What deal would be acceptable to most Brexit-supporting MPs?
How far will regulatory divergence be permitted and how will disputes be settled?
When the UK was a member of the EU it enjoyed tariff-free access to the Single Market in return for being bound by regulations made in Brussels over wide swathes of economic activity. If no trade deal is concluded by 31 December, then the position will be reversed: the freedom to regulate will be gained, but at the cost of tariffs and paper-work when trading with the EU.
Whether that represents a net gain depends upon which sectors of economic activity are the greater priority. If the UK trades on WTO terms from 1 January, then the average tariff on agricultural goods would be 11 percent (with punitive tariffs imposed on beef and lamb). Exporting cars would be hit by a 10 percent tariff. The Treasury would be free to support those businesses especially harmed, and alternative markets could be sought. These could be useful correctives. But an argument that relies on the freedom to underwrite penalised businesses with greater subsidies was not, historically, what attracted most Tory MPs to the cause of Euroscepticism.
The aggrieved victims from EU tariffs and customs bureaucracy will understandably make the headlines. But for most goods, the imposition of EU tariffs is a marginal cost and for the service sector (80 percent of the UK economy), scarcely any imposition at all. Indeed, if sterling fell and remained at more competitive levels as a consequence of “no deal,” then that depreciation would outweigh most tariff levies, leaving trade marginally better off from the process. For many SMEs it is more the non-tariff barriers represented by customs declarations and form-filling that present a greater burden.
The tangible downsides must be weighed in the balance with the less tangible but potentially significant upsides from gaining regulatory freedom. Britain’s fintech, AI, pharma and scientific R&D-led innovation sectors are among the most likely beneficiaries. With the benefit of an already world class science base, the UK would gain the opportunity to leapfrog the EU in the technologies of tomorrow. The “Singapore-on-Thames” analogy has been one of the most misused (by both sides) and fanciful threats/aspirations in the Brexit debate. But in these areas, at least, it could prove apt.
It therefore falls to MPs to weigh such competing considerations in the fleeting hours that will be afforded them to examine the hundreds of pages of a trade deal. A fundamental issue for them will be the extent to which Boris Johnson’s government has conceded the ability to diverge from Brussels regulations – and what the penalties for doing so involve.
A fundamental issue will be the extent to which Boris Johnson has conceded the ability to diverge from Brussels regulations – and what the penalties for doing so involve
In the parliamentary debate to come, Johnson’s government has two clear advantages over the May administration it replaced. The first is that the deal Theresa May’s advisor and negotiator, Ollie Robbins, tried to secure and which she failed to get parliament to approve made scarce pretence to be anything other than Brexit-in-name-only (BRINO). May’s interpretation – not supported by either the psephological data nor the reality of views among her Brexit-minded MPs – was that the referendum vote to leave the EU was a rejection of free movement of people but not a desire to disrupt frictionless trade through regulatory divergence. May was entitled to feel no enthusiasm for Brexit, but in failing to even understand what its proponents wanted she showed a failure of statecraft – or intellectual curiosity – on a scale that is surely unrepeatable.
Whatever they fear, Brexit-supporting Conservative MPs at least start from a position of knowing Boris Johnson understands – and campaigned for – their cause. His preference for a Canada-style deal which offered tariff-free entry to the Single Market whilst permitting regulatory divergence, has been blocked by Michel Barnier, even although it was offered by Donald Tusk to Theresa May in October 2018. She rejected it, and that was that – an opportunity squandered. Britain will consequently not have its cake and eat it. But whatever deal emerges in the coming days can be more easily sold to sceptics by Johnson than his predecessor was ever capable of articulating.
What will Johnson’s deal involve? While the talks remain unresolved on fisheries, it is clear the other main impediment to a deal, the level playing field (a loaded term to mean UK regulations cannot diverge from EU ones) is all but concluded. If the final deal still involves – as Brussels demanded – the EU’s ability to impose lightening tariffs on any regulatory divergence by the UK that the EU unilaterally decides is harmful to its own interests, then clearly Brexit-supporting MPs cannot in good conscience support it.
More likely is a deal involving “managed divergence.” Both Britain and the EU (which for these purposes effectively includes Northern Ireland) could go their own ways on regulation and both could retaliate against the other if the adjudicatory body established that divergence made for unfair competition. But what would be the yardstick of “unfair”? What arbitration board – and how composed – would adjudicate? How quickly would it do so? These are the details that must satisfy MPs.
what would be the yardstick of “unfair”? What arbitration board – and how composed – would adjudicate?
Brussels’ earlier negotiating position was that EU law, as interpreted by the European Court of Justice, would determine the rules of the game. This bold assertion of legal colonialism receded during July’s negotiations. But whilst non-regression (neither side can undercut the common standards both had on the last day of transition this year) was accepted in principle by the British as well as the EU, the latter’s effort to introduce a ratchet clause (tying the UK to follow whatever standards the EU introduced after 1 January next year or face lightening tariffs) was a fresh provocation. Without it, a deal might now be nearing the Royal Assent.
The British government has long conceded that there will be no regulatory free-for-all after 1 January. There is, after all, a dispute settlement body for countries that trade on WTO terms to adjudicate on breaches of trading agreements and the UK would be bound by that procedure if there is no deal with the EU. The WTO disputes board boasts that it has heard 597 disputes since 1997 and issued rulings on 350 of them. It is for the most part a slow process. A UK-EU arbitration body stands to be far more intrusive on what constitutes unfair activity than the WTO version. Whilst it would seek to make quicker judgements than the WTO, it must not be so hair-trigger that almost any regulatory change approved in London finds itself being taken to arbitration. The test for doing so has to be high, truly independent in adjudication, and retrospective. Will it be?
No less crucially, there is the question of how comprehensive will regulatory divergence be defined in the agreement. The level playing field is primarily concerned with environmental protection (where the UK is increasingly outpacing the EU in its dash to go carbon neutral), labour laws and state aid (competition policy). Will the final deal keep strictly to these categories? Sceptical MPs must satisfy themselves that the key areas where regulatory independence would boost Britain’s innovative and entrepreneurial pioneers are not enmeshed in these areas where permitted divergence is likely to be slight.
There is a lot for MPs to ponder. They will have a matter of hours to do so.
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