From the Customs Union to free movement, we are still just chatting amongst ourselves. When we put our plans to Europe, there will be a painful collision with realityby Jonathan Portes, Anand Menon / August 16, 2017 / Leave a comment
“Peace in our time.” Apparently that was how a Downing Street source described the joint article by Philip Hammond and Liam Fox published in the Telegraph last week on “transitional arrangements” after Brexit. And, appropriately enough, David Davis now has a piece of paper to wave on his trip to Brussels next week—the government’s “future partnership paper” on customs arrangements after Brexit. But will this truce prove lasting, or merely a prelude to a more protracted conflict? The whole debate, public and political, about “transition” is beset by (witting or unwitting) obfuscation over what the term means, why it might be necessary, what it might imply, how long it might last, and how achievable it might be. A degree of clarity on these issues might help illuminate what is a hugely important, though currently a misleading and potentially damaging debate.
A “phased process of implementation”
To start with semantics, transition is not the only phrase currently being used to describe the period between Britain formally leaving the European Union and the full implementation of the new relationship between them. Six months ago, in her Lancaster House speech, the prime minister signalled that the signing of a deal with the EU would be followed by a “phased process of implementation” (not a “transition period”—a phrase which was literally banned from use inside the Department for Exiting the EU).
This distinction goes to the heart of the question of what “transition” might be needed for. An “implementation phase” implies that the United Kingdom has managed to agree not only an Article 50—or divorce—deal with the European Union within the two years allowed by the EU treaty (29th March 2019 at the latest) but also one that sets out, in considerable detail, the nature of the future trading and regulatory relationship between the UK and the EU27.
At the time of her Lancaster House speech, Theresa May was expressing confidence that this could be achieved by the time the UK left the EU. Once it was explained to her that this was in fact not legally possible—as the EU can only sign trade deals with non-member states—she appeared to row back from this slightly. But until recently the government stuck, in public, to this broad position. Indeed, Brexit Secretary David Davis still insists a new trade deal could be done within the two year period. Liam Fox, for his part, has claimed that a trade deal with the EU should be “one of the easiest in human history.”
Transition, under such circumstances, would genuinely be an implementation phase, required to allow both sides to put in place the necessary measures to ensure smooth implementation of whatever deal is done. For Davis, it is necessary not because Britain will not be ready, but because other countries would need more time to prepare new customs systems. For others, more realistically, it is because there is no prospect of the UK having in place the necessary administrative and bureaucratic mechanisms to implement a new customs and immigration system—to say nothing of replacing the myriad regulatory roles of the EU and its agencies—by March 2019.
So an “implementation phase” would allow government and businesses, both British and European, enough time to plan and prepare for the new arrangements agreed under the terms of the deal. This might be about our immigration controls, customs systems or the way in which we co-operate on criminal justice matters. Or it might be about the future legal and regulatory framework for financial services. For each issue, the time we need to phase-in the new arrangements may differ.
However, while the prospect of a “phased process of implementation” of a new trade deal with the EU makes some sense in theory, it always was, and remains, something of a fantasy. In order to plan such a process, you need to know what it is you are implementing—not in broad terms, but in considerable detail. It’s not just that the adjustment needed were Britain to remain within the Single Market and the Customs Union would be far smoother than that necessitated by a “hard Brexit,” but also that “implementation” will look very different depending on what, if any, agreements are reached on non-tariff barriers and regulatory equivalence in different sectors. The government’s paper on customs proposes either a “a new customs partnership” or a “highly streamlined customs arrangement”; but devotes only a few sentences to describing what either might entail.
It follows therefore that, until a deal has been done, there can be little or no discussion of how it is to be implemented. Implementation with nothing to implement, in other words, makes no sense. And it is worth noting that those who believe it might be possible for the UK and EU to agree the detailed terms of a deal within the time allowed by article 50 are disproportionately located within the cabinet. We know of no expert on either international trade or on the EU who believes that such a complex negotiation could be carried in such a short space of time. The view of some that it’s simply a matter of agreeing to continue not to levy any tariffs between the UK and the EU, with perhaps some mutual recognition of regulatory standards on top, is not shared by anyone on the EU side (nor, indeed, by those responsible for the actual negotiations in the UK government).
An “off the shelf” transition?
Which brings us to “transition.” In contrast to “implementation,” this means an agreement—an “interim arrangement” as the government’s paper on customs puts it—that allows both time to negotiate a deal in the first place, and, in addition, the space to put in place the measures necessary to implement that deal with the least disruption possible.
What would this look like? To minimise disruption, the fundamentals of existing economic arrangements—meaning most if not all the other aspects of the Single Market, and the Customs Union—would continue as now. The less similar transition is to existing arrangements, the more disruption it will cause (raising the prospect, in extremis, of the need for a transition to transition). And it’s worth bearing in mind that the less similar it is, the more costs it will impose on our partners. The more difference there is between the EU Customs Union and a Customs Union, to which the government’s recent paper refers, the more our trading partners will need to invest to ensure their border systems can cope.
