BIT 18 June 2021 – Saturnian Brexit: How Brexit is reinforcing its own causes…and will devour its children

I have always felt that Brexit addressed people’s real and legitimate grievances by proposing fake solutions based on a flawed analysis of what the real problems are. As the first post-Brexit year progresses, it becomes increasingly clear that it is worse than that. Not only is Brexit not providing any solutions for the real problems that caused it, it is actually going to make them worse. Those who voted for Brexit because of their grievances will suffer from its consequences as much – or more – than the rest of us. Or to paraphrase Jacques Mallet du Pan’s bon mot: By feeding its parents, like Saturn, Brexit will devour its own children.

Two news items underscore this ‘saturnian’ direction of Brexit: The agreement in principle on a Free Trade Agreement (FTA) with Australia and the report by the Taskforce on innovation, growth, and regulatory reform (TIGRR), published on Wednesday this week. To see why the Australian (and other) post-Brexit FTA and the TIGRR recommendations would aggravate the issues that caused Brexit, we need to start with these causes of Brexit.

What caused Brexit?

Brexit is a hugely complex phenomenon and as such has multiple causes. Different people voted for Brexit for different reasons. A study by the UK in a Changing Europe research centre finds not only low-skilled workers and pensioners, but also people from the ‘squeezed middle class’ supporting Brexit.

That said, academic research in the area of electoral studies find robust evidence that at the individual level gender, education, and age were the key characteristics determining the Brexit vote: Literally all studies (e.g. this one) find that the older and the lower the level of formal education, the more likely you were to support Brexit, especially if you are male. Conversely, the younger and the higher your educational attainment, the less likely you were to support Brexit, especially if you are female.

However, beyond the individual level, researchers argue that it is important to see these individual factors in the context of regional inequalities in the UK. Here, trade liberalisation and austerity are key determinants of Brexit: Firstly, studies have shown that areas that have suffered more from trade liberalisation-induced de-industrialisation since the 1970s, were more likely to support Brexit than areas with less exposure to trade-induced and hence deindustrialisation. Indeed, one study shows that this so-called ‘China shock’ – the deindustrialisation of regions of Britain due to the massive increase of imports of cheap Chinese products – has led to declining living standards in the industrial heartlands of the UK, which then turned to support the Brexit idea. Secondly, studies have also shown that areas particularly affected by the austerity measures imposed by the Coalition government since 2010 following the global financial crisis, were also the areas that most strongly supported Brexit.

These regional factors are important to understand the Brexit vote, because they help us explain why it was not only the so-called economically ‘left-behinds’ (the unemployed or workers who have seen their real wages decline, and pensioners who are struggling to make ends meet) who voted for Brexit, but also well-off middle-class voters. The latter may not have suffered directly and materially from globalisation, but they are confronted with the economic decline of their area. This may have caused worries about the future of the region or the country in general, which has led people to support Brexit regardless of their material interests (a phenomenon called sociotropic voting by political scientists).

In a nutshell – and arguably put a bit bluntly – the two root causes of Brexit were trade liberalisation (which caused the “China Shock”) and financial market liberalisation (which caused the global financial crisis of 2007-8 and then austerity). The Brexit-related news this week clearly show that on both accounts the Johnson Government is going to make things worse rather than better.

The ‘Bonfire of Regulation Task Force’

The first important event this week was the publication on Wednesday of a report by the Task Force on Innovation, Growth and Regulatory Reform (TIGRR) composed of Iain Duncan Smith, Theresa Villiers, and George Freeman. The report contains few surprises, but a lot of cause for concern. It is based on the simplistic and ideological libertarian assumption that any piece for regulation is one piece too many. Regulation is interpreted as the product of overzealous bureaucrats who want to constrain our freedoms for no reason other than justifying their own job. There is no acknowledgement that regulation is key to any highly developed, technologically advanced, civilised society.

As a result, the great benefit of Brexit according to this report is simply that it is a ‘”one-off” chance for UK to escape EU red tape.’  The 100 recommendations reach from reforming rules on clinical trials for drugs (arguing that UK would become world leader in medicine with a lighter-touch regime while of course ignoring the fact that having its own rules may mean UK drugs may not be approved in other countries), lowering data protection standards, allowing pension funds to invest in riskier assets, to reduce capital requirements for insurance companies certain put in place after the Global Financial Crisis (so-called Solvency II regulation).

Let me focus on the area of financial regulation (pp.32ff). In this area, the proposals essentially boils down to moving away from cautionary, prudential regulation towards a more risk-driven approach to regulation. This is explicitly stated on p.13 where the report blames the EU regulation as based on  “excessive caution that is often disproportionate to the associated risk.” (Many of the arguments are ultimately based on the century old – but deeply flawed and romantic – notion of a superiority of the Anglo-Saxon common law over continental civil law).

Two concrete proposal towards riskier financial regulation concern defined contribution (DC) pension funds and insurance companies. The report argues that allowing pension funds to invest in riskier businesses would provide new sources of finance for small and scaling-up companies (proposal 2.1). This could be achieved by changing the rules about the charge cap for fees and administrative expenses that currently seek to protect savers from overly risk and expensive investment options (such as private equity and venture capital). The report states that:

“The charge cap (0.75%) on the fees and administrative expenses that can be borne by savers is a sensible investor protection measure in principle, but in practice has driven many schemes towards passive investment to keep the charges well within the cap. UK savers therefore have limited exposure to high-performing illiquid assets, including private equity and venture capital that tend to outperform public markets.”

The report does not say, of course, that the trend towards passive investment strategies has been a global phenomenon since the GFC and has partly happened for good reasons: Actively manged funds are risky, expensive in terms of management fees, and often do not outperform cheaper, less risky, passively managed ones. That is not to say that passive investing is without problems, but simply allowing pension funds to invest in riskier assets without increasing (prudential) regulation is a recipe for disaster. Indeed, the pension fund industry has explicitly warned the government against lifting or removing the charge cap. But as always, the Johnson Government ignores practitioners from the industries concerned.  

From the pensioners point of view lifting the cap from .75% to 1% could mean that the amount of money from their pension pot that is paid to people in the investment industry for managing their savings would nearly double (from around £92,000 to £170,000 over their life time according to the Department for Work & Pensions), while it is unlikely that the increased risk and fees would actually lead to increased returns.

