Written by Briefings for Britain
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This article was first published in Briefings for Britain and we republish it with their kind permission. Part 1 was published here yesterday (embed link).
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The UK’s negotiating efforts with the EU this year have been dramatically better than under the May administration. But a bad deal is still a real risk as a result of political and time pressures.
It’s also notable the UK government has allowed timetable slippage to occur – threatening to halt talks without major progress but not following through on this. The latest so-called deadline is October 15th but few in the EU believe this is a real deadline, unsurprisingly given the previous experiences in this area.
Our concern is that a combination of time pressure and political pressure – the latter made much more acute by the ongoing coronavirus crisis which is also arguably a crisis of government credibility – may tempt the UK government into making a rushed and bad deal.
Such a deal might feature a lot of highly damaging ‘small print’ that effectively locks the UK into following EU rules – backdoor dynamic alignment. A bad deal might also provide multiple avenues for the EU to pressure the UK into closer alignment over time – for example by fomenting endless disputes in areas like state aid and the level playing field and using unilateral retaliation clauses to close off UK market access one sector at a time. We have been here before, notably in the shape of the Northern Ireland Protocol which contains a number of damaging clauses that UK ministers do not at first appear to have fully understood the significance of.
Overall, it’s quite easy to imagine the government signing up to something that appears at face value to be broadly in line with its avowed aims but on closer inspection is nothing of the sort. The government and MPs need to remember two things –
First, the goal of re-establishing the UK as a fully independent state can be achieved merely by exiting the transition period at the end of the year. No negotiations or further agreements are needed for this.
Second, the benefits of the kind of free trade deal that is being worked on are, for the UK, quite small compared to trading on WTO rules:
* The EU’s average tariff on UK exports under WTO rules will be around 3%, very low. By way of comparison, before the UK joined the EU in 1973, the average tariff was around 11% and much higher for many sectors.
* Even with an FTA, some UK goods will not qualify for zero tariffs when entering the EU. Because the EU is resisting ‘cumulation’, which allows inputs from third countries with which the UK and EU have FTAs can be counted as local content, some UK-made goods will not have enough local content to qualify (via ‘rules of origin’ thresholds) for zero tariffs.
* Rules of origin compliance costs, which firms must undertake to qualify for zero tariffs, will also reduce the benefit of zero tariffs. In a few cases, they may be high enough to cancel out any benefit from having zero tariffs versus just paying the WTO tariff.
* An FTA with the EU will do nothing to ease possible border congestion. This is an incredibly important point. New border systems including checks, paperwork, and IT systems, will all be coming in regardless of whether an FTA is agreed. All the FTA would do is remove tariffs – which are anyway paid electronically and so have little or no part to play in defining border costs.
* An FTA with the EU will also do little or nothing to reduce other non-tariff barriers to trade – these will be much the same as under WTO rules. Indeed, the EU seems very keen to ensure this is so, its refusal to agree mutual recognition of conformity assessment for goods (which avoids double testing), in defiance of WTO guidelines, being a good example.
* The proposed FTA will not offer much on services – the UK’s strongest sector – beyond standard WTO commitments.
* It is the EU that benefits most from free trade in goods, running as it does a huge trade surplus with the UK. The UK can quite easily redirect its spending – on food, cars and other major items that constitute this surplus – elsewhere.
So, what would a bad deal look like? Its key component would be a thin FTA with no third country cumulation, no MRA on conformity assessment, no significant customs cooperation arrangements, and nothing of substance for services.
In addition, it would include a failure to exempt most GB-NI goods from tariffs and checks, the UK agreeing to maintain SPS and financial services rules very close to EU norms, onerous level playing field conditions and backdoor alignment of state aid rules. These add-ons would be quite enough to cancel out the minor benefit of zero tariffs versus the low average EU WTO tariff.
We should also look out for a bad deal on fishing that preserves key parts of the Common Fisheries Policy and a governance mechanism for the whole deal that allows the EU to retaliate unilaterally and disproportionately to perceived breaches of the deal and even to collapse it entirely based on disagreements in one small part of the overall package. Finally, look to see just how difficult it might be for the UK to exit such a deal – does it include standard exit clauses allowing the deal to be dumped after say 12 months? What other costs might such an exit trigger?
How should we know if a bad deal is on the way? Watch the political briefings and spin lines from pliant MPs. Lots of references to ‘sensible compromises’, ‘middle ways’, ‘balanced agreements’, ‘getting Brexit done’ and mentions of the background of the coronavirus epidemic should set alarm bells ringing.