Logic therefore dictates—as the Chancellor apparently told business leaders recently—an “off the shelf” deal, which would follow closely the “Norway model” of European Economic Area membership. This would not be a “no change” option any means—Norway is not in the Customs Union nor does it participate in the Common Agricultural Policy, so some significant adaptation would still be necessary. Nor in itself does it deal with the Northern Ireland issue. This being said, such a model has obvious attractions. It would mean that Britain’s retains membership of (as opposed to the meaningless notion of “access to”) the Single Market. And it is tried and tested, and much of the necessary legal framework already exists.
“Free movement may end in a purely formalistic legal sense—but in practice continue as it is now”
But logic alone is not enough. The problem here is obvious—any “off the shelf” model looks, in economic terms, very like existing EU membership. And in political terms it looks even worse: during the referendum campaign, both Remain and Leave dismissed—crudely but not inaccurately—the “Norway model” as “pay but no say.” And indeed EEA membership implies not only accepting free movement, but also acceptance of EU law, and continued payments to the EU.
Hardly surprising then that some Leavers, either for principled or tactical reasons, see an extended transition period on these lines as a betrayal. Jacob Rees-Mogg, for example, claimed that “If we are subject to the rules of the Single Market and the regulations of the Single Market, and subject to the fiat of the European Court of Justice, we are paying for the privilege and we can’t do free trade deals with the rest of the world, then we are in the EU.” This is clearly wrong in legal terms—it is quite conceivable to be in both the Single Market and the Customs Union without being an EU member state. Which does not, however, prevent Rees-Mogg’s view being widely held.
Confronted with this backlash, the government position is now that any transition period will not be an “off the shelf” model, but rather will be negotiated with the EU. But this doesn’t rule out something which, in practice, borrows very heavily from the EEA model. The fundamental distinction—between implementing a new system and allowing current arrangements to continue more or less as now while a new deal is negotiated—still remains.
This is very clear in the case of customs. But the single most difficult issue, from a political perspective, will be free movement of people. The official government line is that free movement of people “as it is now” will end in March 2019. But if, as seems likely, the government adopts a similar approach to that taken in the customs union paper, then what this means is that it will end in a purely formalistic legal sense—but in practice will continue more or less as it is now, with the likely exception that new arrivals will have to register. Since most EU nationals coming here to work already register for a National Insurance number (at least) and any new system would likely be an extension of this, the practical impacts are likely to be limited.
So where does that leave us? Behind the political smoke and mirrors, it seems clear that the government has, for all practical purposes, abandoned the idea that we will be discussing how to implement a new, post-Brexit arrangement with the EU. Instead, it is concentrating on devising arrangements that will allow it to say that we have indeed left the EU, in fact as well as in law, while preserving the fundamentals of the EU-UK economic relationship for a time-limited period until a future trade agreement is negotiated (and perhaps implemented).
The Cabinet “deal,” then, looks like this:
As we leave the EU, we will also “leave” the Single Market and Customs Union on 29th March, 2019. Free movement will also “end.” Brexiteers may rejoice—independence will arrive on schedule, we will have taken back control, and the hated writ of the European Court of Justice will no longer run in the UK
But—and this is the clever bit—nothing will actually change. Goods and services will continue to flow freely between the UK and the EU27 with no tariffs or other trade barriers and businesses will continue to be able to hire the European citizens they want and need (there might perhaps be an extra form or two). Economic disruption will be minimal
And this will be made possible by a bespoke, time-limited transitional agreement—an “interim arrangement”—which will both give us the time to put in place the necessary administrative and bureaucratic systems for customs and immigration, and to negotiate the terms of our future trading arrangements with the EU. And at the same time we will be free to negotiate trade deals with the rest of the world, to come into force when the transition ends.
The EU position
The problem, of course, is that this is a carefully crafted compromise designed to paper over as far as possible, divisions within the Cabinet and the Conservative Party. What has so far been almost completely absent from the debate is any serious consideration about how the EU27 might approach the discussions. We forget too easily that both sides will have to agree to any such arrangement.
In this respect, London does have one key card to play. While a chaotic Brexit would be a disaster for the UK, it would also do significant economic damage to the EU. So both sides have an interest in an orderly transition, and the UK’s acceptance that this will have to be on broadly similar terms to the current arrangements is clearly much more likely to be acceptable to Brussels than a bespoke, “having cake and eating it” approach. So the EU is likely to welcome the change of tone in London.
“There will be every incentive for groups of countries to drag their feet if they think it is in their interest”
This does not, however, mean that reaching agreement will be either quick or easy. As Michel Barnier has repeatedly made clear, his mandate is currently confined to the divorce, not to the moving out of the furniture and the selling of the house. In other words he has no mandate to negotiate either on the terms of any eventual deal, nor on any “transitional arrangements” bridging the gap until such a deal can be signed.
