Are the edges of a Brexit deal coming into focus?

We always must prepare for a no-deal outcome. But we do not need to expect one

June 24, 2020
EU chief Brexit negotiator Michel Barnier. Photo: Photo: Nasa
EU chief Brexit negotiator Michel Barnier. Photo: Photo: Nasa

When Theresa May said that she thought no deal was better than a bad deal, plenty of people complained but few truly believed her. Hers was a cautious government, desperate to maintain the confidence of MPs, most of whom were desperate to avoid the economic shock of no deal.

Boris Johnson’s government is nothing like that. Whereas May seemed allergic to risk, Johnson is a man of appetites, and a risk appetite is among them. He has a big majority so there is no chance that MPs will compel him to avoid no deal. When he evangelises about the virtues of a sovereign Global Britain, freed from EU tyranny, he sounds like a true believer, not like a closet heretic reproducing the prevailing orthodoxy for fear of excommunication.

Those are some of the arguments that it is more likely that the post-Brexit transition period ends in “no trade deal” than it was that the pre-Brexit Article 50 period ended in “no deal.” Here are three more. First, “no trade deal” now is less intrinsically frightening for everyone than “no deal” was then, because it is reversible. A withdrawal agreement can only be granted to a member state. If it leaves without one, the moment is gone, and only the opportunity for mini-deals to mitigate the damage remains. But a trade deal can be given to any state at any time. So, the EU might think, why not let the UK leave without a trade deal, do its penance with some economic pain, and return, chastened, to the negotiating table?

Second, “no deal” is not so scary in a Covid-19 world. Trading on WTO terms used to sound like the end of days: shortages of medical supplies, empty supermarket shelves, disrupted travel. Now it just sounds like late March. Third, we will be in a coronavirus-driven recession by the time the no-deal shock hits. Once the economy has lost 20 percentage points of GDP to coronavirus, ministers might wonder, what difference would it make to lose another couple to a no-trade-deal Brexit?

Combine all that with the gulf between the two sides’ positions, and you might start to lose hope for a mutually advantageous deal.

And yet, in the face of it all, the key obstacles to a deal—disagreements on the “level playing field,” fish and governance—do not look so insurmountable as they once did.

On the level playing field—that is, the environmental, labour and state aid restrictions which the EU wants to see the UK commit to—there have beenreports that London is banking on a “compromise” whereby the UK is subject to retaliatory measures, such as tariffs, if it diverges from the rules. At least on labour and the environment, that sounds like the EU’s existing proposal with extra spin. Rather than “the UK must comply and, if it does not, it will face tariffs,” the approach becomes “the UK may comply and, if it does not, it will face tariffs.” There will still be arguments over state aid, where Brussels makes the unusual demand that the UK keep updating its rulebook in line with the EU’s. The EU is asking for a lot here, but at least in the commission, officials recognise that. Their most novel asks may yet soften as the UK gives ground.

On fish, likewise, there are murmurs of movement. At the start of the negotiation, the EU wanted no reduction in its access to British waters, whereas the UK wanted annual negotiations, the failure of which would lead to no access at all. In recent weeks there have been reportsofthawed positions, with the possibility of some phased transition away from status quo fishing quotas, and a system for revisiting them that gives EU fishermen more stability than an all-or-nothing annual negotiation.

Meanwhile on governance, the question is whether there will be one overarching agreement, as the EU wants, or lots of little ones, as the UK wants. This affects the scope of retaliation if anyone breaks the rules. If the UK is not playing fair on fish, can the EU hit the UK’s access to its market for car parts—or is that sealed off in a different agreement? Though the two sides are still squabbling about this, it is unlikely it will be the obstacle to a deal. The stakes are too low. Whatever happens, the EU can always hit the UK where it hurts, because important aspects of the relationship—like market access for the UK’s financial services providers—will be controlled by the EU unilaterally, as part of an “equivalence” framework.

The edges of a deal, therefore, are starting to come into focus.

But if, on 31st December this year, there is no white smoke on these issues, do not be surprised if, in time-honoured Brexit tradition, the parties kick the can down the road. Though it will be too late to extend the transition period, creative lawyers in London and Brussels can find ways to give negotiators more time if that is what the politicians want. No 10 will know full well that, while a “no-trade-deal” outcome is reversible, the losses caused to individual businesses are not. It will know full well that, while the public may be less scared of long queues and empty supermarket shelves than they used to be, what matters is how culpable ministers are for the disruption. It will know full well that, while the aggregate no-deal impact on the economy might be masked by the coronavirus recession, many of the sectors exposed to Brexit risk are not exposed to coronavirus risk—and where businesses are exposed to both, they will have used up stockpiles and planning resources to the virus response, so are more exposed than ever.

We have to prepare for no deal, always. But we do not have to expect it.