Proposal 2.2 suggests lowering capital requirements for insurance companies set out by the Solvency II directive. This directive determines how much own capital insurance companies need to hold to prevent insolvency. According to TIGRR, lowering the requirement would mean that insurance companies could spend more of their capital investing, thus increasing supply of finance to the economy. The most worrying aspect of this proposal is that TIGRR seems completely oblivious of the reasons why this regulation was deemed to be necessary in the first place. Namely, the biggest financial crisis the world has experienced since the great depression in 1929. Indeed, there is a large amount of academic evidence that shows that financial crises are invariably preceded by a phase of financial liberalisation that is not accompanied by the establishment of ‘prudential regulation.’ Carmen Reinhart and Kenneth Rogoff have provided evidence from 800 years’ worth of historical data on financial crises. Similarly, the Global Financial Crisis (GFC) has hit precisely those Anglo-Saxon countries hardest who liberalised rigorously in the 1990s, but neglected to establish financial market regulation with teeth. IDS and his fellow TIGRRs now propose that we should go back to a pre-Global Financial Crisis area and let financial service firms take more risks. Of course, these are just highly aspirational proposals. But they do indicate what the dominant approach in the Tory party is.

FTAs – A race to the bottom

The second big news story this week was the announcement of an agreement-in-principle with Australia on a Free Trade Agreement. This was hailed as significant – actually ‘historic’ – news by the Johnson Government.

The reality seems to be a wholly different one. The UK farmers’ strong opposition can be shrugged off as an ‘interest group’ protecting its rents. Yet, it is more difficult to ignore the fact that both trade experts and UK businesses seem lukewarm at best about the deal. There are many reasons why the UK-AUS FTA will only provide limited benefits to the UK economy and they have been discussed before (including on this blog). Australia is simply too far away to compensate for lost trade with the EU. Also, which UK products precisely Australians will buy more of is unclear. The Express mentions whiskey, biscuits, ceramics, and cars. The contribution of these goods – with the exception of cars – to UK GDP are of course marginal. As for cars, the FTA is very unlikely to lead to a significant increase in demand for UK-produced cars. The vast majority of cars produced in the UK are part of global brands, owned by foreign companies who also have manufacturing plants closer to Australia.

What is remarkable, though, is the way in which this deal came about – against resistance within the cabinet, against resistance of UK farmers, without consultation of business (who reportedly had to rely on information of their Australian and Norwegian partners to obtain information that the UK government withheld from them!) and without any say for elected Members of Parliament (sovereignty versus unelected bureaucrats anyone?) who have now asked for a change in the rules about Parliamentary scrutiny for trade deals.

While economically the impact of the Australia deal will be small, its effect on UK trade policy may be big. The Australia FTA sets a precedent for other trade deals, and thus potentially weakens the UK’s negotiation position. Many commentators have noted that the zero-tariff agreement for Australian agricultural products is something other countries may ask for too. It will be difficult for the UK to refuse that. So, this deal with Australia is at best a useless, but quite possibly a bad deal – not just because it allows access to the UK market to meat produced in horrific conditions – but also because of its impact on future trade deals. A test for this hypothesis is already looming: New Zealand has signalled interest in concluding a deal with the EU, the UK and others to counterbalance its dependence on China. According to the FT, NZ trade minister Damien O’Connor said any “New Zealand-UK deal would probably be similar to the UK-Australia trade agreement”, which implies “[t]ariff cuts on New Zealand farm exports including dairy, lamb and beef would be among Wellington’s demands.”

However, like I wrote many times before, FTAs have become completely reified and ‘superwoman’ Liz Truss and the Johnson Government conclude them regardless of their content. As Chris Grey underscores in today’s Brexit & Beyond blog, the Australia FTA is purely symbolic. UK businesses have urged the government to adopt a more cautious, long-term approach and stop concluding bad FTAs just to score political points.

An alternative or perhaps complementary (economic rather than political) interpretation would be that Brexiteers actually blindly believe in the benefits of free trade that any FTA is better than none. A statement after the conclusion of the trade deal with Island, Norway, and Lichtenstein (which has given rise to quite some ridicule and disappointment) by International Trade Minister Ranil Jayawardena summarises this perfectly: "More trade and more investment will drive growth and support jobs in every corner of our country."

That statement is provenly false. The research on the impact of the ‘China Shock’ in both the UK and the US clearly show that trade liberalisation creates winners and losers. This is why trade liberalisation needs to be accompanied by compensatory measures if it is not to produce large numbers of discontent people in a country.

Such a system of trade liberalisation with domestic compensatory mechanisms through welfare transfers or selective trade barriers was in place for much of the post-War period and was referred to ‘embedded liberalism.’ This embeddedness has been eroded ever since Margaret Thatcher and Ronald Reagan came to power in the late 1970s and early 1980s respectively and spread their ideology around the globe. It is this ‘disembedding’ of markets that has exposed workers to competition from low-wage countries, to a stagnation and even decline in real wages and thus to the discontent that has led to a populist backlash against the EU and globalisation in general.

There is no evidence whatsoever that the government’s post-Brexit policies will do anything to address these problems. To the contrary, according to the FT, the Trade Remedies Authority (TRA) already scrapped “safeguard” tariffs in more than 50 areas since the UK left the EU,” which means UK manufacturers are more exposed to unhampered foreign competition. This – together with the ‘zero-tariff approach’ to new trade deals – indicates that the Johnson Government’s vision for a post-Brexit Britain is one of disembedded liberalism – thus reinforcing the causes of Brexit.

Singapore on Thames or not?

In an interesting piece published yesterday, Alex Dean of the Prospect magazine stroke a rather optimistic tone about the direction of travel of post-Brexit Britain. He argues that the fear of post-Brexit Britain becoming a nirvana for laissez faire, free market libertarians was misplaced. According to him, post-Brexit Britain has moved in the opposite direction. The basis for this claim is the ‘levelling up’ agenda, the end of austerity, the public spending during the Covid19 response, but also the discussions of changes (increases) to the taxation of multinational firms around the G7 meeting.

I find this optimistic argument entirely unconvincing. I do not think the Chancellor’s Covid response is anything to go by to predict what the future post-Brexit economic and budgetary policies will look like. Covid sure was a once in a lifetime crisis (well, hopefully!). The exceptional interventionist measures that the Chancellor adopted will soon be wound down and the pendulum will swing back into a more conservative approach to public finances. This may not mean a return to open austerity as under Osborne. Dean rightly argues that this policy would go down very badly with the newly won ‘red-wall conservatives’ in the Midlands and the North of England. But cuts to public spending will take subtler (such as a smaller than expected pay rise for NHS staff) or less domestically controversial forms (such as cutting the foreign aid budget).

Similarly, the government’s ‘levelling up’ agenda for now involves some spending on underprivileged areas of the country. Yet, partly this money is redirected from other areas (e.g. the moving of parts of the civil service out of London) or is infrastructure spending (such as the environmentally disastrous HS2 project). While some public money will be spent on such projects to maintain electoral support for the Tories, this in itself is hardly a sign that the ‘Singapore on Thames’ vision of post-Brexit Britain is off the table. Indeed, the TIGRR report already contains suggesting that the financing of the levelling up policy and of other infrastructure spending should become an opportunity to encourage private investments (cf. proposal 2.3 by TIGRR). In other words, levelling up may soon become an opportunity for privatisation of infrastructure projects.

