Tuesday 12 December 2017

Britain seems set on picking most expensive item on EU exit menu

The departure of the UK's ambassador to Brussels exposes the hard truths behind a hard Brexit

Sir Ivan Rogers, who last week resigned as Britain's ambassador to Brussels, amid suggestions of tension between the mandarins and the Leavers in the Brexit negotiations Photo: REUTERS/Francois Lenoir
Sir Ivan Rogers, who last week resigned as Britain's ambassador to Brussels, amid suggestions of tension between the mandarins and the Leavers in the Brexit negotiations Photo: REUTERS/Francois Lenoir
Colm McCarthy

Colm McCarthy

Last week's spat in London between the civil servants and the hard Brexiteers needs to be seen in context. If the UK ends up outside the EU's single market, and outside its customs union, there will be dramatic and potentially very damaging consequences for external trade, unless a successor deal on trade access can be negotiated.

The resignation of Sir Ivan Rogers, the UK's ambassador in Brussels, is the latest evidence of tension between the knighted mandarins and the benighted Leavers. To simply quit, in a so-called 'hard' Brexit, would see UK trade conducted under the default rules of the World Trade Organisation, which would mean the return of tariffs on trade with European countries, lost benefits from the EU's existing preferential trade deals with countries outside Europe and exposure to non-tariff barriers and costs. These latter can sometimes be a bigger hindrance to trade than the tariffs themselves.

Six months after the referendum, and with just three to go before Article 50, the notice to quit, is to be served, it is remarkable that senior civil servants are still unhappy with the political muddle about what Britain wants.

It matters greatly what form Brexit takes. A negotiated deal retaining as much trade access as possible does least damage, even if a price has to be paid in the form of continuing contributions to the EU budget or some form of immigration status for EU nationals. Theresa May's comment that 'Brexit means Brexit', or her fatuous elaboration into a "red, white and blue Brexit", is entirely devoid of meaning.

Britain is an open trading economy and the future rules of engagement could range from a continuation of existing arrangements to a loud slamming of doors on large parts of the UK economy.

Most British trade is conducted free from barriers of any kind with the other EU countries or on a preferential basis with EU partners, including countries with which the EU has free-trade agreements (FTAs). In addition to the 27 countries which will remain in the EU proper, four countries are effectively part of the single market through membership of something called EFTA (the European Free Trade Area). These are Iceland, Norway, Liechtenstein and Switzerland. Turkey has a customs union with the EU so there are few barriers to British trade with Turkey either.

The EU has negotiated FTAs with some important countries outside Europe, including South Korea and Chile, offering trade access on better terms than the default World Trade Organisation rules which come into play should there be an abrupt hard Brexit. The figures for the geographical distribution of UK trade in 2014 are in the chart above

Most UK exports go to countries where trade access would worsen in the event of an abrupt hard Brexit. Almost two-thirds of imports come from the same countries. It is not possible to resign from the EU and its deep and complex architecture of trade relations the way one would resign from a tennis club.

Sir Ivan Rogers had apparently been pointing out to ministers that negotiating a successor arrangement to keep trade moving, including a transition glide-path to the new regime, was advisable. He reported that his EU interlocutors think such negotiations will be complex and will take up to ten years. For this advice he appears to have been side-lined and he resigned.

When May assumed office she appointed three Leave campaigners to execute the electorate's decision, Boris Johnson as foreign secretary, Liam Fox as trade minister and David Davis as Secretary of State for Exiting the European Union no less. The latter's department has come to be called Dexeu and has been fighting the foreign office for control of the Brexit process. Whitehall wags refer to its personnel as Dexys Midnight Runners, after the 1980s pop group and a reference to their alleged nocturnal scheming.

Last week's carry-on is unfortunately not just a Whitehall turf war. The government has declined to reveal its negotiating priorities, not in order to preserve tactical advantage as May claims, but because it has yet to choose any priorities. The Conservative Party is still divided over Europe.

Some favour a successor trade deal and a negotiated transition while others, including it would appear the Brexiteer ministers, are infatuated with the notion that a clean, costless and early breach with Europe is feasible. In this they appear to be sorely mistaken.

The core belief is that the UK can depart its trading arrangements, freed at last from what they regard as the shackles of EU membership, and take to the seven seas, replacing lost European markets with lucrative new trade deals in distant and welcoming markets that exist largely in their imagination. If Britain loses its European markets, or even a small slice, this loss cannot be replaced quickly or at all through new trade deals with non-EU countries. There is something pathetic about the procession of ministerial visits, to Japan, India and the Gulf States, noised about by the spinners as evidence of the wonderful opportunities that will become available around the world to the UK's unshackled powerhouse economy.

The potential to replace lost European trade with hypothetical trade deals elsewhere has been analysed in detail by several think-tanks and government departments, notably in a study released by the Treasury last April. The conclusions are unsurprising: it will be difficult to expand UK trade to these far-flung markets, and Brexit will have an economic cost.

The Brexiteer ministers, and a large element in the Tory party, seem to be in denial about the harsh realities of dealing with the consequences of their referendum success. There is a wide menu of possible Brexit arrangements. The UK appears to be headed for the most costly version and it is the unenviable duty of civil servants to limit the damage.

Ireland was advised during the week to follow the UK out of the European Union by none other than UKIP leader Nigel Farage, who appears to have forgotten that Ireland is also a member of the Eurozone and does not have a currency. How exactly, Nige, do you quit the EU with no currency?

A hard Brexit, with no successor or transition deal between the UK and the EU, is the worst possible outcome for this country. It may already be too late but the Irish government should be praying that the dwindling band of adults in the UK policy establishment are the ones that prevail.

Sunday Independent

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