Trade Knowledge Exchange > Commentary > Uncategorised > Reflections on the Road to Brexit

Reflections on the Road to Brexit

Theresa May’s latest major speech on the United Kingdom Government’s Brexit policy developed a pattern already established in her speeches delivered at Lancaster House, London and in Florence during 2017.

Mrs. May was much criticised for the lack of practical detail in those earlier speeches about what the UK’s future trading relationship with the remaining EU member states (the EU27) should be. Her latest speech was expressly designed to bring together people in the Conservative Party who are on different sides of the Brexit debates, and in that she had some, if only limited, success. Strong supporters of Brexit welcomed it as a firm restatement of the Government’s commitment to leaving the EU, and to respecting the “red lines” laid down for the withdrawal negotiations.[1] Critics complained that while the speech was long on statements of principle and of goodwill towards European partners, it was once again crucially short of practical proposals.

Mrs. May went further than previously in recognising some of the myriad practical problems which arise from implementing Brexit, but mostly she still put forward only general aspirations for their solution rather than a roadmap.  Her speech contrasted with the much more detailed, and formally written, draft negotiating position put forward by Michel Barnier earlier in the week.

But, for the first time in public, Mrs May accompanied her now familiar commitments to Brexit and to negotiating a new deep and comprehensive partnership with the EU27 with a recognition that “hard facts” must be faced, compromises would have to be struck, and nobody would get everything that they wanted.

Five “tests” and some “hard facts”

The speech set out five “tests” for the Brexit negotiation, which in particular must:

  • Respect the referendum result;
  • Be secure and enduring;
  • Protect UK jobs and security;
  • Be consistent with the UK’s wider ambition to be a modern, open and outward-looking democracy;
  • Strengthen the union of the United Kingdom.

Mrs. May started with a series of familiar negatives, on outcomes or objectives that would not work for Britain.  Specifically she ruled out a “Norway” model of agreement with the EU (too much involvement in the Single Market, EU-based regulation and subjection to European Court of Justice – ECJ – jurisdiction); and on the other hand a “Canada” model (too little reciprocal market access, and necessity for border checks on trade).  She continued in negative vein by ruling out once again any sort of “hard border” in Ireland and, at the same time, any solution that would differentiate Northern Ireland from the rest of the UK.

In talking in general terms about the need for a “new balance” between the UK and EU, the speech however showed signs of a dawning recognition of realities on the Government’s part.  “Hard facts” had to be recognised, especially that:

  • Leaving the Single Market may entail less reciprocal market access with the EU27 than the UK currently enjoys;
  • While the full sovereignty of the UK courts will be restored, EU law and ECJ judgments will continue to affect the UK. To avoid clashes of standards, the UK should aim as far as possible to keep national regulation in line with that in the EU27;
  • Reciprocal market access must be on fair terms, e.g. in such matters as competition, state subsidies and workers’ rights;
  • It will be difficult to resolve tensions between key UK objectives, specifically between as “frictionless” a border with the EU27 as possible, no hard border in Ireland, complete UK trading freedom with the rest of the world and a partnership with the EU that would be deeper than under any other current free trade agreement worldwide.

Mrs. May recognised the paradox inherent in the UK and EU27 starting from a position of identical policies and regulation in order to arrive at a different legal basis for operating the same common policies. In that she echoed the words of her chancellor in Davos earlier this year.  Given the extent to which UK and EU economies are “entwined”, she stressed that regular consultation mechanisms, freedom of mutual data flows, agreed mechanisms for data protection and an agreed independent dispute arbitration mechanism would be essential.

Roadworks ahead on trade

On trade, Mrs. May rightly reflected that every trade agreement is unique, depending on the respective interests of the parties. That observation applies to the agreements the EU itself has struck with its closest non-member partners.  In any new agreement with the EU27 the rights and obligations of the parties must be held in balance; the UK recognised that it could not negotiate only for outcomes that were of value to the UK side (cherry-picking).

It was important not to disrupt pan-European supply chains.  There should be no tariffs or quotas in the new relationship, together with common standards (agreed where appropriate under the aegis of competent international bodies), mutual recognition of UK and EU27 standards, and a single set of approvals for goods in trade. The UK should seek associate status in key European regulatory agencies in the fields particularly of chemicals, medicines and aerospace, where quick and authoritative decisions are essential, and on a basis which would ensure a leading role for the UK courts in settling disputes.