Same for the G7 global tax reform: It took only a few days after the G7 meeting for the UK government to undermine its spirit by pushing for an exemption for financial services.

More generally, the fact that there has not been an actual ‘bonfire of regulation,’ does not mean that deregulation is not happening. Believing that the post-Brexit ‘Singapore on Thames strategy’ would consist of a quick, radical reduction in the size of the state or regulations was always a naïve believe. But small changes – such as lifting the cap on management charges for pension funds – are enough to fundamentally transform and further disembed the UK variety of liberal capitalism. Yes, in some areas there is more regulation (at the borders notably), but the regulatory reforms that TIGRR and without a doubt Sunak’s and Kwarteng’s Cabinet ‘Better Regulation Committee’ will be driving still can trigger a race to the bottom in standards.

Incidentally, it is also wrong to claim that the second ‘Thatcherite revolution’ has not happened, because the state has not shrunk significantly in the past year. In actual fact, under Thatcherism too, ‘shrinking the state’ – outside of welfare cuts – has always only ever been rhetoric.  Thatcherism was not a small state project – state spending grew by an average 1.1% a year under her premiership. Even though that is less than under other governments, it’s hardly evidence for a libertarian ‘drowning the state in a bathtub’ approach. Indeed, Andrew Gamble used the title The Free Economy and the Strong State to characterise Thatcher’s policies. Thatcherism was definitely anti-welfare and anti-public interest, but it was anti-state only in rhetoric. In reality, Thatcherism is very much pro strong state. Indeed, this is another way in which Singapore seems to continue to inspire the Johnson Government and other Brexiteers: Not only is Singapore a case of fairly unregulated capitalism, but also is it politically an undemocratic, authoritarian regime. Like I wrote last week, that is indeed something the UK government also seems to be aspiring to.

The wrong kind of vision – the wrong kind of competition

While the deregulation may not have taken off yet, the fact remains that inside the Tory governing circles it is the only game in town. From the infamous Britannia Unchained book – co-authored by no less than four current cabinet ministers – to the discourses by the PM himself and the – of course aspirational but possibly not uninfluential TIGRR report –, it is evident that the current Tory leadership cannot think about economic matters other than in very simplistic libertarian terms. The mistake of underestimating the ruthlessness and determination of Brexiteers to pursue their vision – however absurd – has been made before.

The UK government is stuck in a 19th century understanding of capitalism and liberalism and it will ruthlessly pursue that vision. Their favourite model is a Manchester capitalism-style system of laissez faire that is hugely profitable for producers and owners, but disastrous for everyone else. The only plan is to compete with the EU for FDI by lowering standards and regulations and thus making it cheaper for companies to produce in the UK. The only way Brexiteers can conceive of competition is in terms of cost competition: You beat your competitors by producing more cheaply and offering cheaper products – not better-quality ones. Colin Hay has warned of this dangerous obsession with cost competitiveness nearly a decade ago. Competing on quality rather than cost - and thus selling your products at higher prices – is what allows you to pay higher salaries and thus avoid the downward spiral of ‘beggar-thy-neighbour competition,’ which causes the discontent that led to Brexit. There are no signs that any of the post-Brexit strategies point in that direction.

The hyper liberal laissez faire capitalism of the 19th century eventually broke down with the 1929 stock market crash and was blamed for the rise of fascism in the 1920s and 30s. Various political movements from left and right - including the US Democrats under Franklin D. Roosevelt, William Beveridge in the UK, and the post-War German ordolinerals around Christian-democratic Minister for the Economy Ludwig Erhard - understood that markets need to be embedded through social policies, welfare states, and market regulation. Neo-liberalism was born out of the insight that free markets require embedding and compensation of the losers of competition to not constitute a ‘social explosive’ (as the German neoliberal Wilhelm Röpke put it). Of course, neoliberalism has since been perverted by neo-classical economists and turned into its contrary. But the fact remains that after the 1930s people had understood the disastrous effects of ‘unchained markets.’ The UK government has not understood. As long as the UK government does not learn that lesson, Brexit will always only have one ultimate outcome: It will devour its children.

Brexit Impact Tracker 13 June 2021 – The “Sausage Wars” and the increasingly worrying features of the Johnson Government

This past week was all about Brexit in the British media – illustrating once more for everyone to see that Brexit is far from done! The big event overshadowing everything else this week was the fast approaching end of another ‘grace period’ on border controls on goods traded between Great Britain and Northern Ireland. This time the goods concerned are chilled meats. As a third country, Great Britain will no longer be allowed to export chilled meats to the EU after July 1st, 2021. The Northern Ireland Protocol (NIP) implies that Ireland remains within the EU customs union and single market, meat products exported from Great Britain to Northern Ireland will now have to be frozen. While this has been – or should have been – clear to everyone ever since the NIP has been agreed on by the UK government and the EU, senior members of the UK government now consider this effect of Brexit to be ‘bonkers.’ With the first meeting of the Partnership Council, which overseas the manage the Trade & Cooperation Agreement (TCA), taking place on Wednesday and the G7 meeting later in the week, the disagreements around the implementation of the NIP led to unprecedented tensions between the EU and the UK – which the tabloid press was quick to label ‘sausage wars.’

Maros Sefcovic, European Commission vice-president, used rather undiplomatic language to clearly tell the media that the trust in the UK government had all but gone and warned the UK government against any further unilateral action (such as unilaterally extending the grace period on chilled meats). Conversely, an oft-cited article signed by Lord Frost published in the FT continues to insist that the EU should show more flexibility  – by which the minister evidently means that the EU simply accepts that the UK follows its own rules without guarantee that they are compatible with EU rules, but should still be allowed to export without constraints into the single market.

There has been a great amount of commentary on the issues surrounding the NIP this week and the upcoming end of the ‘grace period’ (e.g. Chris Grey’s Beyond Brexit blog, Tony Connelly’s analysis, and the FT’s Brexit Briefing). So, its not worth that I summarise this once more. Rather, I want to focus on what the UK government’s handling of the NIP situation tells us more broadly about this government and possibly the future of the country.

In my day job as a Professor of International Management & Political Economy at Loughborough University, I mainly study the democratic backsliding in Central Europe and especially Hungary (and the impact this has on multinational companies’ strategies). So far, I have resisted the temptation to compare the Johnson government to the government of Victor Orbàn, which I’ve been studying together with my colleague Dori Sallai literally since Orbàn came back to power in 2010. But it becomes increasingly difficult to ignore the striking parallels between the steps Orbàn took to entrench his power, leading to significant ‘democratic backsliding’ in Hungary. These steps include a reform of the electoral system, high-level corruption to create a clientele that will support the governing party, and bringing the national media in line. Last week, I was struck to find signs of all three of these anti-democratic populists mechanisms at work here in the UK.

