A narrow EU trade deal is the most likely way forward
It is worth reflecting on Mark Carney’s call for the British government not to make any compromises on financial services in post-Brexit trade talks with the EU. The outgoing governor of the Bank of England argued that the City of London had a lot to gain from a regulatory divergence. This way, it could exploit new commercial opportunities, including those arising from the transition to a low-carbon economy.
Just consider for a moment how far the debate has come since the referendum in 2016. Back then, Mr Carney delivered scary forecasts. The City of London was desperate to keep passporting, which allows financial companies to trade from anywhere and to anywhere in the EU. Now Mr Carney actively encourages divergence.
His line of argument applies to other sectors too. If the UK wanted to become a global leader in artificial intelligence, it would be constrained by EU regulations. There are also concerns about the impact of the new General Data Protection Regulation, on the grounds that it restricts the collection of data for commercial use and increases compliance costs. There are business opportunities to be exploited if the UK manages to extricate itself from GDPR. I expect this to become a big issue in the trade talks.
One of the policy challenges of Brexit is to balance the new opportunities that might arise out of regulatory divergence with the interests of businesses that benefit from EU membership.
Divergence is costly in the short run. Longer-term there is more money to be made in artificial intelligence than to be lost by, say, reduced production of diesel cars, which are soon to be extinct anyway. But even in the motor industry, there are opportunities in divergence. EU car prices are kept artificially high by requirements to make cars capable of speed on the German autobahn — plus an EU-wide 10 per cent import tariff.
So where does all this leave the trade talks? During her visit to London last week, Ursula von der Leyen, the new European Commission president, linked the degree of preferential single market access to regulatory convergence. She still appears to be working from the assumption that the UK would seek deep market access in areas like financial services. But Mr Carney’s comments suggest that the EU may overestimate the UK’s appetite — and the price it is ready to pay for it.
Observers tend to extrapolate from the previous round of negotiations, before the UK general election, during which the EU rammed through most of what it wanted. Back then, the UK’s position was weakened by a confused negotiation strategy, the lack of Conservative majority, and three deadline extensions. Boris Johnson’s victory ended all that.
It is possible that the prime minister may be bluffing. Will he extend the end of 2020 deadline for the transition period after all? I would not bet on it. If not, the best deal that can be achieved would be a relatively narrow agreement focusing on the free flow of goods.
One possible obstacle is the EU’s insistence on regulatory alignment even in the case of a no-frills zero-tariff trade agreement. I find that demand hard to justify given the EU’s large trade surplus with the UK. A zero-tariff agreement would not threaten the integrity of the single market.
Just think for a moment what would happen if no deal is agreed by the end of this year. No, the German car companies will not intervene. BMW and Mercedes will simply divert car production to their US plants and export to the UK from there. They will not suffer, German workers will. Would it not be reasonable to expect Berlin to organise a qualified majority in the European Council in favour of a narrow trade deal?
Another potential problem is sequencing. The UK should not agree to the EU’s proposals to stagger the talks, with fish as part of the first course. It would better for the two sides to define the scope and the timetable first, then negotiate all the chapters in parallel.
Both sides have an overwhelming interest in striking a deal — not least in view of the geopolitical situation. The UK should consider giving assurances to the EU on environmental regulation and labour standards and, yes, maybe on fisheries too. Whatever the future UK industrial strategy, it will probably not rely on child labour, coal-fired power stations, or halibut.
It is also worth reflecting that the harsh Brexit that now lies ahead is the result of monumental political misjudgments — by Theresa May, the former prime minister, the Labour Party, the Liberal Democrats, Tory rebels and the second referendum campaign. The European Council, too, is partly to blame. EU leaders could have helped secured a softer Brexit if they had refused to participate in the charade of Brexit extensions.
The reason a narrow trade deal is now the most likely way forward is that all the alternatives have been eliminated.