9 July 2018
L. Alan Winters CB is Professor of Economics and Director of the Observatory.
The (three page) Chequers Statement is a remarkable political sticking plaster. Coupled with some robust politics it appeared to have kept the Cabinet unified for a few more days, although now even that goal has been missed.
This note is not about the politics, but about the technical aspects of the Statement which is replete with ambiguities and wishful thinking (or worse). The White Paper, if it arrives on time, may resolve some of these ambiguities, but that is far from clear, given the political imperatives that Mrs May feels must guide her actions.
Among the things in the Statement that strike me are :
Paragraph 4a: “The UK and the EU would maintain a common rulebook for all goods including agri-food, with the UK making an upfront choice to commit by treaty to ongoing harmonisation with EU rules on goods, covering only those necessary to provide for frictionless trade at the border.”
What is the set of rules that is necessary – and who decides? In principle, everything affects trade and any divergence between the UK and the EU requires a border of some sort. And once you have a border process for even one product, you start to impede others.
Paragraph 4a: “Parliament would have oversight of the incorporation of these rules into the UK’s legal order – with the ability to choose not to do so, recognising that this would have consequences.” (Paragraph 6f is similar.)
On the face of it, there is no certainty – a poor basis for long-term investment. De facto, almost no single regulation is worth losing the whole (UK-EU) relationship over, so de facto the UK has no sovereignty. And it will entail constant negotiations! Think Switzerland.
Paragraph 4a: “…services, where it is in our interests to have regulatory flexibility, recognising the UK and the EU will not have current levels of access to each other’s markets.”
Wholly unclear what we get – or ask for.
Paragraph 6b says that services are “where the potential trading opportunities outside of the EU are the largest”.
Evidence for this is lacking given how managed services trade is. It accepts loss of market access in EU services markets, without any indication of improvements elsewhere.
Arrangements on “financial services that preserve the mutual benefits of integrated markets and protect financial stability, noting that these could not replicate the EU’s passporting regimes;”
This is very abstract.
Paragraph 4b: “The UK would commit to apply a common rulebook on state aid, and establish cooperative arrangements between regulators on competition. …. [Both] agree to maintain high regulatory standards for the environment, climate change, social and employment, and consumer protection – meaning we would not let standards fall below their current levels.”
The commitment on competition is not strongly binding; letting standards fall requires definition – what if there is new evidence? Would no-one ever wish to relax a standard?
Paragraph 4c: UK commits to ensure “due regard paid to EU case law in areas where the UK continued to apply a common rulebook. …. means for the resolution of disputes, including through a Joint Committee and in many areas through binding independent arbitration – accommodating through a joint reference procedure the role of the Court of Justice of the European Union (CJEU) as the interpreter of EU rules”
What mechanism is proposed for arbitration? Investor-State Dispute Settlement (ISDS) is not a happy precedent. Note that the CJEU is the ‘owner’ of the common rulebook because the rulebook is identical to EU rules.
Paragraph 4d: “the UK and the EU as if a combined customs territory” but with separate tariffs! The key issue is “The UK would apply the UK’s tariffs and trade policy for goods intended for the UK, and the EU’s tariffs and trade policy for goods intended for the EU – becoming operational in stages as both sides complete the necessary preparations.”
Note, the EU has to cooperate before the new arrangement can come into operation. Given this fact, and the absence of the technology at present, the UK effectively remains in a customs union. This will encourage almost no interest in signing new Free Trade Agreements (FTAs) with the UK in goods markets, so we are back to the issues of my blog last Friday about the difficulties of achieving services-only agreements.
Relatedly, in Paragraph 6e we hear that the UK would have “an independent trade policy – the UK would have its own seat at the WTO, be able to set tariffs for our trade with the rest of the world, and have the ability to secure trade deals with other countries.”
Yes, in principle, but not – with this (unconvincing) Facilitated Customs Arrangement – in practice: the UK will be an unattractive partner for an FTA because taking advantage of paying lower tariffs in the UK than the EU’s external tariff will be uncertain and highly bureaucratic. Besides, the evidence that our own FTAs will add much economic value is limited.
