This has been a momentous week in the (still ongoing) Brexit process.

July 1st, 2021 marked the six month anniversary of ‘actually existing Brexit.’ It also marked the deadline for EU citizens to apply for settled status in order to retain their rights to live in the UK. July 1st was also going to be the expiration date for the grace periods on the export of chilled meats from Great Britain to NI. Fortunately, an extension of this grace period has now been mutually agreed.

There was also the usual stream of news about the economic impact of Brexit, which is turning out to be as bad as most economists had predicted. There is talk of threats of food shortages – among other things due to the lack of lorry drivers – and decline in trade with the EU. There were also some reports of positive impact of Brexit in the pro-Brexit papers though. The Telegraph celebrated the UK moving up in a ranking on the ease of doing business. More materially, Nissan announced its decision to invest in a new plant in the UK – arguably in order to be in line with the rules of origin spelt out in the Trade and Cooperation Agreement (TCA), which can be interpreted as a positive economic effect of Brexit (on how to interpret whether Nissan’s decisions shows that Brexit is working, readers may want to check my earlier post).

Two legal challenges - For and against Brexit

There was also a very significative ruling by the Belfast High Court on the incompatibility of the Northern Ireland Protocol (NIP) with the 1800 Act of Union. The ruling confirmed that the NIP did indeed conflict with the Act of Union, but at the same time ruled that, by voting in favour of the NIP, Parliament had – implicitly – repealed parts of the Act of Union. The ruling was considered a blow to the Unionists - who had brought the case –by some, but labelled ‘politically significant’ by the new DUP leader.

Another Brexit related legal challenge that was decided this week was the case brought by British Sugar plc. against the government’s decision to unilaterally lower tariffs on raw sugar imports. The High Court ruled that the company had the right to request a judicial review of that decision. The significance of this ruling is twofold: For one, it is a test for the aggressive  - and some (including myself) would say reckless – international trade strategy that the Department for International Trade has adopted under the leadership of Liz Truss. For the other, it is also a test of the impact of the NIP on the UK government’s ability to use state subsidies. That link may be less obvious: The case was brought by British Sugar on the basis that the unilateral lowering of the tariffs constituted a de facto subsidy for the US-owned Tate & Lyle Sugars. Tate & Lyle is the UK’s largest – indeed only significant – refiner of imported cane sugar. British Sugar, on the other hand refines home-grown beet sugar. By lowering the price of imported cane sugar, Tate & Lyle would benefit from a de facto state subsidy. This subsidy, so the argument ran, disadvantages not only British Sugar, but also EU sugar exporters to the UK. That’s where the NIP comes into play: British Sugar argued that the subsidy would constitute an unfair disadvantage for EU sugar producers who export to the UK and therefore be in breach of the NIP and the TCA. The High Court did not rule on these claims, but found them plausible enough to allow a judicial review. The decision may lead to the courts setting important precedents around the governments post-Brexit trade and subsidy strategy.

Beyond these events, two very significant developments in the areas of financial services regulation and state subsidies rules are to be reported. Taken together, they provide clues about what the government’s post-Brexit economic plan for the UK is.

Financial services – ‘no deal’ it is!

 In financial services, another hugely important – albeit unsurprising – piece of Brexit news this week was the confirmation that it will be a no-deal Brexit in terms of financial services. The stalling of negotiations on a comprehensive financial service settlement between the EU and the UK – which would have maintained UK financial service firms’ passporting rights to serve clients inside the EU single market – means that the City of London’s only hope for access to EU market will be a unilateral ‘equivalence’ recognition by the EU.

 This will most likely mean that divergence of the UK from EU standards in financial services and – possibly –  the ‘Indo-Pacific tilt’ (set out in the Integrative Review) will be accelerated. This will likely spark more regulatory competition in financial services and a race to the bottom in terms of financial regulation. Indeed, Sunak’s reform plans for financial regulation and listing requirements, also set out this week, clearly indicate that that is the intended direction of travel.

 Partly, this is already happening and having and impact.  Indeed, another piece of Brexit news this week was that London reclaimed first place in equity trading in Europe, after having lost that spot to Amsterdam earlier in the year. This is to an important part due to the re-admission on the London Stock Exchange of Swiss stocks. Swiss stocks are banned from trading on EU stock exchanges after the EU Commission refused to extend its recognition of Swiss financial regulations as equivalent two years ago. Post-Brexit, the UK has benefitted from this situation by admitting Swiss stocks to the London Stock Exchange, which has helped boosting trading volumes. The divergence from EU rules seems to pay dividends here. But ultimately they are precisely the sort of start to a race to the bottom, which – as we know from 800 years’ experience - will inevitably be the breeding ground for the next financial crisis.

The ‘No Deal’ in financial services also has a political side: Tellingly a Financial Partnership agreement with Singapore was signed earlier in the week. This can be seen as another sign of the ‘Indo-Pacific tilt,’ but also of an increasing reliance on good relationships with authoritarian regimes due to the turning away from Europe.

 The new state subsidies rules – towards a new industrial policy?

A somewhat less obviously momentous event was the introduction by the government of its plans for post-Brexit state subsidies rules in the form of the Subsidy Control Bill. This may sound like a boring technicality, but state aid was of course one of the main sticking points in the negotiations of the Trade and Cooperation Agreement (TCA). Plus, it is a very revealing piece of legislation that can tell us more about the government’s plan for the UK economy – if there is any – than the posturing and rhetorical grandstanding that we are now used to.

