This week’s news was – once again – very much dominated by ‘Partygate’ and the debates about a possible investigation into the PM misleading Parliament. Yet, there were some important Brexit-related news too. Most importantly perhaps, our Brexit Opportunities and Government Efficiency Minister (BOGEMin) Jacob Rees-Mogg testified before the Commons’ European Scrutiny Committee (ESC), which is a re-purposed Eurosceptic select committee that used to ‘scrutinise’ new European legislation applying to the UK, but since Brexit has turned its attention towards the Withdrawal Agreement (WA) and the Northern Ireland Protocol (NIP). What the BOGEMin had to say to the ESC holds some interesting clues about how Brexit is going from the government’s perspective.
Wither international law and economic realities
The BOGEMin’s remarks in the ESC meeting essentially showed two things: firstly, that he does not accept the rule-based nature of the international order; secondly, that he does not accept the economic realities of 21st century Britain.
The NIP
Regarding the first point, the BOGEMin stated in no uncertain terms that to him the NIP was something that the UK government only signed, because it believed it would be changed afterwards. His precise words were (according to Nick Tyrone’s substack): “We signed it on the basis that it would be reformed……That is really important to understand because a lot of commentary that says: ‘Well, we signed it and therefore surely we should accept it lock, stock and barrel.’ That’s absolute nonsense.”
The BOGEMin’s suggestion that the EU would have signed a treaty containing a clause that triggered an almost immediate renegotiate seems very implausible; Especially given that maintaining peace in Northern Ireland by avoiding a land border on the island of Ireland was THE key sticking point in the negotiation process.
Regardless, it seems that the UK government is serious about its claim that the clause stating that the NIP can be changed implies a right for the UK to demand that it will be changed. Indeed, the PM has promised to ‘fix’ the Protocol and the government is reportedly working on legislation that would permit the UK Parliament to ‘override’ parts of it even without triggering Art. 16. This development sets up another clash with the EU over the Northern Ireland issue, as the UK will most likely be in breach of international law if it continues down this road.
These developments related to the NIP are interesting because they once again are revelatory of a worrying basic feature of the Brexit movement which Chris Grey calls ‘anti-ruleism.’ The disregard for any rules – whether domestic or international – betrays a fundamental authoritarian ‘might is right’ approach to politics, where the only justification one needs for imposing one’s ways on others is the power to do so. The extent of one’s power – not rules or others’ rights – limits what one is allowed to do. This is a fundamentally undemocratic and illiberal attitude that the Brexiters in government share with authoritarians around the world.
Regulatory divergence
The other significant statement BOGEMin made to the ESC was that he now wants us to stop talking about regulatory ‘divergence’ from the EU, because to him the EU regulations should not be regarded as more important than the regulations of – say – the US or Singapore. His precise words were: “We must get away from this idea of divergence. I don’t care what the EU does any more, any more than I care what the United States does or the Singapore does.”
That is an interesting statement for two reasons: Firstly, it reveals the BOGEMin’s deep ignorance about – or lack of concern for – the economic realities that British business are facing. Many observers and business people were quick to point out the absurdity of this claim (some of them nicely summarised in a Tweet by Peter Foster). His suggestion that UK car manufacturers should not follow EU rules about speed-limiters, for instance, reveals that he completely ignores the fact that UK companies continue to operate in, sell to, and do business with the EU. Contrary to the Brexiters in government, who seemingly make and break the rules as they please, businesses do not have the luxury to simply ignore rules and regulations that govern the markets they operate in (see below).
The second interesting point with his plea to stop talking about ‘regulatory divergence’ is that it might indicate an emerging attempt to shift the public’s attention away from ‘Brexit opportunities’ which he is in charge of. Various reports and the creating of the position of BOGEMin have provided precious little by way of clear opportunities to repeal EU regulations in UK law and generating clear benefits. The legislation on gene editing seems to have become the one case Brexiter can hint at. It becomes increasingly clear that in most cases repealing, changing, or diverging from EU regulations will increase costs for businesses (e.g. by super-imposing a new approval regime for chemicals on top of the EU’s REACH regime). Therefore, since a direct comparison between UK and EU regulations the BOGEMin may be preparing the ground for the public to stop paying too much attention to how exactly UK regulations have changed (or not) since Brexit and with what effect. So ‘getting away from the idea of divergence’ may be a strategy to better obfuscate the fact that in the vast majority of cases regulatory divergence creates Brexit costs, not benefits.
