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 :

The Common Rulebook – goods and services

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.

The Common Rulebook – horizontal issues

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?

Dispute Settlement

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.

Customs Arrangements

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.

Free Movement

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.

The Budget

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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The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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