Paragraph 6d: “the UK will leave the Common Agricultural Policy …. designing a domestic agricultural policy that works in the best interests of the UK;”
How does this match with the common trade policy? Would the EU allow the UK free access to EU markets if it promoted agriculture strongly? We would also need to determine how the EU’s negotiated limit on agricultural subsidies will be divided with the UK if we wished to pursue subsidies.
Paragraphs 6h “end free movement” and 6i “a mobility framework so that UK and EU citizens can continue to travel to each other’s territories, and apply for study and work – similar to what the UK may offer other close trading partners in the future.”
This implies that any EU arrangement may be special at first, but may be offered elsewhere (Australia? USA? India?) later. It will be a poor substitute for free movement in the eyes of the EU, even if it makes sense for the UK.
Paragraph 6j: “end vast annual payments to the EU budget, with appropriate contributions for joint action in specific areas, such as science and innovation, releasing funds for domestic priorities – in particular our long-term plan for the NHS;”
Note the ‘vast’. Remarkably, the ‘Brexit dividend’ has not yet quite been put to rest: it is true that some of the money that currently goes to the EU may not leave the Treasury after Brexit, but it is widely agreed that this will be outweighed by the amount of money that fails to arrive in the Treasury in the first place. That is, Brexit will cut the resources available to the UK public purse.
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‘Constructive ambiguity’ might have been a more technical, and less political, title (but then everything is political). The continuing technical incoherence, even now, coupled with the appointment of the particular Brexit Three, tends to confirm my initial suspicion that May appointed the Three to fail. If so, might we expect technical coherence when she moves to the soft Brexit end game/mutual relaxation of red lines? Raab, unlike Davis, has the technical competence ..
(although I was moved to post this on 2/3/16: In his interview, commencing 07.43 this morning, on BBC Breakfast (News) at http://www.bbc.co.uk/news/10318089, in answer to a question put around 07.48, Dominic Raab M.P. suggested that a UK renegotiation with the EU post-Brexit would not necessarily be drawn out. Having earlier said that the UK economy was very large and complex, he cited as an example in favour of celerity of renegotiation Greenland’s 1985 exit as particularly complex because it involved renegotiation on fisheries and even so took only two years. This argument is self-defeating. Brexit would involve renegotiation on 35 chapters of the EU acquis (of which Fisheries is only one), and in any event nearly three years elapsed between the Greenland consultative referendum of 23 Feb. 1982 and ‘Greenexit’ on 3 Feb. 1985. (One might add that Greenland – and Denmark – are debating its possible reentry.)
I think that this is a very good fornesic analysis.- especially on the point that retaining the possibility to refuse to apply a new single market regulation of cancelling our ahherence to an old one would create a permanent degree of uncertainty, which would do needless damage to investment . And the logic of ending UK membership of the Single Market for Services isn’t clear, unless it is somehow thought that this will make it easier to obtain agreement that the UK won’t have to respect freedom on movement (which is a bit odd, because freedom of movement was in the Rome Treaty and predated the Single Market).
Just one extra point. The CAP that paper envisgaes not applying (a sop to Mr Gove?) won’t, apparently, is itself changing. The Commission proposals for the period after the end of the current financial perspectives proposes in place of the cuyrrent system of rules a looser structure under which member states would develop their own programmes to meet commonly agreed goals. As the goals aren’t particularly contoversial, it’s not entierly clear how far membership will be all that different or non membership – except, of course, that an independant UK could chose to pay less to its farmers. Not quite what those farmers who voted leave had in mind!
‘this (unconvincing) Facilitated Customs Arrangement – in practice: the UK will be an unattractive partner for an FTA because taking advantage of paying lower tariffs in the UK than the EU’s external tariff will be uncertain and highly bureaucratic.’
Could you explain this a little more, please?
The UKTPO briefing paper provides an analysis of public support for a UK- US trade agreement, the possible economic benefits, investigates where support and tensions may lie, and ultimately lays out what the agreement could entail.
The team of researchers find that seeking an agreement allows both countries to present themselves outwardly as pursuing a sovereign policy in their own best interests as well as constructive members of a liberal world trading order.
L. Alan Winters