Symbolic policies 1: Free Trade Agreements
The denial of economic reality by the BOGEMin is combined with an equally reality-denying and gravity-defeating and purely symbolic international economic policy that focusses all its efforts on Free Trade Agreements (FTAs).
This week, escaping the heat of Westminster, the PM travelled to India to make progress on the trade deal with India. I have posted about all the issues with the UK-India FTA in a previous post. The most fundamental reason to be sceptical about any promises made in relation with the UK-India FTA is that, while it may boost UK exports of whisky and professional services, it will never make up for the loss of access to the EU single market. Britain currently conducts twice as much trade with Belgium alone as it does with India. An FTA may redress that difference a little bit, but it most certainly will not allow to completely compensate for all the loss in trade with Belgium and the other 26 EU members. Another problem with the India FTA is that the government, in its enthusiasm for free trade with anyone but the Europeans, often neglects to mention that trade liberalisation cuts both ways. India, much less desperate to get a deal quickly, will only sign one that has considerable upsides. Here, access to the UK market for agricultural produce will be one important ask. That in turn may very well mean for the UK to agree to lowering Sanitary and Phytosanitary Standards (SPS) on imports from India, which trade enthusiasts have urged the UK to do for some time. Shankar Singham, for instance, has criticised the EU’s ban on imports of Indian Basmati rice due to high levels of fungicide residuals (p.8). In other words, those in favour of an FTA with India seem willing to sacrifice UK food standards to seal the deal. Such an approach would of course have multiple knock-on effects, such as making exports of certain UK goods to the EU even harder, because the EU may worry about the lowering of standards in the UK.
More broadly, there is a distinct possibility that in certain sectors, an FTA with India – negotiated by a government desperately trying to prove to the British public that it can deliver on the promise of post-Brexit freedom to trade with the whole world – may lead to an ‘India shock,’ akin to the ‘China shock’ that China’s accession to the World Trade Organisation (WTO) triggered. The ‘China shock’ led to a massive increase in import competition from China, affecting the livelihoods of workers in formerly industrial areas of the UK and the US. An FTA with India where the UK has ‘few defensive interests’ (as Singham puts it in his Eastern Promise report), i.e. where the UK sells out whatever sector needs to be sold out to get the deal done, may have a similar effect on sectors such as low-skill services that can be provided remotely or farming. This could have devastating effects on certain parts of the country, especially because the UK government is adopting a similar approach with few ‘defensive interests’ with other major farming countries such as Australia.
It is unlikely that the Johnson government will be moved by any concerns about a too one-sided trade deal with India. For the government, FTAs have become reified symbols of sovereignty that are not judged based on their content or economic impact, but simply on their number. Since FTAs have become a symbol of freedom and sovereignty rather than a means to achieve an economic end, for Brexiters the more FTAs we have the freer and more sovereign we are.
That attitude is also reflected in the government’s new approach to a trade deal with the US. Now that an FTA with the US has been all but ruled out by the Biden administration, the UK government has started negotiating with individual US states over ‘bilateral economic pacts.’ The problem, of course, is that US states cannot sign Free Trade Agreements with foreign countries. Therefore, what is being negotiated are non-legally binding bilateral economic pacts, which are – according to Trade minister Mordaunt – statements "of ambition" with "immediate and practical" benefits for businesses. These pacts will seek to reduce regulatory barriers and costs, e.g., through mutual recognition of qualifications. But such pacts will not reduce tariffs and business are reportedly sceptical of their value. But that, of course, does not matter to the government. What they are looking for are announcements in the British media of ‘world-leading’ trade pacts with Texas, Arkansas, etc. made possible by Brexit. Few readers will read on beyond the headline or bother to discover what material impact such pacts actually have.