Electoral Reform – Gerrymandering to retain power

Gerrymandering designates the practice by a governing party of redrawing the boundaries of electoral constituencies to increase the likelihood of winning the next elections. This practice has been widely used by Orbàn in Hungary after 2010, which assured him a massive electoral advantage over the opposition and has secured him large parliamentary majorities ever since.

There is increasing concern that the UK government is attempting exactly that. Labour has warned for some time that the current reform of electoral boundaries is an attempt to entrench the conservative’s grip on power. But political scientists – like Victoria Honeyman – too are expressing concerns over the current conservative attempts to redraw the electoral map.

The suggested changes to constituency boundaries would affect contested constituencies such as Bately and Spen in West Yorkshire (where, incidentally, Kim Leadbeater – sister of murdered MP Jo Cox – will defend a labour seat in a by election on July 1st 2021). According to the conservatives’ plans, this constituency would be integrated with Hipperholme – a firmly conservative area – and thus increasing the Tory’s chances of gaining or holding this seat at the next General Election.

Institutionalised Corruption

There is now also ample evidence that the current government is highly corrupt. This week the High Court rule in favour of the Good Law Project’s case against the government over a contract awarded to a market research firm Public First, whose bosses had personal relationships with Dominic Cummings. This ruling means that Michael Gove – as minister responsible for the Cabinet Office when the contract was awarded – acted unlawfully. More generally, there is an increasing amount of evidence showing that coronavirus contracts were awarded to companies and people with close ties to people inside the government. The Good Law Project speaks of ‘institutionalised cronyism’ in public procurement. I do not see much difference with what we call institutionalised corruption in our research on Orbán’s Hungary.

The current government’s corrupt behaviour is not limited to public procurement, but also affects the use of public funds to generate support amongst the population for the government and the governing party. Like I discussed before, the ‘levelling up’ policy has already been shown to be essentially as pork barrel scheme whereby the government channels taxpayers money to constituencies it considers marginal seats in the next elections. That too is an instrument often used by Orbàn and other anti-democratic populist governments to increase popular support.

Another parallel is that the high-level corruption has not legal consequences for the government, which is driven by ‘nepotistic corruption’ as Peter Kreko and Zslot Enyedi put it. Indeed, despite two rulings already judging that senior figures in the UK government – Matt Hancock and Michael Gove  – have acted unlawfully, there is no sign of any consequences for these politicians. This is a government that has prove time and again that it does not care about the legality of its actions or the rule of law. It considers itself above the law and thereby signals to citizens that compliance with laws is voluntary – at least of those with money and power. Needless to spell out what such an attitude will do to trust in our public institutions in the long run.

The Government’s Media

The third worrying parallel between the UK and the Hungarian case was the way in which the BBC seems to have started to uncritically adopt the government line on the Northern Ireland issue. Andrew Marr’s interview with Maros Sefcovic last Sunday was heavily criticised for suggesting that a clear majority of people in Northern Ireland ‘hated’ the NIP. Moreover, in a shocking interview by Evan Davis with Thomas Byrne – the Irish Secretary of State for European affairs – on Radio 4’s PM programme on June 9th, Davis uncritically insisted on the point that British sausages do not pose any health threat to EU citizens, implying therefore that the EU’s approach was unreasonable. He insisted on the question: ‘What is the danger to any European of a British sausage smuggled into the EU single market via Northern Ireland?’ The whole interview suggested that the EU not accepting UK food standards as equivalent was simply based on a stubborn insistence on applying the rules for the sake of it. That is terribly close to the government’s recurring – and wrong – accusation of ‘legal purism.’ Such uncritical reporting on why the EU has the rules it has, clearly fuels unreasonable and unjustified anti-regulation attitudes that have played an important role in the history of Brexit.

Bryne’s completely ineffectual answers that missed the broader point (that the EU giving in to UK’s current demands would undermine the basic principles on which the whole single market is based) did not help of course. But the point is that presenting the problem in the terms Davis did means accepting the government’s discourse, when it should be challenged, not reproduced by journalists. Instead, the BBC increasingly sounds like a government channel. The simplistic and biased way in which the NIP issues were covered in the Andrew Marr Show, on PM, and on other BBC programmes implies that the BBC simply accepts the government’s interpretation of the situation.

I may be overreacting and reading too much into some isolated examples of bad journalism. Nevertheless, observing the toothless reporting of the BBC about crucial Brexit issues alongside what can only be seen as political appointments to key positions at the BBC in the past year (Richard Sharp – a former banker, advisor to Rishi Sunak, and large Tory donor – as chair of the BBC and Time Davie – a former Conservative politician – as Director General) does remind me of how Orbàn and other authoritarian leaders in Central and Eastern Europe try to bring the national media under control to better serve their goals.

Readers may consider this an exaggerated comparison and I am not suggesting the UK’s democratic system will quickly crumble like the Hungarian did. At the same time, there are few things I would put past this government. And foreign leaders seem to increasingly become disillusioned with the UK government too.

Signs of lost credibility

EU officials and political leaders of EU member states seem to increasingly drop any diplomatic pretence and openly voice the loss of faith in the UK government as a viability partner. This week European Commission President Ursula von der Leyen lectured the UK government on one of the most basic principles of international politics, namely ‘pacta sunt servanda’ – treaties have to be respected. French President Emanuel Macron explicitly questioned the seriousness of the UK government stating that “I think this is not serious – to want to have another look at something in July that was finalised in December after years of discussions and work.”

The UK government, however, seems rather to follow Johnathan Swifts bon mot that “promises are like pie crust, made to be broken.” The government continues to insist on ‘flexibility,’ ‘common sense,’ and pushes back against ‘legal purism,’ to try and get an arrangement whereby EU rules do not apply to the UK. The only arrangement it will accept are either unilateral recognition by the EU of UK rules as equivalent or a mutual recognition solution where both countries accept each other’s standards as equivalent. The UK also insists on a ‘risk-based approach’ whereby the EU simply accepts that the risk to EU citizens from food imports from the UK  - without guarantee that the UK will maintain its current standards. Such a level of trust in UK standards after Brexit may be difficult for the EU to muster, especially given that the memory of the BSE crisis in the 1990s has not completely faded. But independently of that, the problem is that the UK essentially asks the EU for a paradigm shift in its approach to safeguarding the integrity of the single market, by exempting the UK from following the rules that all 27 member states have to follow to be part of the single market.

Some had hoped, the G7 summit this week in Cornwall might provide an opportunity to overcome the impasse in Northern Ireland through the intervention of US president Joe Biden.

