Theresa May’s decision to trigger article 50 in March 2017 was a monumental mistake. An impulsive reaction to silence dissenters such as Johnson before the party conference. By invoking article 50 the UK removed its leverage with the EU. And put itself in a time-limited game with the EU, where the UK is at a huge disadvantage.
Before starting the clock running, the Government should have established their position – which still remains unclear – and commence planning for Brexit. Instead, the negotiation has been marred by Government infighting, a complete lack of preparedness and a constantly shifting position. Yet despite this, public support for Brexit remains robust. Most of the media remain vehemently on board. The UK’s exit from the EU even if it resembles a car crash seems assured. The consoling fact is that it remains to be seen whether this Government, sitting on a knife-edge majority, has the ability and the wherewithal to actually take the UK out of Europe.
For a country preparing to leave a 45-year union, it would be reasonable to expect money to be thrown at this problem to ensure the best possible outcome. But despite current Government rhetoric of preparing for no deal, additional resources for this immense task have not come to close to approaching the level required, while planning has barely started.
Take the trade negotiating team. Assuming the Government means to leave the EU, recruiting top trade negotiators should be an immediate priority for the UK. At least three hundred seasoned trade negotiators would be necessary to negotiate all these new trade deals, including a new trade deal with the EU. Unfortunately, the Government has shown very limited enthusiasm to recruit anyone. Currently, the Department for International Trade only appear to have one trade negotiator in their employ, their joint-permanent secretary Crawford Falconer. The remainder of the trade negotiating team have been filled by career civil servants, most of whose experience of trade negotiations probably goes no further than a 5-day training course.
Then there’s the UK agencies which will need to be set up post-Brexit to replace around two hundred plus European agencies. This is a mammoth undertaking. EU agencies currently cover everything from allowing new drugs on shelves to importing nuclear materials (Euratom). If the UK is serious about leaving, work should be at an advanced stage to create replacement agencies for these institutions. But preliminary planning has only just started in earnest. Since it will take at least 2 years to make these agencies operational it’s mystifying why nothing substantive has been done. Afterall, the repercussions of not getting these agencies ready in time would be severe. For instance, if the UK were to be unable to agree a safeguard inspections system for its nuclear energy to replace Euratom before it left the EU then power outages would be likely, since the UK imports a lot of its nuclear fuel from the EU.
Leaving the EU would also involve ripping up around 750 agreements with the EU. If there is no transition deal, then replacement agreements would need to be finalised by 2019, else there would be serious repercussions. Of course, most of these would go unnoticed by the general public, but not all. The ending of the free skies agreement would prevent UK planes from travelling to the EU and US. Without an agreed transition, airlines would start cutting flights from May 2018 onwards, since flight schedules are set a year in advance. By autumn 2018 all planes to the EU and the US would be grounded. This would not resonate well with the general public. More than 135 million passengers fly between the UK and EU every year. That’s about 370,000 passengers a day.
Trade issues would also pose a significant problem. While the imposition of tariffs would impact on the economy it would represent a minor issue compared to the customs checks required in a post-Brexit landscape. Take Dover, since 1985 the number of road haulage vehicles travelling through customs has quadrupled to over 7000 lorries a day in 2016. Of this, customs only had to clear 500 lorries a day. Post-brexit, customs checks would need to increase fourteen-fold.
The Government is recruiting 5000 additional custom staff in an effort to manage this. Unfortunately, the problem is not just a personnel issue. Customs infrastructure is currently inadequate to process the level of traffic, post-Brexit. And just a 20-minute delay at Dover would result in traffic backed up all the way to Dartford. Tens of billions of pounds would therefore need to be invested in customs over the next few years, to minimise disruption to trade in a post-Brexit world.