Symbolic policies 2: Immigration
Trade Deals are not the only policy tool that has become reified and now plays a purely symbolic role for the government to have something – anything – to show for Brexit. A similar disconnect of a policy’s symbolic values from its actual impact is immigration. The government announced to great mediatic effect a bold policy for dealing with illegal immigrants by sending them to Rwanda. There are serious doubts whether that policy is practical and if it were, whether it would achieve its goals and at what cost. But again, that does not matter to the government. The important thing is that the UK papers for a couple of days talked about how the Tory government is tough – indeed cruel – on illegal immigrants and how labour and others are pushing back.
Janan Ganesh’s, talking about populist politics in the US, notes that if “populism is to be all circuses and no bread, the performers will have to resort to ever wilder and more shocking feats.” That is precisely what is happening in the UK. With less and less bread on the table of many UK families, and given that people will get bored of promises of all the Brexit benefits that are just around the corner, the government has become very innovative in designing policies that have little actual impact, but can be sold in the pro-Tory media as great Brexit victories.
Actual impact of these policies does not matter. Nor does the fact that some of them are in direct contradiction with each other. Thus, the government’s symbolic policies in the area of immigration and in the area of trade are to some extent incompatible. The government’s desperation to conclude an FTA with India will almost certainly mean increasing immigration from India. For the Indian government, one of the most important asks in the negotiations will be easing of visa rules for Indian workers and students. On his visit to India, Johnson and India’s PM Modi were talking about a ‘living bridge’ between the two countries.
That is of course not a bad thing per se. With EU immigration reversing and labour shortages affecting many sectors, the country desperately needs immigrants. Rather surprisingly, even the Daily Express seems to understand and ran an article this week celebrating “a 25 percent increase in non-EU migrants in the last year.” For the Express, cause for celebration is the fact that less than a tenth of the nearly 240, 000 overseas work visas issued last year were to workers from the EU (down from around 50% by the time of the MAC report on EEA immigration in 2018 when we were still members of the EU). Conversely, the inflow of Indian, Pakistani, Nigerian, and Filipino workers has increased. It is great to see the Daily Express celebrating immigration – although only because it is seen as a sign of independence from EU –, but it is much less clear how this trend in extra-EU immigration will go down with the Tory voter base.
It has of course been a long-standing conservative promise to its voters to reduce the number of immigrants. Nothing suggests that this manifesto promise will be fulfilled anytime soon. Moreover, if the Tory/Brexit base had a problem with the alleged impact of immigration on public services, benefits and the like, they may in for a nasty surprise. The 2018 MAC report on EEA immigration showed that EU immigrants had a higher ratio of tax contributions to benefit burden compared to the average UK citizen or non-EU immigrant, which are now increasingly replacing EU immigrants (see this excellent thread by Prof Robert Busch). From this perspective, it is unlikely that the post-Brexit patterns of immigration that are emerging will go down well with Tory voters. Indeed, the Express ran a poll on the question “Is Boris right to increase immigration from India in exchange for a trade deal?” 88% of the Express readers who answered the poll said ‘no.’ Therefore, on this front too, the government finds itself between a rock and a hard place: if it wants a trade deal with India to make good on its promise of post-Brexit trade deals, it will have to ease visa rules, thus risking its reputation of being tough on immigration.
Post-Brexit UK Companies become more European
While the government becomes even more detached from reality, withdrawing increasingly into the realm of purely symbolic policies aimed at demonstrating independence from the EU, UK companies move the other way. Indeed, Brexit seems to make UK businesses more European!
A Newark-based company announced this week that it will be closing down its operations in the UK and move to the EU instead, leading to the loss of 110 jobs. Yet, such obvious cases of full-on ‘Brexodus’ is not the only way through which UK companies become more, not less, European. The Financial Times reported on a boom in trade hubs in the Netherlands set up by UK companies to avoid importing into the UK and re-exporting to the EU. Not surprisingly, the report shows that this has been happening ever since the 2016 referendum and especially during the protracted Brexit negotiations, which made it difficult for companies to predict what sort of deal – if any – would be reached. As Chris Grey puts it, such decisions are initially ‘unreported and unknown outside of the companies themselves,’ but over time we will see such decisions having a cumulative effect. There is an increasing number of academic studies that document the Europeanisation of UK businesses after Brexit, which allow us to better understand the complex and at times subtle ways in which Brexit impacts the UK economy. Financial services and business lobbying are two cases in point.