Uncle Joe and the ‘special relationship’

Indeed, the UK government seemed worried about Biden potentially weighing in in the dispute, accusing the EU of trying to use American pressure to solve the issues. Biden, of course, has been very outspoken about protecting the Good Friday Agreement – both because of the US’s role as a broker of the agreement and for personal reasons. The US’s most senior diplomat in the UK – Yael Lambert – is reported to have formally reprimanded the UK over its stance on the NIP that – according to the Americans – ‘inflames’ tensions in Northern Ireland.

This puts the government into a difficult position. Post-Brexit, the US was meant to be a key ally for the UK notably by agreeing to a new free trade agreement that would help compensate for the loss of access to the EU single market. Yet, it increasingly looks like the US government under Biden agrees more with the EU than with the UK over the interpretation of the NIP.

What does this tell us about the relationship between the Johnson government and the Biden administration?

Interestingly, the Prime Minister was recently reported to have objected to the term ‘special relationship’ between the US and the UK, which he finds ‘needy and weak.’ In the current context, the announcement by Biden that he would be “meeting with Prime Minister Boris Johnson to affirm the special relationship between our nations” may indeed almost sound like a threat.

Johnson’s dislike for the ‘special relationship’ and his willingness to portray himself as the leader of a Global Britain that has regained its independence and self-confidence does contrast quite starkly with his behaviour during the meeting with Biden at the G7 this week. His response to a joke Biden made about their marriages was ‘I’m not going to dissent on that one. I’m not going to disagree with you there or indeed on anything else, I think highly likely’. This does not sound like the PM affirming Britain’s new-found ‘sovereignty,’ but rather like cringe-worthy submissiveness. But then, of course, Saturday evening’s defiant statements by the PM about the NIP was a clear indication that Biden’s intervention has not changed much in the government’s attitude.

Moreover, whatever happens to the NIP, the US is likely to eventually pursue an FTA with the UK. Such an agreement would fit the US current international strategy to counter Chinese influence around the world by strengthening its ties with Western allies. Perhaps Biden’s suggestion this week that an agreement between the UK and the EU on Sanitary and Phyto-Sanitary (SPS) standards would not jeopardise the UK’s chances of sealing a trade deal with the US is not just trying to provide a solution to the NIP issues, but also preparing the ground for future trade negotiations.

What’s going to happen next?

It seems very unlikely that the UK government will back down in the dispute over the chilled meat rules. Once again it has adopted a bellicose and intransigent attitude that leaves little room for compromise without losing face domestically. That may very well mean that the UK government will go ahead and unilaterally extend the grace period beyond July 1st. That in turn would leave the EU no other option than taking retaliatory actions as defined by the Withdrawal Agreement and the TCA. The problem with that, of course, is that such action may take a long time to take effect, lengthy mediation processes and possibly a court ruling. In the meantime, the integrity EU single market will be de facto breached. This has led to some reports that the EU is considering an emergency solution, namely imposing checks on trade between the Republic of Ireland and the rest of the EU. Needless to say that this would be a major change in the EU’s approach to Brexit and would cause massive objections from the Irish side. Naomi O’Leary talked about the return of the ‘colonial nightmare,’ because such an arrangement would imply that the Republic of Ireland would be cut off from the EU single market and would de facto become part of the UK’s domestic market.

There is little chance of such an emergency plan to become reality. Nevertheless, given the UK government’s bellicose approach it does seem difficult to imagine any possible solutions to overcome the impasse. It is extraordinary to see the stubbornness with which the UK insists on an ‘equivalence’ or ‘risk-based solution,’ while not even complying with the basic requirements need for such a risk-based solution to be viable (namely sharing data about the movement of goods imported into NI from Great Britain). This is a clear sign of what Chris Grey called the Brexiteer’s refusal to accept that ‘Brexit means Brexit’. Indeed, it becomes increasingly clear that Johnson’s Brexit government believed that even after exiting the EU, the UK would receive special treatment from the EU and hence the commitments made in the NIP and TCA would not actually have to be respected.

An interesting possible solution to the impasse is described by Raoul Ruparel in a Politico article, which he calls ‘managing divergence.’ This solution would take advantage of the fact that after 40 years of EU membership, the UK and the EU are currently aligned in terms of regulatory standards. This makes it possible to adopt a light touch approach to checks and border controls, until the UK actually decides to deviate from its current standards and regulations. This is indeed the basic mechanism that underlies much of the TCA, which contains non-regression clauses that makes the current market access conditional on both parties not reducing labour and environmental standards below current levels.

This currently looks like the only solution that might be acceptable to both parties. Although, this arrangement would only kick the can down the road, as the problem of border checks in the Irish Sea would re-emerge as soon as the UK decided to indeed diverge (or rather regress) from current standards.

More importantly, perhaps, it is not clear at all whether the UK government is actually interested in any solution that might look like a compromise. Rather, the Johnson government seems to be willing to simply hold its tough line, extend the grace periods unilaterally, selling it domestically as a sign of strength and sovereignty, and then blame any negative effects – including the potential of renewed violence in NI – on the EU’s ‘legal purism.’ Indeed, Johnson’s intransigence after a week of continuous pressure from the EU and the US is remarkable. On Saturday night, after talks in the margins of the G7 meeting, he threatened that “[i]f the protocol continues to be applied in this way, then we will obviously not hesitate to invoke Article 16” (which would suspend the protocol).  There does not seem to be any willingness to find a solution to preserve peace in Northern Ireland.  The government seems to simply bank on the EU not following through on its threats of retaliation – which is another parallel with anti-democratic populists in central Europe. The government simply does not seem to take the threat to peace in Northern Ireland seriously. Its childish and cavalier approach to the very serious issues was perfectly illustrated by  Lord Frost who reportedly wore union jack socks at the G7 meeting. With Biden’s intervention seemingly ineffectual, it seems increasingly doubtful that anyone can reign in this childishness and safe the Northern Ireland agreement.

Brexit Impact Tracker – 6 June 2021 – Brexit News Big and Small…and the continuing reification of Free Trade Agreements

The past week has brought us the usual mix of two types of news about the impact of Brexit: The first type is news about things we knew would happen after Brexit. The second type are the sort of mundane things that we all took for granted, but that now turn out to be made hugely more complex due to Brexit and start affecting people’s livelihoods in ways none had anticipated – let alone thought through – ahead of the Brexit referendum or during the negotiations about the Brexit deal and the post-Brexit relationships with the EU. The latter type of news illustrates just how closely interconnected the UK and European economies have become after 40 years of EU membership and how enormous and manifold the costs of the divorce will be. Let me start with the latter, because they often get little attention beyond a fleeting note in the newspapers.

