15 December 2017

Alasdair Smith is an Emeritus Professor of Economics at the University of Sussex, and is a member of the UK Trade Policy Observatory.

The deal done on Friday December 8 in the Brexit negotiations has already been subject to conflicting interpretations. The UK has committed to having no hard border in Ireland, and committed in terms which seem to admit no rowing back. Here’s the crucial paragraph 49:

“The United Kingdom remains committed to protecting North-South cooperation and to its guarantee of avoiding a hard border. Any future arrangements must be compatible with these overarching requirements. The United Kingdom’s intention is to achieve these objectives through the overall EU-UK relationship. Should this not be possible, the United Kingdom will propose specific solutions to address the unique circumstances of the island of Ireland. In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement.”

These words suggest three possible ways in which the UK could fulfil its commitment: a new EU-UK trade agreement which would avoid the need for a hard border; “specific solutions”; and, failing those two, full alignment with at least some of the single market and the customs union.

In Parliament on Monday, December 11, the Prime Minister made it clear that she believes the first way is feasible:

“We have set out already—we did this in the summer—arrangements that we believe could be in place, which we will now be able to discuss in detail with the EU27 as we move into phase 2 of these negotiations. They would enable us to retain tariff-free and frictionless access across borders, while at the same time ensuring that we are not a member of the customs union and the single market.”

She also was unambiguous about the “fall back” option:

“If we cannot find specific solutions, the UK will maintain full alignment with those rules of the internal market and the customs union that, now or in the future, support north-south co-operation, economic co-operation across the island of Ireland and the protection of the Belfast agreement.”

Because the agreement allows for different ways that the UK government commitment could be met, there are conflicting interpretations of its implications for the future of UK-EU trade relations.

The hope that the Irish border issue can be resolved “through the overall EU-UK relationship” (the first option in para 49), runs up against the problem that a free trade agreement will not in itself allow frictionless trade, even if there are no tariffs on any UK-EU trade flows. If the UK is outside the EU customs union, and has different external tariffs from the EU, mechanisms are needed to ensure that external goods do not enter the EU market via the Irish border without paying EU tariffs. And if the UK is not in the single market, mechanisms are needed to ensure that goods which enter the EU market across the Irish border satisfy EU regulatory requirements. (And obviously, there are reciprocal UK concerns about trade flowing into the UK across the Irish border.) The objective of para 49 cannot be achieved “through the overall EU-UK relationship” if that relationship does not include membership of the customs union and the single market.

The next option in para 49 is “specific solutions to address the unique circumstances of the island of Ireland”. Some commentators think that technological wizardry combined with behind-the-border inspection can dispense with the need for border inspections. At least some of these ideas miss the point that border inspections are needed not for those who pay their taxes and obey regulations, but for those who might not. Until concrete and workable proposals are developed and evaluated, this avenue is best labelled “magic realism”. Only if we can go down this avenue is it possible to contemplate a Canada-style UK-EU relationship or to discuss trade deals with third countries.

Economic realists (such as Kevin O’Rourke, Simon Wren-Lewis, Martin Sandbu, and my colleagues Peter Holmes and Jim Rollo) argue that the only UK-EU trade arrangement compatible with maintaining an invisible border in Ireland is for the UK to have a full customs union with the EU and for the UK to adhere fully to single market regulation for goods. They therefore see the third option in para 49 as the only one which will deliver the government’s commitment on the Irish border. If they are right (and I think they are) there is a conflict between the Prime Minister’s clearly expressed view that leaving the EU requires the UK to leave the customs union and the single market and her equally clearly expressed commitment to avoid creating a hard border in Ireland, which para 43 of last Friday’s statement spells out as:

“The United Kingdom also recalls its commitment to the avoidance of a hard border, including any physical infrastructure or related checks and controls.”

The arguably incautious statements made by Michael Gove and David Davis soon after Friday’s statement have given rise to apprehensions that there are circumstances in which the UK government might renege on the commitments it has made. On the Irish border, however, para 46 of the statement is unequivocal and strong:

“The commitments and principles outlined in this joint report … are made and must be upheld in all circumstances, irrespective of the nature of any future agreement between the European Union and United Kingdom.”

Notwithstanding this commitment, we need to recognise the pressures that will arise if the promise of the “magic realist” solution is not realised, and avoiding a hard border in Ireland requires the UK to remain in a customs union with the EU, so that new trade deals with other countries are virtually impossible; to remain in the internal market for goods; so much UK economic activity remains permanently subject to EU regulation; and to keep UK agricultural policy closely aligned with the CAP.

There are two stages at which the risks of the current agreement falling apart might arise.

The first is in 2018 when the withdrawal negotiations move to discussing in outline what the new trade relationship might look like.

Even in discussion of the outlines of a new trade agreement, the fundamental problem would quickly surface. In the absence of magical solutions, the message for the UK would be that its commitment on the Irish border would prevent it having the new freedoms which Brexit is meant to deliver.

The same messages would emerge in discussion of transitional arrangements – only a ‘standstill’ transition replicating the current UK-EU arrangements would satisfy the Irish border condition.

These would be hard messages for the Brexit enthusiasts, and there might well be strong pressure on the UK government to repudiate the draft withdrawal agreement, and go for a disorderly Brexit without a withdrawal treaty. Faced with the prospect of disrupted supplies of fresh food to UK supermarkets, closure of car factories, disruption of air travel, and all the other consequences of a disorderly Brexit, UK politicians and voters would surely want to think twice about whether this is the future we want.

Pragmatism might well prevail, with the constructive ambiguity of the December agreement carried forward past the formal exit of the UK from the EU in March 2019.

Even more troubling is the scenario in which the UK government accepts that the only possible transition arrangement is a ‘standstill’ in which the UK, signs a withdrawal treaty with the EU, and remains in the customs union and the single market while a new long-term trade deal is negotiated. Reality then dawns soon after Brexit that the Irish border commitment constrains the UK to BINO (Brexit in name only).

“This is not what we voted for” say the hard-line Brexiters. Disastrous though it would be for the reputation of the UK, there is pressure to repudiate the withdrawal treaty and have a disorderly exit from the standstill transition. With the UK already out of the EU, the option of no Brexit would no longer be available, even if that’s what the majority would prefer to a disorderly Brexit.

In the days since the December agreement, our EU partners have unsurprisingly expressed concerns about the UK backing off the agreement. UK citizens who would prefer a soft Brexit to a disorderly breakdown of our relationship with our largest trading partner (as well, of course, as those who would prefer no Brexit) should equally be on their guard. There’s an obvious danger in a Brexit to a ‘standstill’ transition from which the disappointed Brexiters could bounce the country into the hardest imaginable Brexit.

In short, once it’s clear that a ‘standstill’ transition period is needed before a new long-term relationship between the UK and the EU can be settled, there’s a very strong case that the transition should be created by an agreed suspension of Article 50, so that the UK remains a member of the EU (albeit one with curtailed voice) while a new relationship compatible with the UK government’s commitment on the Irish border is negotiated.

 

Disclaimer:

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.