The UK’s threat to walk out of EU trade talks is real

Via Financial Times

Here’s an astute observation from a former senior British official in the EU, which came during a conversation about political misjudgments: in the corridors of Brussels, one no longer bumps into Brits to talk about how the politics is shaping up back home. There is nobody around any more at the heart of the EU machine to tell you what the UK government is really thinking.

This decline in informal contact set in long before the UK officially left the EU at the end of January. It was part of the reason why EU politicians and journalists ended up underestimating support for Brexit in the UK at the 2016 referendum and afterwards. And now they may be misreading the UK’s implicit threat to end the trade talks in June.

The fundamental assumption in Brussels is that this will not happen. But can it be right? In the absence of perfect foresight, the best we can do when weighing up the possible success of the trade talks is to rely on revealed preferences — and from both sides.

The EU said, loud and clear at the start of last week, that it would not grant a Canada-style free trade agreement to the UK. The council of ministers has since hardened its position. I do not think the EU can easily climb down.

On the UK side, the signs are also clear. Boris Johnson began his premiership last summer by proroguing parliament. He went on to fight and win a general election.

The Conservative manifesto on which he has gained his mandate was explicit not only about going through with Brexit, but about establishing a distant future relationship with the EU.

READ ALSO  LGBT activists denounce Putin’s war on liberal values

After his election victory, Mr Johnson ruled out an extension of the negotiating deadline for a trade deal at the end of this calendar year. The UK parliament even passed legislation to that effect. He is, what’s more, backtracking on the level playing field commitment in the political declaration attached to the Brexit withdrawal agreement. He seems to be backtracking on the customs border in the Irish Sea as well. He got rid of a chancellor of the exchequer in Sajid Javid who would have constrained some of his fiscal plans to increase investment in pro-Brexit areas and support new high-tech industries. Both plans could easily run into conflict with EU rules on state aid.

Whatever you might think of Mr Johnson, this is a remarkably consistent story. So why would anyone think that he is bluffing?

Classic trade negotiations are win-win games. The negotiations that start on Monday will be different. Both sides have framed their objectives in terms of regulation, not of trade. The UK seeks maximum regulatory independence. The EU wants to prevent it on grounds of competition. If you take the politics out, it is not hard to construct a technical compromise. But there is no deal imaginable that would allow both sides to declare victory in terms of their stated goals. They have turned it into a zero-sum game.

Also consider another unusual aspect of this negotiation. The UK may be the smaller country, but it can secure its chief negotiating goal of regulatory independence unilaterally by walking out. The EU cannot do the same.

READ ALSO  Droning on - The pandemic is giving unmanned deliveries a fillip | Business

The political reality in the UK is that Mr Johnson has a House of Commons majority of 8O, and many of these MPs owe their political careers to him. There will be no rebellion. The worst to expect from the business lobby would be a raised eyebrow. British businesses are not going to stop Mr Johnson just as the German carmakers will not stop the EU.

Maybe we should start looking at second-best options: a no-deal outcome followed by a trade agreement a year or two later. This would clearly not be economically efficient. Both sides would incur the costs of no-deal first, the UK more than the EU. But at least we would find ourselves in a scenario where both sides stand to regain trade flows that had been lost in the rupture. The problem today is that the losses are hypothetical. In two years, they will have materialised. That could make it easier for the UK and the EU to calculate gains from a zero-tariff, zero-quota agreement.

This means that Europe as a whole, the UK included, should prepare for two foreseeable material economic shocks this year: a spread in the coronavirus and a WTO Brexit. I agree with Mark Carney, governor of the Bank of England, that the economic impact of Brexit on the UK is genuinely uncertain. Success or failure will depend on what the UK does with its new freedom.

The EU faces all these shocks, plus perhaps US tariffs on cars: the perfect storm for an economy dependent on exports and global supply chains. The EU cares deeply about institutions and laws, but lacks strategic thinking in virtually all policy areas. Brexit is not the biggest crisis for the EU, but it could end up as the wrong one at the wrong time.

READ ALSO  Oil majors face up to plunging asset values