The ‘Small Brexit News’: School trips and the end of the teething problems hypothesis for grocers

In the category of the ‘small Brexit news,’ the most disturbing one to me this week was a story in the Guardian about the impact of Brexit on European school trip organisers. Several companies are expecting a massive drop in short-term visits to the UK from October when new, more restrictive rules will apply for travellers from Europe including the need for a passport and the end of visa exemptions for certain non-EU travellers when travelling to the UK from the EU in a group. The UK government refuses to exempt children taking part in short organised educational trips from these new passport and visa requirements. This implies amongst other things that all pupils will need passports – as EU national ID cards will not be accepted anymore – and any pupil of non-EU origin will have to apply for an individual visa (as opposed to benefitting from an exemption when travelling as part of an organise school trip). This will increase red tape for schools and travel agents offering school trips and will add an estimated 10-20% to the cost of the trip per child.

What is interesting with this story is the explanation that the minister for future borders and immigration, Kevin Foster, gave to justify his refusal to exempt school children from the new rules: He reportedly said he was “committed to strengthening the security of our border” and to “keep those who may pose a threat away from our border.” So, the same government that asks the EU to show ‘common sense’ over the Northern Ireland Protocol, that bravely walked into the glorious post-Brexit world without any plan, and that decries anyone who voiced any concerns as ‘fear monger’ are scared of school children? It has indeed been one of the great paradoxes of Brexit – and another victory for the Brexiteers’ strategy of shamelessly distorting reality – that it is the Remainers who ended up being considered as driven by fear, when the whole Brexit project is driven by people wishing back a world that’s less scary to them.

Also, in the category of ‘small news’ that often go unnoticed, is an interesting article in The Grocer magazine. The article quotes Sandra Sullivan of the Food & Drink Exporters Association as saying that many companies had hoped at the beginning of the year that the new trading rules established under the Trade and Cooperation Agreement (TCA) would still change. Yet, Sullivan now notes that grocers had come around to understanding that “the fact is this is EU legislation. It’s the rules. That’s now sinking in and companies are starting to change their business models,” i.e. they stop exporting to the EU altogether. The ‘teething problems hypothesis’ seems to turn out to be wrong in one more sector.

The ‘Big Brexit News’: Brexit’s impact on services

In the category of Big Brexit News – i.e. things that have an economy-wide effect and we all did expect to happen – is a striking new study from academics at Aston University. The study found that UK services exports from 2016 to 2019 were cumulatively £113bn lower than they would have been had the UK not voted to quit the EU in June 2016. This is a significant study not only because of the sheer amount of the decline in service exports, but also because of the timing: The study captures exclusively the anticipatory effect of Brexit, which pushed companies to adapt their business model before Brexit actually happened. This is important to put in writing, because a few years down the line, Brexiteers will probably compared post-transition period figures (after 1.1.2021) to figures before the end of the transition period, but after the Brexit vote. This will underestimate the negative impact of Brexit. Indeed, the Aston study reminds us that in some sectors and for some companies, Brexit already had an impact before it actually happened.

The study is also significant, because once again it underscores the recklessness of Brexiteers when it comes to the service industry – Britain’s most important industry. Given the structure of the UK Economy (with 70% of GDP coming from the services sector), services should always have been a focal point in the Brexit negotiations. Instead, the government decided early on to focus on free trade in goods only and then spent most of the negotiations haggling over fishing quotas. In the end, the most important sector of the UK economy was almost completely neglected in the TCA. The FT argued this week that partly this may be due that – in financial services at least – the EU and the UK were perhaps quite happy to start going separate ways in terms of financial regulation. Yet, in areas like the creative industries, business services, legal services etc. etc., the neglect seems astonishing and greatly damaging to the UK economy.

 Yet, rather than trying to address these issues of concern for service sector firms, the government firmly focusses its attention on concluding trade deals at any cost (including arguably the cost of loss of lives, if we are to believe recent reports that the late imposition of a travel ban on India after the emergence of the delta Covid19 variant was due to Johnson not wanting to jeopardise the FTA negotiations with Indian PM Modi). The costs that the government is willing to accept for concluding FTAs shows just how symbolically important they have become for the government’s legitimacy. This week has brought several new developments on that front.

Liz Truss’s three victories

Liz Truss – Secretary of State of International Trade – was able to declare victory on three fronts this week: The closing in on a trade deal with Australia, the approval by the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) countries of accession talks with the UK, and the – somewhat unexpected – conclusion of a new FTA with Norway, Iceland, and Lichtenstein.

The trade talks with Australia seem to be nearing their conclusion with officials expecting a tentative agreement for the week commencing June 14 (mor on this below).

On Wednesday the CPTPP gave the green light for accession talks with the UK, which will be helped by the Australia FTA. This may sound like big news, as it may seem like joining the CPTPP would be an important step towards the ‘Indo-pacific tilt’ the government has promised in its Integrative Review (better known as the Global Britain report). Indeed, Liz Truss herself lauded the prospect of accession to the CPTPP as the UK joining another “dynamic free trade area.” But once again, we need to keep the proportions in mind. Joining the CPTPP is another largely symbolic step that experts do not expect to yield large economic benefits: The CPTPP countries are simply too far away, too small export markets for UK products, and it is unlikely that the UK will get a very good deal in particular for services. In particular, one important point to keep in mind is that the UK already has FTAs with 7 out of the 11 CPTPP member states (Canada, Chile, Japan, Mexico, Peru, Singapore and Vietnam). It is about to sign an 8th one with Australia, which will leave New Zealand, Brunei and Malaysia as the only CPTPP countries with which the UK has no FTAs at the moment and for which CPTPP membership may imply an increase in market access. Moreover, experts from the UK Trade Policy Observatory also point out that in many respects, bilateral FTAs with CPTPP countries may be more beneficial than membership. This is because joining an existing club with establish rules does not leave leeway for the UK government to negotiation any specific rules. Rather, the UK will be given the choice to accept the multi-lateral CPTPP rules and join, or not accept them and not join. The current CPTPP rules may not be particularly favourable to the UK, because as a major service exporter it would have an interest in liberalisation of that particular area. Yet, it is regarding services that the CPTPP agreement – like many bi- and multi-lateral FTAs – does not go very far, giving member states the possibility to exempt domestic services from liberalisation. It is therefore not clear what additional economic benefits the UK government is expecting from CPTPP membership.

The third ‘good news story’ in terms of trade, was the conclusion of an agreement with Norway, Iceland, and Lichtenstein. This deal seemed elusive still a week ago. Various newspaper reported that the deal was close to collapsing due to the opposition of the Christian Democrats – a minority partner in the government close to agricultural interests. Norwegian sources report that the opposition was overcome when PM Solberg approached the oppositional Labour party to support the deal. It would also seem that compromises were reached on which varieties of cheese the UK can export at lower tariffs (only four varieties) and that tariffs would be lowered and not completely eliminated. This may have brought the Christian Democrats and their Minster for Food and Agriculture Olaug Bollestad on board, although the deal will now be debated in the Norwegian Parliament. Given that the Labour Party reportedly only agreed to the deal being brought before parliament, but did not guarantee that it would be supporting it, its fate may still be in the balance.