Mrs. May set out ideas for a “customs agreement”[2] with the EU, the first time that the UK Government has done so although the term has been loosely used in the context of Brexit debates.  Even so, the Guildhall speech gives only partial indications of how such an arrangement might work.  What UK business needs to know urgently is the whole picture of what the UK/EU27 tariff position will be following Brexit, and how customs and other border procedures will work, including the single set of approvals referred to elsewhere in the speech.  As far back as December 2016 Liam Fox, Secretary of State for International Trade, recognised this need and announced that as far as possible, and in order to minimise disruption, the UK’s new post-Brexit tariff schedules will maintain its current level of commitments under the EU Common Customs Tariff.

The Guildhall speech says nothing more on that central issue, but instead sets out ideas for a working “customs partnership” focusing in particular on UK implementation of a single set of approvals and a single duty payment for goods that enter the UK in transit to destinations elsewhere in the EU27.  This would apparently involve Her Majesty’s Revenue and Customs (HMRC) in effectively operating as a collecting agent for EU customs in order to avoid further border checks on onward transhipment into the EU.  There would be different procedures for goods imported for end-use in the UK so that HMRC would be faced with running two systems concurrently.

Alternatively the UK Government has proposed, but with no practical detail, a “highly streamlined” customs arrangement under which the UK and EU27 would “jointly agree to implement a range of measures” to minimise trade frictions, and with specific provisions for Northern Ireland (which would conflict with the Government’s commitment not to distinguish in any way between Northern Ireland and the rest of the UK).

Mrs. May did suggest a series of objectives for keeping cross-border trade regulations to a minimum, together with cooperation to minimise security risks.  She also wishes to waive border requirements for intra-Ireland trade for SMEs, using “trusted trader” procedures for larger cross-border operators.

As regards agriculture and fisheries, Mrs. May did no more than note that the UK would cease to be part of those EU policies.  She spoke briefly on the UK’s vital trade in services, noting only the wish to minimise any adverse impact, and to facilitate mutual UK/EU trade and establishment by services providers.  She set out rather more developed proposals for the mutual regulation of broadcasting, but left discussion of the all-important future of financial services to a forthcoming speech by the Chancellor of the Exchequer, Philip Hammond.  She made only passing reference to UK/EU economic linkages in the essential fields of energy, transport, digital communications, law, science and innovation, and education and culture.

Appraisal

Despite stressing that the Government’s firm determination to withdraw from the EU can be reconciled with the negotiation of new trading relationships – integrated in all but name – with the Union, the speech answered few if any of the vital practical questions. These are the ones for which businesses and investors would like some answers, and soon.

The tone towards the UK’s European partners was generally conciliatory, and in some areas at least the speech recognised more openly than before the complex legal and administrative issues which arise from Brexit. However, there is still no attempt to find a practical solution to the conflicted issues surrounding the future of Northern Ireland – on this, politicians in both the UK and EU continually repeat the problems, but with no indication of a practical way out.

As pointed out above, following several pages of generalities Mrs. May spoke in detail only about some aspects of trade in goods, with the barest reference to the fortunes of the UK services sectors (some 80% of the UK economy, and 38% of UK exports to the EU in 2016) and of other vital and complex sectors and activities. In that respect it had the feel of Hamlet without the prince. Nevertheless, this speech does appear to abandon the idea of “hard Brexit” as in any way a viable outcome. It does not, however, avert the risk of a hard Brexit coming about through accident.


Notes

  1. [1] Ending jurisdiction of the European Court of Justice in the UK; ending free movement of EU citizens into the UK; a fully independent UK trade policy; and no compulsory contributions to the EU budget.
  2. [2] This is not a term normally used in international trade negotiations, and it does not appear in the World Trade Organisation Agreements. It will be extremely important what precise meaning the UK Government attaches to the term, and whether the EU side can be persuaded to agree.

About the Author

Michael Johnson

Michael
Johnson

Michael Johnson was a senior official of the UK’s former Department of Trade and Industry, where he worked on international commodity policy, UK bilateral commercial relations with developed country markets, and the UK’s input to EU external trade policy. He is in demand as an independent consultant, and has advised governments of more than twenty developing or former Communist countries on trade policy formulation and on trade-related development projects.


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