The author of this article is Harry Western
This article was first published in ‘Briefings for Brexit, and we re-publish with their kind permission. Part 1 was published here on Tuesday and we apologise for omitting to publish this Part 2 yesterday as advertised – Ms May’s Brexit Betrayal was the main topic in yesterday’s issue, for obvious reasons.
Importantly, it should be understood that the WA places no legal obligations on the EU to agree any kind of permanent trade deal with the UK. The EU could instead simply pocket the £39 billion the UK would have to pay the EU under the WA and never agree a trade deal.
But more critically still, the PD (Political Document) also states that any final trade deal that is agreed between the UK and EU should ‘build and improve on the single customs territory provided for in the Withdrawal Agreement which obviates the need for checks on rules of origin’. These two conditions can only be met by the UK and EU remaining in a permanent customs union, thus ruling out the UK having an independent trade policy.
What we see here is the same deliberate ambiguity visible in the Joint Report that laid out the original version of the Northern Ireland backstop. And we can be certain that if the WA were passed, the outcome would be the same too – the EU adopting its own, maximalist, interpretation of the agreement and dropping the elements that are inconvenient. So, the EU would make it clear from the outset that the ‘final’ trade deal would require a customs union. If the UK disagreed, the EU would simply let the backstop kick in – which of course creates a customs union anyway.
NI faces potentially significant economic costs from the backstop because the backstop arrangements places NI in a different customs, VAT and excise territory from the rest of the UK; the ‘backstop’ arrangements are not really a UK-wide system at all. This would create potentially large NTBs (Non Tariff Barriers) to trade between NI and GB, including full third-country customs and regulatory controls.
If we take the UK Treasury’s estimates of the potential costs of such NTBs seriously, we could be looking at a long-term decline in NI GDP of up to 10%. The Treasury claims tariff and non-tariff barriers on UK-EU trade will cut UK GDP by 8% in the long run, with 80% of this effect coming from NTBs. But NI-GB trade is twice as large as UK-EU trade as a share of GDP, so even if the backstop created only half the level of trade barriers between GB and NI that the Treasury claims Brexit will create between the UK and EU, the Treasury methodology would see NI GDP cut by 8%.
This calculation raises a very serious question about how realistic these Treasury estimates are. If they really believe the effects on GDP could be this large, it’s hard to understand how they could ever have agreed the backstop. And indeed, official sources are keen to claim that ‘checks’ on trade flows between NI and GB under the backstop could be kept to a minimum. But if that is so, then the Treasury’s claims about massive GDP losses for the UK outside the single market and customs union look extremely questionable as the same minimising techniques could presumably be used.
The EU will hate the backstop:
this claim is perhaps the most dubious claim of all. The trade arrangements set up by the backstop are hugely advantageous to the EU:
- The backstop would be preceded by a two-year ‘transition’ in which the UK would be a 100% rule-taker from the EU, allowing the EU to launch a series of regulatory attacks on key UK industries including financial services
- The backstop arrangements involve the UK agreeing to recognise the EU’s protectionist system of geographical designations (for foodstuffs etc.) which benefit the EU far more than the UK
- The EU’s massive trade surplus in foodstuffs with the UK will be baked in as the UK will be unable to turn to cheaper third country suppliers and will have its own food exports hindered by high EU NTBs. The same will be true, to a less extreme extent, for the EU’s large trade surplus with the UK in manufactures
- The ‘level playing field’ clauses in the backstop prevent meaningful deregulation in the UK across most economic sectors and tie the UK into a host of damaging regulations
- The EU will be able to ‘sell’ access to the UK’s huge $1.8 trillion consumer market in trade negotiations with non-EU countries. The UK will be able to do nothing about this and will not even get any benefit for its exporters from such deals
- The UK will not be able to act as a serious competitor to the EU in the trade arena, but will be effectively an economic dependency of the EU
The trade arrangements created by the backstop are so one-sided and so damaging to the UK that it is very likely the UK will try to negotiate alternative arrangements rather than enter the backstop. The obvious areas for change would be the archaic system of movement certificates and some kind of deal on SPS regulations to minimise checks on trade in foodstuffs.
But the EU will be ready for this with its own list of further demands. Aside from an insistence that any replacement for the backstop must take the form of a customs union, these demands will include a fisheries deal that preserves the EU’s massively unfair quotas of UK fish, continued financial contributions to the EU budget, the preservation of free movement and probably the UK accepting dynamic alignment with the EU across an even wider range of regulatory areas – even more extreme ‘rule-taker status’. On past form, the UK would be likely to give in to these demands and doubtless business lobbies will quickly begin to agitate for precisely that.
This would leave the UK with a ‘Brexit’ from which all the possible upsides would have been stripped; no regulatory independence, no trade independence, no upside for agriculture or fisheries, no end to freedom of movement, and continued payments to the EU.
Under the WA, which has no exit clause, there would be no way for the UK to avoid this outcome without either abrogating an international treaty or (possibly) allowing the EU to annexe NI. So, the WA inevitably leads to a) backstop trade arrangements that are hugely damaging, arguably worse than WTO rules and which partition the UK or b) an alternative set of trade arrangements that are essentially EU membership with no say.
Rather than accept the choice of these unfavourable outcomes, the UK authorities would do far better by embracing an exit based on WTO rules-based trading with the EU. While this would have some short-term costs, these would be broadly similar to the likely costs of the backstop trade arrangements – and the UK authorities would save £39 billion and would have enormous scope to offset short-term costs with intelligent use of trade, regulatory and tax policies.