Regardless, the deal may indeed be beneficial to the UK economy, also because one of the concession the UK made in return for access to Norwegian meat and diary markets, was to lower tariffs on Norwegian fish and seafood, which may benefit the fish processing industries in Northern England. But of course, only once the details of the deal are known will it be possible to assess whether and to what extent it goes beyond the previous relationship under EU membership and what exactly the concessions (access to UK fishing waters) are.

Form not substance: The reification of FTAs

Economically speaking the reason why FTAs may matter for post-Brexit Britain is because Brexit means that we have cut ourselves off the EU Single Market, which is by far the most important export market for British products. It is hoped that FTAs may increase trade with other countries so as to compensate for the expected loss in exports to the EU, but also potentially off-set increasing prices for imports. Yet, this economic logic behind the Government’s Brexit strategy has long gotten lost with the shift away from substantive, problem-solving-orientated politics to symbolic politics, or what Chris Grey calls “performative gesture politics of ‘Global Britain’ grandstanding.” This has led to a reification of FTAs: They are now seen as a goal in themselves rather than a means to an end. Indeed, the right-wing pro-Brexit press reports about FTAs as if the estimated value of trade between to countries directly translates into money in British people’s pocket.

More shockingly, even expert commentators seem to explicitly value trade deals as a goal in themselves rather than a means to an end. Thus, well-known trade expert Dimitry Grozoubinski tweeted after the announcement of the Norway, Iceland, Lichtenstein deal: “While free trade agreements and rollovers [of pre-existing EU deals] can’t compare or replace the Single Market, they are still nice to have and hard work to do, so should be celebrated.”

As a former trade negotiator Grozoubinski is certainly best placed to judge how hard it is to work on a trade deal, but the other parts of the statement – that any trade deal is ‘nice to have’ and ‘should be celebrated’ is gravely mistaken. Only a staunch libertarian free trader will believe that any type of trade liberalisation is better than none. That assumption is provenly false, even though the Cobdenite, anti-corn law nostalgia in this country pretends otherwise.

In actual fact, a bad trade deal is way worse than tariffs and quotas. There are library-filling amounts of studies on the negative impact of precocious and unselective trade openness on developing countries (see for instance here). There is also an increasing amount of recent empirical evidence that trade liberalisation may not only be bad for non-university educated workers in developed countries, but indeed directly responsible for Brexit. Thus, one study conclusively showed that areas harder hit by cheap imports from China since the 1990s and thus experiencing industrial decline, were the areas that most strongly supported Brexit. The same has been shown for the US, where areas affected by the ‘China shock’ following liberalisation of trade, were significantly more likely to vote for Trump in the 2016 presidential election. In other words, liberalisation of trade during the UK’s membership in the EU may be one of the root causes of Brexit.

Therefore, the terrible irony with the Truss-Johnson post-Brexit FTA strategy is that it is pursued in the name of the people whose economic grievances led them to vote for Brexit, but will ultimately reinforce the root causes of these grievances.

Whether or not this is a conscious cruel and cynical trick they are playing on their electoral base, I do not know. But the point is that for them the strategy is working. The British public has come to accept trade deals as an end in themselves– regardless of their actual economic effect – because they are a symbol of ‘sovereign Britain.’ Truss is being rewarded for her truly impressive effectiveness in rolling over existing and concluding new deals. The FT acknowledged that “[t]he signing of a UK-Australia trade deal would be seen as a political boon for Liz Truss […] cementing her reputation as one of the Conservative party’s rising stars.” It quoted the editor of the Conservative Home magazine as saying: “Members like ministers who can deliver and delivery in politics is difficult. But Liz has been delivering a mass of trade deals. The fact that nearly all of them have been rolled over is neither here nor there.” This is the perfect illustration of the symbolic value of trade deals for pro-Brexit politicians. Liz Truss and Johnson do not care about the economic realities, but only about the symbolic power of ‘getting things done,’ proving naysayers wrong about Brexit, and showing that the UK can get trade deals done outside the EU. For their electoral support and career advancement in the short term, any trade deal is good news.

Quantifying the impact of the FTAs: The right-wing Press versus the experts

The reification of trade deals in the UK press leads to new FTAs being announced as great victories without much concern for the detail of the agreements. Thus, a couple of weeks ago the Sun ran an article about the UK-Australia deal with the headline: “BRITAIN is poised to clinch a £18billion trade deal that will bring a triple boost for millions of hard-working families.” The ‘triple boost’ refers to Liz Truss’s prediction of more jobs, higher wages, and lower prices due to the deal – which led her to call the deal a ‘win, win, win’ scenario. The paper was very specific about quantifying the benefits from the deal: “It will mean 20p off the price of a bottle of Aussie wine and more highly paid jobs as British exporters expand workforces.” An infographic further shows that vegemite will be 8% cheaper, shoes ‘up to 16%’ and clothes ‘up to 12%’ cheaper.

Besides the question of whether 20p of a bottle of wine will make people’s lives significantly better, it is questionable if these figures hold up to scrutiny. Experts – like Sam Lowe – are, of course, much more cautious about quantifying the impact of the deal, because that impact will depend on many things: Will tariff cuts be passed on to consumers? Will the increase in Australian imports displace British products or products otherwise important from elsewhere?  Plus, one incontestable and unshakable fact remains, namely that Australia is far away, which means we should not expect a massive increase in imports from or exports to Australia. Lowe therefore think the impact of the Australia FTA will be ‘so small as to be unobservable.’

You could of course follow Grozoubinski and argue: “Ah well, no harm done! It’s nice to have this deal even if its impact is limited.” Well, that is once again not quite true. One important potential implication of offering Australia a zero-tariff deal on agricultural produce and food products may mean that other countries – like the US and Brazil – will ask for the same thing. The implications on British farmers of zero-tariff deals with these countries may be more significant due to the relative geographic closeness (compared to Australia).

Moreover, as Welsh first minister Mark Drakeford recently warned, one unintended consequence of a trade deal with Australia on Australian terms (i.e. the UK accepting Australian standards rather than insisting on current UK standards), would open the UK market to sub-standard agricultural produce and food products (Australian agricultural produce are sub-standard, not just in terms of animal welfare, but also in terms of the use of hormones, neonicotinoids, and other chemicals that are not currenlty allowed in the UK or the EU). This in turn would mean that access for British food and produce to the EU Single Market would certainly be further complicated.

Sadly, given our government’s ruthless and reckless strategy to conclude any trade deal with any country for personal and symbolic reasons, means that chances are such pragmatic economic considerations are not high on the government’s agenda.

