Brexit: Be careful what you wish for
There now seems every likelihood that the United Kingdom and the European Union will fail to reach a formal and definitive agreement on future trade and economic relations to take effect from 1 January 2021. Thus at the end of the agreed “transition period” on December 31, 2020 the much-feared “No Deal” outcome will happen.
In that case the UK will cease to observe the rules of the EU Single Market, and will set out to make its way in the international trade world protected by the basic principles and rules of the World Trade Organisation (WTO) and by such preferential trading arrangements as it can negotiate bilaterally with non-EU countries.
Meanwhile the WTO is itself under serious threat, chiefly from the United States which was one of its major founders but is now systematically subverting and breaching WTO rules and determined to paralyse the dispute settlement system which it regards as contrary to American interests. Institutionally, the WTO is without a leader, having seen its Director-General resign; and with a varied field of candidate successors from which a clear favourite is yet to emerge. It is thus far from certain that the WTO can offer to the UK the back-up assurance which it will need in its new independent trading status.
The EU, for its part, would find its standing in international economic governance diminished. It would be seen as being unable to broker even a basic agreement with a former member state, at a time at which it is struggling for internal unity in response to the Covid-19 Pandemic. Both parties have an interest in ensuring that a further Brexit shock does not add to the economic shock of the pandemic.
And finally, for reasons explained below, some non-EU partners will also be exposed to some of the fallout from a no-deal exit.
This in turn raises questions on what if anything can be salvaged from the apparent wreckage. Negotiations with the EU are continuing, apparently intensively but reportedly making little progress in an increasingly acrimonious atmosphere of blame and counter-blame. This is the product of fundamental attitudes and political imperatives on both sides, which seem to be hardening.
In principle it could still be possible to reach a UK/EU bilateral deal in time for the end of the transition period on 31 December. In practice that deal would have to be cut by some time in October in order to allow time for ratification by all 27 EU member governments and in some cases by their parliaments. Without increasingly heroic-looking compromises on both sides, this does not look likely.
If a formal deal is not possible, are there any halfway houses that could act as a temporary refuge? Under eleventh-hour time pressure, there is a possibility that both sides will look for some sort of partial (“quick and dirty”) bilateral arrangement which can preserve the most vital economic interests of both sides; and be implemented without too obviously ditching entrenched positions of principle such as the UK’s rejection of any future subjection to EU law.
Such a partial deal or package of deals might, for example, provide on a temporary basis for measures such as tariff exemptions for some classes of goods; exemptions from quality and other border checks; mutual approval of quality assessment and testing bodies and acceptance of their certifications; or exemptions from transport documentation requirements.
Will such an arrangement fly? A key requirement is that this deal still needs to meet the requirements of Article XXIV of GATT 1994 that to be acceptable a customs union or FTA must eliminate the “duties and other restrictive regulations of commerce…….with respect to substantially all the trade between the constituent territories”. (“Substantially all” has never been satisfactorily defined, but as a rule of thumb can be taken to mean around 90%.) Whether a quick and dirty deal would meet that standard remains to be seen.
If they proceed in that way, the UK and the EU would need to hope that the arrangement would not be challenged under the WTO, perhaps counting on the fact that there have been no formal dispute settlement proceedings invoking non-compliance with GATT Article XXIV to date. And that assurances that parties would try and secure a more formal arrangement will be deemed sufficient to sustain the deal at least in the short term.
Moreover, a number of major trade partners may have an interest in the UK and the EU agreeing to a FTA, particularly if it contains rules of origin that allow the goods of these partners to move without – or with limited friction – between the UK and the EU. This would be the case for Japan, for example, which is facing the prospect of losing, as of 31 December 2020, tariff-free access to the UK and the ability of its goods to freely circulate between the EU and the UK, as they can under the terms of the EU-Japan FTA which still applies in the UK till December.
And setting aside the question of whether a halfway house approach is tenable, it needs to be pointed out that the losses from a partial agreement, even if lower than a no deal agreement, are still severe. A partial agreement would involve losses to goods exports from the UK of around 45% of those likely to be sustained under a no-deal exit, and around 90% of the losses on services, which would be largely left out of partial deal.
And if there cannot be any agreement?
In July 2020 the UK Government published a 200-page document entitled The Border with the European Union – Importing and Exporting Goods. This sets out in detail the new controls which will apply to bilateral trade between the parties, to be implemented in three stages from January to July 2021. It covers such matters as preparation of the range of new export and import documentation which people trading with Europe will have to complete. Extensive further directions and guidance to industry are to be expected over the coming weeks.
Under the UK’s new independent customs regime it may mean that imports of comparable goods from different sources are for a time treated differently. For example, in the application of the new UK customs tariff and other border checks, imports from non-EU sources which have already been dutiable in Britain under the EU common customs tariff may continue to be subject to familiar systems of checks; while imports of comparable items from the EU, faced with new and unfamiliar checks, will be given a few months’ grace in the introduction of those checks. Such discrimination in the application of checks risks breaching the UK’s non-discrimination obligations under the WTO. UK Trade Secretary Liz Truss has explicitly warned in a leaked letter to ministers that it could be open to challenge in the WTO.
Again, the implicit hope is that the attitude of trade partners to the UK would be benign. This could be because the imposition of the UK’s new basic MFN tariffs on EU goods puts non-EU goods on a level footing with EU ones. Or because the UK believes that if it engages in FTA discussions with non-EU countries, the latter would soften their attitude towards the UK (though the reverse is equally true: a threat to take the UK to the WTO could be used as negotiating leverage).
A depressing conclusion
The reality for both sides is that the imperative is now one of damage limitation. Gone, for the moment, are the perhaps rose-tinted declarations of 2017 promising a comprehensive FTA. A partial deal on any basis would be messy, probably entailing loose ends, imperfect definitions, and disputes. All these would directly affect the activities and livelihoods of manufacturers and traders. The partial arrangement would also probably collide with the separate but acute problem of implementing the special Protocol covering trade between the EU27 and Northern Ireland, which at one and the same time is to remain inalienably part of the United Kingdom customs territory while continuing to observe EU standards and regulations.
This approach would also require the indulgence of the EU’s and the UK’s trade partners. There may be self-interested reasons for them to adopt a benign attitude. But equally; if they sense that the UK is desperate for trade agreements and is also pursuing policies that are WTO-inconsistent, they could try and use this situation for negotiating leverage.
And finally, both the disruption of a no-deal exit, and of a partial deal (even if at a lower level of disruption) would diminish the standing of both the UK and the EU in the governance of world trade. This would be contrary to the stated intentions of both parties to play a role in securing rules-based trade, and at a time when the multilateral system of trade is at its weakest since its inception after the second world war.