Assuming that sufficient progress is made in the Article 50 negotiations, then the European Council will give him such a mandate—but they will know very well that they are in a position to determine terms. And the EU has already set out its general position. The sort of piecemeal, “cherry-picking,” bespoke approach which the British government still appears to favour is simply not an option. Rather, we shall have to apply and abide by all the EU’s rules
“Any such transitional arrangements must be clearly defined, limited in time, and subject to effective enforcement mechanisms. Should a time-limited prolongation of Union acquis be considered, this would require existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures to apply”
Taken on the face of it, this would rule out the UK’s proposed “interim arrangement” for customs, let alone similar provisions for other aspects of the Single Market. And in addition to these considerations of principle from the EU, there are also more hard-nosed tactical reasons for the EU to drag its feet. First, there is cost, as mentioned above. Why should other member states foot the bill for a transitional Customs Union that is different from both the status quo ante and the final outcome? Second, EU countries can already see that in some sectors—and not just financial services—uncertainty over what will happen in March 2019 is beginning to influence the thinking of multinationals as to whether they want to invest in the UK. The longer it takes for the outlines of a deal to become clear, the greater the uncertainty, and hence the temptation to hedge against the possibility of no deal or a bad deal by planning a redirection of investment or even a relocation. And—since a transitional deal will have to be agreed, at least, by qualified majority voting and the European Parliament—there will be every incentive for individual countries or groups of countries to drag their feet if they think it is in their interest.
So it is not hard to see the negotiations dragging out, against a steady drip of relocations of business and jobs from the UK to the continent, until—sometime late in 2018—what’s on the table is a time-limited arrangement under which we continue paying into the EU budget, free movement continues as now, we lose our voice and vote in the Council and Commission, we remain subject to the decisions of the ECJ, and we agree the broad outlines of a future free trade deal and trading arrangements with the EU—but with no certainty on when such deal might actually be agreed and implemented.
This may sound like a worst-case scenario—but both the political and the legal/administrative logic points to this as the position most likely to command consensus among the EU27. Is this deal really politically viable for any UK government? Perhaps we should have talked to the EU before launching a debate about transition amongst ourselves?
The Brexit end-game
But, let us suppose—for want of a better alternative—we end up with the kind of transitional arrangement set out above. What are the long-term consequences? It certainly represents a defeat for the proponents of a “clean break” Brexit. But it is nonsensical to see such an outcome (as some seem to be doing) as either a victory for those who favour a “soft Brexit” or—more bizarre still—for Remainers. Remember, on 29th March, 2019, on the current legal and political trajectory, we will leave the European Union. Transition resolves little or nothing about the long-term. Whether Brexit represents a “cliff edge” or not will depend, not on transition, but on the nature of the final trade deal arrived at.
And if that deal means that the UK leaves the Single Market and the Customs Union, there will be, at some point, a “cliff edge,” and the evidence is overwhelming that this will mean that, over time trade with the EU will decrease significantly. Transitional arrangements might allow the UK to prepare slightly better for this eventuality. But, at the end of the day, they would represent little more than the difference between jumping off the cliff in swimming trunks or a padded jacket. Slightly less painful, but still extremely serious. It may amount to little more than allowing firms rather more time to restructure their supply chains or to decide where to relocate.
Nor should we assume that the threadbare nature of the prime minister’s strategy implies that either the soft Brexiteers or the Remainers—in or out of government—have come up with anything more cogent. Their approach seems to be to accept that—at present—they cannot argue about the finality of the referendum result. Rather, they are confining their objections to the process, attempting to drag this out as long as possible in the hope that something better turns up.
So what is their endgame? To stay in the EEA, or some modified version of it, indefinitely? But that runs up against the obstacle that was highlighted by both sides in the campaign—it means following the rules and paying in, but with at best considerably less influence. To hope the country “comes to its senses” and reverses course? But the longer we continue down the current road, the harder it will be to turn back—and after March 2019 impossible without a full-scale re-application for membership. Or to hope that wider political developments in the eurozone, with the Franco-German relationship reinvigorated by Macron and Merkel, mean that some sort of new arrangement between “core” and “periphery” is feasible, along the line of the Continental Partnership proposals advocated here? This is perhaps the most viable approach, and the most consistent with the UK’s long-term economic and political interests, but has the disadvantage of being almost entirely outside our control.
So a succession of misjudgements, both tactical and strategic, by the prime minister and all sides of the debate within the Cabinet and Conservative Party have put the UK in even more of a bind than we were before negotiations even began. And of course these divisions are replicated within the Labour Party, whose leadership appears to be still stuck in the “having our cake and eating it” phase of denial.
So where next? The debate about “transition”—important and necessary though it is—is a phoney war. The real argument is whether, outside the formal political structures of the EU, the UK sees its economic and political future as being tightly bound into the rest of Europe, which would mean that the UK-EU relationship, however formalised, remains the fundamental priority. Alternatively, are we better off seeking a “Global Britain,” with the EU remaining an important trade partner, but where we make international agreements and deals as and when they serve our interests. Until we resolve this question properly—not just in the Cabinet but in parliament and the country—we won’t know where we want to go, and the prospect of a successful outcome will continue to recede. That being the case, the debate about transition is merely a distraction. And the longer it continues to dominate the headlines, one that makes the ultimate direction of thrust of government policy—an eventual hard Brexit—a more likely ultimate destination.