‘No-deal’ Brexit back as a real possibility

  • Number cruncher: the Chancellor of the Exchequer Sajid Javid (Photograph by Joe Giddens/PA via AP).

    Number cruncher: the Chancellor of the Exchequer Sajid Javid (Photograph by Joe Giddens/PA via AP).

The Britain-European Union trade talks have not started officially, but both sides are testing out negotiating lines. Britain is already colouring some of them red, setting up a fight this year that will encompass the three Fs: fish, financial services and the freedom to diverge from EU rules.

To use another F-word, all three issues are fraught. But itís the last of them that might blow up hopes for a quick trade deal.

Given Britainís intentions to leave the EUís customs union and single market, and strike trade deals with other countries, the best it can hope for is a bare-bones agreement with zero tariffs and duties across most goods sectors.

Thatís pretty much all thereís time for before Boris Johnsonís self-imposed deadline for a deal by the end of this year. Yet, even that might be hard to achieve if early soundings are correct.

Whatever else comes out of the trade talks, Chancellor of the Exchequer Sajid Javid said last week, Britain will reserve the right to diverge from EU rules and regulations. ďThere will not be alignment; we will not be a rule taker, we will not be in the single market and we will not be in the customs union ó and we will do this by the end of the year,Ē Javid told the Financial Times. The statement raises two questions: is he serious, and what exactly does he mean?

When Johnsonís predecessor, Theresa May, talked tough about Britainís Brexit negotiating stance, she was bluffing, mostly. She had too many warring elements in Parliament and her own party to please. Getting a withdrawal deal was the priority, to settle the status of EU citizens, divorce payments and the crucial question of the Irish border.

Nor did she truly believe that regulatory divergence from the EU could be anything but a source of friction and cost to British business; she saw Brexit as a damage-limitation exercise. She tried, and failed, to push through a Brexit deal that kept Britain closely aligned with the EU on goods trade.

Javid, however, must be taken at his word. His boss, Johnson, has a comfortable parliamentary majority of 80; the Remainers, doubters and soft-Brexiteers have been cleared out.

Javidís position is an article of faith as much as it is political expedience. Johnson and his allies see divergence as a chance to remake Britainís economy and trading relationships.

Regulatory autonomy is the sine qua non of a real Brexit. Britain wants a free-trade agreement similar to the EUís Canada deal, only with added agreements on services, data and other areas.

Brussels wants something that ties the British in more closely, including an agreement by Britain to abide by so-called level playing field provisions, meaning Britain would need equally tough rules on social and environmental protections, taxation and state aid.

Michel Barnier, the European Commissionís Brexit negotiator, long ago made these provisions central to the EUís demands.

Nor will Brussels shy away from linking different parts of the negotiations to get what it wants.

Croatian Prime Minister Andrej Plenkovic, whose country holds the EU presidency, says the EU will be nakedly ďpoliticalĒ in the negotiations.

Trade Commissioner Phil Hogan has indicated that access to the EUís single market for financial services may depend on the EU keeping its existing fishing rights for British waters.

If Britainís desire for divergence precludes meeting the level-playing field provisions, the scope for a free-trade agreement will narrow considerably.

While the minimal expectation, known as the ďskinnyĒ deal, is for quota and tariff-free access for British goods, thatís not a given.

Even Switzerland, with its myriad EU deals, doesnít have tariff-free access to the bloc. Agriculture and food products may be areas of disagreement.

If a goods deal is struck, there will be non-tariff barriers to trade. British companies might voluntarily comply with EU regulations, but this will need supervision and ďrules of originĒ checks, and an EU representative to guarantee the legality of British products. All of that will carry costs.

If the dealís scope becomes so diminished as to provide questionable political and economic benefits, is it worth doing at all? Thatís a key question.

ďThe skinnier the FTA becomes, the more attractive a no-deal outcome becomes,Ē James McBride, a partner at public affairs firm Hanbury Strategy, said during a webinar last week organised by law firm Herbert Smith Freehills. The EUís zeal for enforcement provisions on any new deal, including fines and sanctions, will be another dampener.

Conventional wisdom is that Britainís desire to maintain access for its huge financial services sector will keep it at the table; and that this might be traded for concessions on fisheries. That may be a miscalculation.

It assumes Johnson has room on the fishing industry. While itís a tiny share of the British economy, taking back control of ďour watersĒ was a totemic issue for Brexiteers.

Fishing is also important for Scotland; any perceived sell-out might fuel the Scottish independence movement. Britain exports most of its own catch, so access to EU markets certainly provides an incentive, but the Prime Minister will want to show some gain here from Brexit, too.

The EU also may be overestimating how far Britainís desire to win ďequivalenceĒ for the City of London will motivate other compromises.

London saw how the EU swiftly withdrew equivalence from the Swiss to punish them for foot-dragging on the blocís internal market rules. Down the road, it could be a weapon wielded against Britain, too.

ďThere are many people in 10 Downing Street pushing the idea that Britain doesnít want equivalence,Ē McBride says.

He puts the chance of a deal at 50-50 by the end of 2020.

Now Britainís departure is assured, the big question has been resolved. If the two sides canít agree on the degree of trade friction they are prepared to tolerate, no deal could easily follow.

ēTherese Raphael writes editorials on European politics and economics for Bloomberg Opinion. She was editorial page editor of The Wall Street Journal Europe

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Published Jan 22, 2020 at 8:00 am (Updated Jan 22, 2020 at 7:22 am)

‘No-deal’ Brexit back as a real possibility

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