Financial service migration
The pre-Referendum prediction that 100,000 jobs could be lost in the City of London alone due to Brexit has become the favourite ‘Remainer prediction’ that Brexiters like to take aim at to discredit what they call ‘Project Fear’ (see my previous post on this point ). So far, it would indeed seem that the actual number of jobs lost in the City is lower by a factor of ten. A new study by Prof. Shawn Donnelly provides some insights into why to date the exodus of jobs from London has not been as great as expected. A key insight is that while a lot of activities have been moved to other financial centres inside the EU, staff have not. Moreover, there are factors that make some activities more likely to migrate to the EU than others. Overall, the impact of Brexit on financial services in London are varied with ‘stock markets moving wholesale (to Amsterdam), asset management migrating strongly (to Luxembourg and Ireland), clearing services hardly budging, and banking in between (to Paris, Dublin and Frankfurt).’
Donnelly’s work identifies various factors that explain the differential impact on different activities and the relative ‘inertia’ of finance jobs. A key reasons why financial service companies stay in London are so-called ‘network’ or ‘agglomeration effects,’ i.e., the fact that companies like to be in areas where other companies active in the same sector are located. Locating in proximity to other companies providing similar or related services generates positive synergy effects and make access easier, which makes a large financial centre more attractive compared to smaller ones.
Moreover, the economic pre-conditions for the provision of some services are not met in smaller financial centres. An important example is clearing and settlement for which the EU has further extended the UK’s waiver to provide this service to EU firms until 2025. The reason for the inertia of clearing services is – according to Donnelly – ‘a combination of high market concentration, network effects on cost, efficiency and effectiveness […] and close relationships with central banks as lenders of last resort,’ but also that no EU financial centre currently has the depth of financial markets needed for clearing transactions.
However, the EU has stepped up pressure on UK financial service firms to migrate jobs into the EU. In January 2022 the European Central Bank (ECB) announced, that after two years of suspension due to the pandemic, it would more strictly audit companies’ asset and staff commitment to EU countries. As EU regulatory pressure on firms to not just move services, but assets and personnel, job losses can be expected to pick up. Moreover, the importance of network effects also suggests that once another financial centre reaches a critical mass, migration may start snowballing and more UK companies not just becoming more European, but stop being British entirely.
British Lobbying in Brussels
The second study that hints at increasing Europeanisation of UK companies by Prof. David Coen and Alexander Katsaitis focuses on British business lobbying in Brussels after Brexit. While the BOGEMin gladly ignores EU regulations and encourages all of us to do the same, British businesses do not have that luxury as they continue to do business inside the EU. Therefore, even after Brexit, they will want to have influence over policy making in Brussels. Coen and Katsaitis show that British firms are now at a distinct disadvantage compared to EU firms, because they have lost the political channels of access to EU policymaking process via MEPs or permanent representatives to the Council. Therefore, they will have to use the administrative/bureaucratic channels of influence instead, i.e., focussing on influencing the Commissions Directorates General, where technical expertise that companies can provide guarantees access and influence. That implies they will “need increased public affairs activities such as consultant service” at the same time that they also need to shift lobbying from Brussels to Westminster. This implies increased costs, which – as ever – will hit SMEs harder than large companies.
Coen and Katsaitis also find that another channel through which UK businesses can compensate for the loss of access and influence through political channels is by more strongly integrating in European professional associations, which paradoxically means that British companies may become more European than they were before Brexit.
Taken together, the developments this week hint at an increasing discrepancy between the government’s obsession with shunning anything European to demonstrate sovereignty and independence from the EU and UK businesses’ need to become more European to continue operating in the EU illustrate that far from being over, Brexit continues to create deep cleavages and divides in British society; and as long as the Brexit project continues to be based on nonsensical symbolic policies, the much needed process of healing cannot begin.