklands.  This is the reality, we have put ourselves in an incredibly weak position with Vetoes everywhere and with few bargaining chips.

By now you might be saying “but hang on, people like Dan Hannan said this would be easy”

That’s because Dan Hannan was aiming for a Norway style model with free movement (he says of labour but it amounts to the same thing).  His plan, like many leave campaigners, was a relatively quick shift into EEA, with some tweaking, and then perhaps some new trade deals.  Unfortunately he and Vote Leave overplayed immigration and convinced people like you that the deal you are after was possible.

So….

OK you don’t need to take my word for it, there’s some material to look at at the bottom of this blog so you can double check what I’ve said but these are essentially the salient points.

Our position

1. We want all the benefits of Trade, but with no contribution and we don’t want as many Europeans coming over.
2. We have only 2 cards to play, and one, being our trade deficit, does not impact a lot of EU countries. Germany may take a hit, but for most EU countries our trade is 5% or less of their exports.  Even in the case of Germany it has 3 years to shift its markets and go after ours.
3. The other card, dragging out the start of Article 50, just creates more uncertainty for the UK and annoys our partners.

The EU position

1. We started this, not them, they didn’t want this.  so there’s no value in talking about EU bullying, this is down to the UK.
2. We have thoroughly annoyed our European partners, and continue to annoy them because we still have no plan.
3. There is absolutely no support for a cherry picked deal in the major EU countries, and wont be.

The Negotiation

1. Once we fire Article 50, we have no cards left.
2. Once started, Gibraltar and everything else will be on the table, we will lose things we did not expect to lose. And we do not have a strong hand OR much goodwill left in the EU.
3. A mixed trade agreement has to be taken back to the parliament of 31 countries (and possibly 11 regional assemblies) and every one has a veto.  There will be push back and a lot of delays.

End Result

1. At the end of the process we will be potentially the only country in the world without a trade deal, selling the most complex item in terms of regulations – Services
2. Non EU countries that we want to trade with can either dictate terms for those deals or decide that WTO between us and them suits them just fine.
3. Until the EU deal and those new trade deals are signed, the country is in an uncertain state.  If it takes 5 years we have 5 years of slow down.

Against this, you have to think “what evidence do I have that the UK can bring 31 other countries to the table and make them do what we want?” – Do you really think 5% of their export market for some, nothing for others is enough, given what we’ve done to them and our standing in the EU?.

No, things are tricky.  But then everyone in charge know this.

Why do you think Boris and Gove looked so terrified the day after the result?  Why do you think the leading Brexiters have gone so quiet?  Have you seen Steve Hilton recently? Andrea Leadsom?   Gisela Stuart is burying herself in EU citizens rights (oh the irony) .  May has set up the 3 Brexiteers to fail but apart from that everyone is very, very quiet.

Because they do have a plan, its just that the plan is almost impossible to implement as it turns out we don’t hold that many cards.

 

Supporting materials

https://flipchartfairytales.wordpress.com/2016/08/10/brexit-enough-david-brent-this-is-serious/

http://www.parliamentlive.tv/Event/Index/cb083c53-3998-4f3a-8eca-e114e3dbdf0b