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14 March 2019

Brexit: The Prospects – A Danube Institute Discussion

"Currently under European treaties we have the right to leave by giving notice within the two years we have left. We give up that right under this proposed deal. This is the most contentious bit of the whole deal because it means that leaving would require permission of the European Union, and the whole deal would be adjudicated by the European Court of Justice."

It may be helpful if I set out a few facts to enable our discussion to proceed. First of all, what did the British electorate vote for when they voted to leave the European Union? Second, what were they offered in the subsequent general election in 2017? Third, what are they now being offered in the deal that Mrs May has negotiated with the European Union, and fourth, what will they finally get at the end of the day?

There is a lot of speculation about why people voted. I have always found the easiest way to find out why people voted is to ask them, and there were polls carried out of people leaving the polling stations on the day of the election. They reached the same conclusion, roughly half the people voting to leave said the most important issue was getting back control of our laws, a third said it was getting back control of our boarders, i.e., being able to control immigration and trade; and a sixth said that it was getting back control of our money. And indeed the Leave slogan throughout the referendum campaign was to take back control of our laws, our borders and our money.

Second, what were people promised in the subsequent general election in 2017? Both major parties promised that they would implement the decision of the referendum. The Conservative Party, despite losing some English seats, partly offset by gains in Scotland, promised that we would leave the single market, leave the customs union, leave subjection to the European Court of Justice, and finally that no deal was better than a bad deal. Three parties at that election promised a second referendum (or not implementing the result of the first). All three parties lost a share of the vote. Since the two main parties increased their share of the vote on manifesto promises to implement the result of the election, it was pretty clear that what people voted for in the referendum was reinforced by the subsequent general election. Later on the Prime Minister reiterated those same promises that we would leave the customs union, leave the single market, no longer be subject to European laws and the European Court of Justice, and finally that no deal was better than a bad deal. In particular, she said no British prime minister of any party could possibly accept a border of any kind between Great Britain and Northern Ireland or, in other words, down the middle of the United Kingdom.

What are the voters now offered? They are offered a deal, accepted by the Prime Minister, which conflicts with all the promises she previously made. First, Britain is to pay 39 billion pounds to the European Union. Second, in return for that transfer we get a transition period when we will continue to negotiate the trading arrangements between ourselves and the European Union post-Brexit. (Originally the government said it would be an implementation period when we, having agreed what the arrangements were going to be would have two years to implement them.) Third, and most contentious, there is the Irish Protocol. It was agreed by all parties that we did not want to see a hard border – that is to say, infrastructure and checks carried out on the spot – between Northern Ireland and Southern Ireland. To achieve that, the agreement says to Britain: Sorry, the whole United Kingdom would for two years continue to be subject to the external tariff, the customs union, and the internal laws of the single market. Moreover, if no agreement has been reached on better arrangements after two years, then either this situation can be prolonged by agreement for an indeterminate period or Northern Ireland will be treated separately from Great Britain for all these purposes. Anyone exporting goods from Great Britain to Northern Ireland – part of the same country – will have to fill in customs returns (though not in the other direction). Northern Ireland would remain subject to European law and the EU external tariff. And finally the United Kingdom would have no right to leave that arrangement.

Currently under European treaties we have the right to leave by giving notice within the two years we have left. We give up that right under this proposed deal. This is the most contentious bit of the whole deal because it means that leaving would require permission of the European Union, and the whole deal would be adjudicated by the European Court of Justice. All those provisions will be in a legally binding treaty.

Admittedly, the treaty will be accompanied by a political declaration about the future relationship between Europe and Britain in terms of trade and cooperation on other matters. The Prime Minister promised this declaration would be detailed, but it is extremely vague, which will mean in practice our continuing to discuss whether we will have a free trade area, a customs union, or whatever at the end of the day. The Prime Minister thought she could persuade people to vote for this mystery package by saying it was the only deal on offer: if MPs did not vote for it, then either there would be no Brexit or no deal. That did not deter Parliament. All the opposition parties said they would oppose it (perhaps for tactical and political reasons) and as many as 100 conservative MPs said they would not support it. Taken together, those decisions would have meant that the whole deal would have been defeated by over 200 votes. So the Prime Minister at the last minute called off the vote, and said that she would go back and ask for what she described as some assurances, i.e., something that was short of being legally binding, just some fond words.

At this point, some Conservative MPs were prompted to send in letters demanding a vote of confidence within the conservative parliamentary party in her leadership. Such a vote for a vote requires 15 per cent of Tory MPs, i.e., 48 in round numbers, to do that, and they rapidly appeared. There was a vote held immediately the same day to wrong-foot the opposition. Prime Minister May won by 200 votes to 117 which meant more than half her backbenches voted against her. Ministers supposedly had to vote for her, but there are some signs that not all may have done so. At all events that vote left her in a weakened position. And when she eventually presented her deal to Parliament in January, she lost the motion by a majority of 230.

So what now is likely? Well the Prime Minister is whizzing around the capitals of Europe begging for help in getting this deal through the British Parliament. It is extremely unlikely, however, that the European countries will want to change an agreement which she had reached with them. They will be unlikely to offer anything except assurances. What she would clearly like is a time limit on the promises to keep Northern Ireland in the European Union and the United Kingdom in the single market and customs union. Since it is very unlikely she will get them, she will return with a deal which a majority of MPs are still unlikely to support.