Customs would also need to be enlarged in key EU countries to conduct border checks on UK goods. However, some key ports for cross-channel trade — Calais, the Channel tunnel, Hook of Holland — lack the physical space to enable an expansion. Moreover, it’s unlikely that EU countries would make the required improvements to key customs ports in time. First, there would be little incentive to divert billions from their budgets for the benefit of our exporters. The UK would probably need to provide additional funding to ensure key investments in customs in the EU were completed in time. Second, it’s highly unlikely that the thousands of additional EU customs officers would be trained within the current timeframe. As yet, no EU countries have sought to increase customs personnel despite the lags in entering service: new recruits have to be trained for 2 years in France and 3 years in Germany before they are able to enter service.
Clearly, customs checks should be avoided at all costs. Unfortunately, if the UK leaves the EU it would be impossible to avoid. Even countries in the single market (Norway) and customs union (Turkey) are subject to onerous rules of origin (ROO) checks to establish the origin of products’ components.
Leaving would also impact on UK services. Specifically, financial services which account for nearly a sixth of the economy. Since the creation of the single market the UK’s finance industry has grown substantially, in part by poaching markets from other EU countries. But if the UK does decide to leave the EU and the single market, financial firms would lose passporting rights to sell services to the EU. In theory firms could rely on equivalence to sell services to the EU – like the finance sector in Switzerland – but this would only cover a narrow range of services. Plus, the EU would be able to revoke it any time. Others such as UBS are plugging hopes on back-to-back trading where satellite offices in EU countries would facilitate the provision of services to the EU, but most of the work would be completed in London. Such optimism seems overdone. Although the EU may be willing to allow back-to-back trading initially, it would be limited to smaller deals and could well be revoked in the future. Overall, if the UK leaves, the Bank of England expects around 75,000 finance sector jobs to relocate to the EU. Although this forecast seems rather high, the exodus of finance jobs would also impact on support industries (legal, accounts etc.), which rely heavily on the city.
Finally, despite the strong negative emotions some people have towards immigrants, their importance in key economic sectors is becoming apparent. A recent fall in the number of EU migrants in the UK has impacted on sectors such as agriculture and health, which are dependent on them. According to the National Farmers’ Union, the number of seasonal farm workers fell by almost a third, this year. Farms facing labour shortages have had little choice but to let fruit and vegetables rot. Similarly, some areas of the NHS have experienced difficulties in filling positions as EU migrants have fallen, particularly the nursing profession. In a small number of extreme cases, wards have been shut due to lack of staff. At present, the overall impact is negligible since there are still a vast number of EU migrants working in the UK, however a future precipitous fall in numbers would have an adverse impact across a number of sectors.
Despite these issues, most of the public are oblivious. Theresa May remains too preoccupied with holding on to power to contemplate having an honest conversation with the electorate about what can be realistically achieved. With only the predominantly anti-EU media to rely on, the public’s overriding belief still seems to be that the world’s 2nd largest economy, the EU, needs the deal more than the UK. Consequently, the onus is on the UK to somehow conjure up a trade deal that is as good as the one it currently has, while taking back sovereignty and control of borders.
In reality, negotiations have been completely dominated by the EU. The UK have held off on agreement on the divorce bill to obtain some leverage on the trade deal, hence the impasse. Unfortunately, time is on the EU’s side. A lack of agreement on divorce proceedings in December or very shortly after (say in January) would have serious repercussions. Faced with no progress on a deal, flights to the EU and US would be phased out from autumn 2018. UK businesses with significant business in the EU would start to implement plans to relocate in early 2018. In fact, UK firms in UK-EU supply chains are already finding it difficult to secure contracts beyond March 2019.
In short, the UK Government is caught between a rock and a hard place. With clinch talks in December there are three choices for the UK: (1) Exit on WTO terms if there is no agreement on a deal; (2) Capitulate to get a bespoke deal; or (3) Hold firm and look for a better arrangement.
(1) Exit on WTO terms
While some populist Brexit MPs like to tout dropping talks entirely and leaving on WTO terms, no UK Government would seriously consider this. Even one headed by Jacob Rees Mogg. Exiting to the WTO before the UK was ready (that is before a transition period) would be political suicide. It would unleash a myriad of negative forces that would subsequently bring down the Government.