What emerges is that the UK government seems to plan on creating a state aid regime that partly satisfies the EU’s claims in this area. Thus, state subsidies will be divided into three categories: unproblematic, ‘of interest,’ and ‘of particular interest’ and be subject to oversight depending on the level of concern. Moreover, unlimited government guarantees and subsidies to insolent companies will be banned. This means that the UK will continue to have some restrictions on subsidies and some oversight over their handing out. Something the EU will be happy with.

Furthermore, while no statutory regulator is created to oversee the regime, a new ‘subsidy advice unit’ will be set up within the Competition and Markets Authority. That’s partly in line with what the EU asked for regarding the level playing field (i.e. there is some oversight). However, the unit can only offer advice on whether a subsidy is fair, but cannot block any government subsidy. Any challenge will have to go through the judicial system and will be decided by the Competition Appeal Tribunal rather than the regulator. That would be going less far than the EU’s insistence on a statutory regulator with powers to intervene when the government subsidises industries to guarantee a level playing field.

What was most interesting though, was that Business Secretary Kwasi Kwarteng was quick to reject the notion that this regime would amount to a "return to the failed 1970s approach of government picking winners or bailing out unsustainable companies." That’s one way of describing the pre-Thatcher era approach to state subsidies. Another one is to call it an industrial policy. And that’s what Kwarteng really is rejecting. Yes, state subsides could – and often were – used to prop-up unviable companies (e.g. to save jobs – which may not necessarily be a bad idea!). But state subsidies can also form part of a coherent industrial policy. What the government and its ministers scoffingly call ‘picking winners’ – while not without risks of course – may actually be one of the most successful economic policies in the history of capitalism. Some of the most impressive cases of catch-up industrialisation in the 20th century – such as Japan (as Chalmers Johnson argued in a seminal book on Japan’s industrial success for instance) but also the so-called ‘Asian tigers’ including South Korea and Taiwan – were based on industrial policies that identified strategically important sectors (such as consumer electronics and cars), initially shielded them from international competition, and provided them with favourable conditions (e.g. cheap credit through state-owned banks) to develop and build up industrial capacity.

Yet, Kwasi Kwarteng has made it clear repeatedly that he did not wish the UK government to adopt an Industrial policy. Thus, earlier in the year, he shut down the Industrial Strategy Council against the will of industry. The question then is, in the absence of an industrial policy and hence a clear plan, how will the government use its newfound freedom to subsidies companies?

The answer can be gleaned from the government’s handling of the ‘levelling up agenda’ so far. Thus, the use of the Towns Fund to subsidies constituencies that the Tories consider ‘marginal’ hints at the fact that this government does not want to be constrained by any pre-defined coherent policy-plan that would prevent it from using taxpayers’ money strategically and opportunistically to reinforce its grip on power.

Long-term observers of the Brexit process had warned a while ago that a lax state aide regime may allow “elite decision makers to give state hand-outs to their chums.” If the handling of the public procurement of PPE during the Covid19 pandemic is anything to go by, that will definitely part of it. More strategically, however, a lax state aid regime, unconstrained by any pre-defined policy plan, will also allow the government to strategically support companies in areas that may be electorally important. Indeed, Kwarteng’s statement that the new regime will allow the government to focus on “key domestic priorities” almost sounds like a threat given that the only priority of this government seems to be to stay in power at any costs to the country and its people.

What economic policy?

So, what did we learn this week about the government’s intended economic policy after Brexit? The first thing is that it will hardly amount to a coherent strategy, but will rather be a set of haphazard and opportunistic actions that the government hopes will provide it with positive headlines in the red-top press to generate sufficient popular support to stay in power.

Partly the absence of a coherent economic policy is due to a fundamental and unsolvable contradiction at the heart of the Brexit project: In terms of the international economy, the Brexit project is drawn between a nationalist, protectionist project and a globalist, free trade agenda. Domestically, it contains a similar unsolvable contradiction between a libertarian, deregulatory agenda – in terms of financial services, genetically modified organisms (GMOs), sanitary and phytosanitary standards for instance – and a much more interventionist economic policy based on increased state intervention in various areas (e.g. in the area of state subsidies or in the area of corporate takeovers).

This Frankensteinian mix of libertarian and interventionist economic policies that are characteristic of Johnson’s populist Toryism, may make some political sense: It allows the government to reconcile the interests of the traditional, wealthy Tory donor with the perceived interests of the new Tory voter in the ‘red wall’ constituencies.

It is less clear what the impact of such an incoherent economic policy will be on the UK economy. The comparative political economy literature uses the concept of ‘institutional complementarities’ to designate a national business system that produces positive outcomes based on the productive interplay between institutions in different spheres. Such complementarities do not necessarily have to mean that only a ‘pure’ system that it is based on either a market logic or a state logic in all economic spheres can be successful. There are successful ‘hybrid systems’ that combine state intervention in some areas with fairly free markets in others. However, what the concept of institutional complementarities does point towards is the necessary interdependence of different spheres of a national business system (such as the labour market and the financial system) and the need for some sort of positive relationship between these different spheres.

It seems highly unlikely that the Johnson Government – driven, as it is, by its members’ personal economic interests and political ambitions rather than the public good –, and pursuing a hotchpotch of economic policies will design a plan for the UK economy that will lead to a cohesive national business system. Indeed, Liz Truss’s stubborn pursuit of FTAs at literally any cost, Rishi Sunak’s deregulatory verve, and Kwasi Kwarteng’s wish to arbitrarily hand out state subsidies unconstrained by an industrial policy, will hardly amount to an economic plan that will put post-Brexit Britain on the path of sustainable growth and prosperity.