What then? I cannot tell you what will happen then. What ought to happen is that she or whoever is Prime Minister should go back to the European Union and say: You offered us a simple free trade deal back on 7 March last year. Donald Tusk, the President of the European Council, then proposed a simple free trade deal like that which had been negotiated with Canada. This is known in the jargon as Canada Plus because it offered a free trade deal plus a range of other things. Tusk repeated that offer in October. It was turned down by the British Government, however, on the assumption that the offer would not extend to Northern Ireland. (In fact Tusk phrased his offer in terms of an offer to the United Kingdom, but London may have been told in private that it left the Irish issue to be solved.)

The Irish issue has become one of the most important issues in the negotiations even though it is a kind of non-issue. We know that because the British government has said there are no circumstances in which we would erect border posts on the Irish border, or require people trading to be checked at the border, or to demand customs declarations there. That can all be done electronically in advance or at the end of the month. At present we regulate cross-border trade without any border posts. And all the governments and authorities involved – the Prime Minister of Southern Ireland, EU Commission President Juncker, Prime Minister May – have said that the problem can be resolved without border posts and without keeping the laws both sides of the border identical. Consider the different rates of duty on things like alcohol and tobacco on either side of the border. One of the main items of trade across the border is alcoholic beverages. Guinness, famously made in the south, and various other alcoholic beverages famously made in the north. They travel back and forth in the process of manufacture. We nonetheless regulate that trade without stopping anybody at the border. All have to be declared electronically and this regulation is appropriately supervised.

Why then has it become such a big issue? The reason is that there were those within the British government, particularly the Chancellor of the Exchequer and his Treasury Department, who wanted to make it an issue because they wanted to keep Britain in the customs union. By accepting the demands of the Irish government and the EU to keep rules on either side of the border identical, they are effectively promising to do just that. So the Irish Protocol (or Backstop) was not a concession dragged out of the British government so much as a voluntary gift offered by people in the British government that contradicted the pledges made to the electorate in the last election and in the 2016 referendum. Calmly analysed, the Irish issue is soluble by simply replacing the Irish protocol in the existing treaty by a renewed commitment in writing from all three parties that they will not erect border posts, or carry out checks on the border, but instead deal with these things by administrative process away from the border. If that was agreed, then we could have a strait free trade deal – Canada plus, plus, plus, as we call it in British jargon – and all would be fine and dandy, though doubtless the Treasury would complain it was not as good as being inside a customs union.

Alternatively, there will not be an agreement on these commonsense lines, and the European Union will say, sorry, we are withdrawing that offer (or it is only available if you keep the Irish protocol arrangements) in which case we will leave on 29 March without a withdrawal agreement.

Would that be a big deal? Not really. I was involved in the negotiations in the Uruguay Round which set up the World Trade Organisation. The WTO is designed to provide a basic framework in which nations can trade with each other without discrimination offering each other what is called “the most favoured nation tariff”. It means that countries cannot impose tariffs on other people’s goods higher than those they impose on the generality of other countries. It also has a dispute resolution procedure. It is a good basic framework under which countries trade. Britain currently trades on WTO terms with a range of countries like the United States of America, our biggest single national trading partner, and with others around the world. Our trade with the countries with whom we trade solely on WTO has risen three times as fast as our trade with our partners in the single market.

I happened also to be the Minister responsible for introducing the single market legislation in the United Kingdom. I made many speeches saying that this was going to boost our trade wonderfully. It has done so modestly. Fortunately, I was also responsible for helping to establish the WTO, and I said again how well it would boost our trade. It has done so rather better than modestly in trade terms. To be sure, though it is not bad to trade on WTO terms, it is better to have a free trade deal with another country.

How would our trade with Europe fare after Brexit? If we were relying on WTO terms to regulate it, our exports to Europe would face an average tariff of four per cent. Now, since the referendum, the exchange rate of the Pound has moved in such a way as to make our exporters 15 per cent more competitive. It would therefore offset four percentage points of that 15 per cent. That is hardly the end of the world. Those exports would still be more competitive than they were before the referendum was held. Of course, an average of four percent conceals much higher tariffs on some goods, particularly on agriculture goods. Tariffs on foreign-made cars are ten per cent, for instance, so that we would have to support those industries in other ways.

Would we be able to do so? Well, let us do a little calculation. The total of four per cent tariffs on our exports would cost us between five and six billion pounds. On the other side of the ledger, we would save 10 billion pounds from what would have been our next contribution to the European Union. Overall, therefore, we would be even better off in terms if we were to keep the same external tariffs as now but applying it to exports from the EU. Whereas our exporters would have to pay five or six billion on imports, that same tariff would cost the exporters from Europe 13 billion. Why so much more? The reasons are that (a) they export far more to us than we export to them, and (b) they export goods that are highly protected like motorcars, whereas we export goods which are internationally competitive and so have low tariffs. Overall again, therefore, we would be better off under WTO terms in trading with Europe. In addition, we would be in a position to negotiate a free trade deal as other countries outside the European Union have done.

To me, therefore, the post-Brexit trade position under WTO rules would not be a bad one. That said, I hope we reach an agreement. I hope it takes the form of a Canada-style free trade deal. Either way, Britain will be able to fulfil the wishes of its electorate.

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