Once the divorce agreement has been finalised, this scenario remains a serious possibility later on in the negotiating period. The complexity of the talks (particularly on trade), the limited timeframe and intransigence of both positions mean it may be impossible to reach agreement within the timeframe. In such a situation, the EU may have no option than to kick the UK out once time is up. Vested interests and the EU’s convoluted approval mechanism may make it impossible for the EU to extend talks. Nevertheless, such action would be deeply unwelcome because of the resulting disruption for the EU. Afterall, the UK finance sector currently finances around fifty percent of investments in the EU.
(2) Capitulate to get bespoke deal
The likeliest option is the UK gives in to the EU and agrees to pay something in the order of 50-60 billion euros net to the EU for the divorce agreement. This option is not ideal since the UK would lose any leverage in subsequent trade talks, while receiving the ire of the anti-EU press and public.
Under this scenario, it is likely that the UK would end up with a bespoke trade deal with the EU. This would suit both parties. For the EU it would be inferior to present trade terms and serve as a disincentive to other member countries, whereas for the UK Government it would offer the best opportunity to spin a positive outcome to the public, particularly enabling border (read migration) controls. Put another way, instigating border controls would not be possible if the UK were to remain in the single market/ EU.
It’s likely the bespoke deal would closely emulate the EU-Canada Comprehensive Economic and Trade Agreement (CETA) deal. Tariffs would be kept off the majority of goods, but customs checks would be reinstated. UK services would be severely restricted into the EU market. Consequently, the service sector would slightly shrink and a proportion would relocate to the EU.
Any trade deal would require a transition period to avoid a cliff-edge. Realistically, the UK would need a transition agreement of at least 5 years to conclude the trade deal and get everything in order. It’s probable though that the EU would only agree to 2 years and subsequently force the UK to offer significant concessions to the 27 EU states to extend the transition period, such as transferring sovereignty of Gibraltar to Spain. Of course, there’s no reason why the UK couldn’t bargain a longer initial transition in return for a higher divorce bill, but the current Government appear unwilling to consider any longer for fear it gives the public the wrong impression.
The question is where would this get us? A bespoke deal would eliminate the UK’s annual contribution of around 15 billion euros to the EU (about 2% of the Government’s annual budget). The UK would not be subject to EU regulations and directives, although it would make little difference to UK firms, which would still need to comply with them to sell products to the EU. Finally, the UK would be able to control the flow of EU migrants into the country, although most EU countries already do this (the UK chose not to implement because of cost). Frankly, though the economic costs would be quite hefty, for a notional idea of sovereignty and the ability to stop EU people entering the country.
(3) Hold firm and look for a better arrangement
The alternative is for the UK to hold firm in December talks on the divorce bill. However, without (highly unlikely) EU concessions talks would break down. This would result in firms leaving along with the fore-mentioned myriad of issues that would need to be resolved before we left in March 2019.
This scenario would impose significant short-term disorder on the economy. The prospect of grounded flights and job losses would almost certainly bring down the present Government and result in a massive shift in public opinion. At this point, with the divorce agreement on hold, and talks with the EU in tatters, the new Government would be facing an impossible deadline to reach agreement (autumn 2018) or consider exiting on WTO terms. Confronted with an impossible task, the Government would have to terminate the process of leaving the EU. Without an agreed divorce agreement this would probably not require ratification from EU members. Otherwise, elimination of the UK’s rebate would probably suffice.
All this rhetoric is of little use to Theresa May. Barring a miracle, she’s likely to be out of office within a year regardless of what she does. Recent reports depict her as a broken woman. She’s still fighting, issuing bellicose statements on the EU, but her days are numbered. What is crucial is who takes over as PM, particularly their stance on the EU, and whether economic news worsens significantly enough in the timeframe to lead to a rapid shift in public opinion and allow the new Government to abruptly change course. It’s a long stretch, but there is still a lot that can happen and a long way to go before the Brexiters have their way.