Preparing the ground for the blame game

At one level, however, the right-wing press and Brexiteers seem to start preparing the ground for the possibility of an underwhelming impact of the new FTAs on the UK economy. The pro-Brexit press starts preparing the ground for blaming Remainers and the EU for the UK’s failure to reach  supposedly salvation of FTAs and CPPT membership. When the Norway FTA was reportedly on the verge of failing a week ago, the Express lashed out at the Norwegian Christian Democratic party’s attempt to block the deal to protect the domestic farming sector and saw it as a punishment for the UK leaving the EU.   

Similarly, in an interesting intervention, Jayne Adye, director of pro-Brexit campaign group Get Britain Out, was quoted as saying “lack of experience in the negotiations by public figures - and media interference - is threatening to derail ‘Global Britain’ with a new form of “Project Fear”.’ Whatever negative impact FTAs will have on the British economy or its farmers can then be blamed on inexperience official negotiating the ‘wrong kind of deal’ or the negotiators being bullied by Remainers into too timid an approach.

At the same time, the debates around the Australia trade deal shows interesting new division emerging in British politics. Right wing pro-Brexit newspapers see themselves confronted with a choice of siding with the patriotic, salt-of-the-earth farmers and fishermen or with the libertarian but internationalist free traders amongst the Brexiteers. Some right-wing papers seem to side with farmers rather than the free traders, thus questioning to some extent the idea of concluding FTAs at all cost. Thus, the Daily Mail accused Liz Truss of trying to push through the Australia deal before putting the Commons Trade and Agriculture Commission on statutory footing and giving it the power to scrutinise trade deals. Even the Express, usually a cheerleader for Truss, called on her to ‘sort it out!’ (the mounting concerns voiced by farmers about a zero-tariff deal with Australia).

Following, the mounting discontent of the fishing industry, farmers may open up a new divide in the pro-Brexit camp, making it more difficult for the Government to ‘have its cake and eat it,’ but instead having to decide who to throw under the Brexit bus. This could then lead to further electoral realignment in the British political landscape by creating new groups of voters disillusioned with the promises of Brexit.

Brexit Impact Tracker 31 May 2021 – The Will of the People…When it Suits Us – A Swiss Bank Holiday Special

Due to the historical decision by the Swiss government last week to stop negotiations with the EU over a new Institutional Framework Agreement, this week’s BIT is longer than usual. Readers not interested in the intricacies of Swiss politics may want to skip sections 3-5 and go right to the last two sections (although I do think that a lot can be learned from the Swiss experience as a third country).

As a British-Swiss dual national, for me last week’s Brexit-related news were overshadowed not by Dominic Cummings, but the decision of the Swiss government to put a halt to the negotiations with the EU about an ‘Institutional Framework Agreement’ (InstA) after eight years.

Many observers consider this decision as a historic moment in the Swiss-EU relationships, similar to the 6 December 1992 when Switzerland decided in a popular vote against joining the European Economic Area (EEA). This may not be directly a Brexit-related story (although Brexit certainly has made the EU more wary about what it offers other ‘third countries’), but I think anyone interested in Brexit should take notice of this significant event.

Indeed, this decision could jeopardise the very successful model called the ‘bilateral track’ that allowed Switzerland to remain outside the bloc, while benefiting from virtually complete access to the single market and participate in various EU programmes.

The Swiss case provides some lessons about what alternatives to membership and a ‘hard Brexit’ may exist, but also because the failure to reach an agreement with the Swiss may have an impact on how the EU deals with third countries more generally. There are also interesting parallels in the type of fake populist politics that drive Euroscepticism in various European countries.

The Swiss ‘bilateral track’

The model currently governing the relationship between the EU and Switzerland resulted from the Swiss voters’ decision in a historical popular referendum held on 6 December 1992 not to join the EEA. With full membership never having been a politically feasible option – although the government did deposit an accession demand after the failure of the EEA, but that demand laid dormant for 24 years and was finally officially withdrawn on 16 June 2016 [DE] – what emerged over the decades since 6 December 1992, was a complex web of 120 painstakingly negotiated bilateral (or ‘sectoral’) agreements.

Contrary to the UK-EU Trade and Cooperation Agreement (TCA), the Swiss ‘bilateral agreements’ allowed virtually unrestricted access to the EU market – without any tariff or non-tariff trade barriers in most cases – and far-reaching reliance on the famous ‘equivalence regime’ whereby Swiss rules were recognised as substantively equivalent to EU rules. Of course, that recognition of equivalence was ‘bought’ at the price of a far-reaching alignment of Swiss regulation with EU regulations. The Swiss even invented a word for dynamically aligning its rules to the evolving EU rules: Autonomer Nachvollzug in German, which roughly translates as ‘autonomous alignment.’

More generally, as EU integration deepened, the EU increasingly put pressure on Switzerland to subject the various Bilateral agreements under the above-mentioned ‘institutional framework agreement,’ which would solve questions of dynamic alignment and mutual recognition when either side’s laws evolve. The InstA was also meant to solve issues around dispute resolution over implementation (an excellent in-depth resource – in German – explaining the issues around the framework agreement can be found here).

 The negotiations started in 2014 and had led to a first draft agreement in 2018, which the Swiss government now decided to scrap [FR] – mentioning unsolvable differences around ‘flanking measures’ in the area of social- and salary dumping when EU companies post workers to work in Switzerland, the directive on EU citizens’ rights (which has led to fears in Switzerland that EU citizens could benefit extensively from the generous welfare provision), and around state subsidies rules.

The rise of the Eurosceptic anti-immigrants – and the beginning of their fall….

The background to this momentous decision, which risks setting back the relationship between the EU and Switzerland for decades is a domestically at times acrimonious political climate driven by the populist, right-wing, anti-immigrant Swiss People’s Party (SPP).

As EU integration and expansion progressed and Switzerland continued participating in the development, Eurosceptics’ opposition to the arrangement grew as well. Successive SPP electoral successes meant that by the 2003 General Election it had become the largest party in the lower house of the Swiss parliament. Consequently, Eurosceptic voices became stronger too. After the entry into force of the Agreement on the Free Movement of People (AFMP) in June 2002, the SPP’s anti-EU platform mainly targeted this aspect of the relationship with the EU

The SPP marked an important victory on 4 February 2014 when the so called ‘popular initiative against mass immigration’ was accepted in a popular vote – albeit narrowly by 50.33% v. 49.67% of votes. This was a surprise to many and led to discussions over the end of free movement of people. But the implementation of this initiative remained difficult, as the EU clearly signalled that having your cake and eating it was not an option. Thus, right after the initiative passed at the ballot box, the EU suspended Switzerland’s membership in the Erasmus+ student exchange programme.

As a result, the government pursued a route that was labelled ‘implementation light’ of the Mass-immigration initiative. Rather than enforcing a strict ‘Inländervorrang’ (‘priority for nationals’) that would have forced employers in Switzerland to hire Swiss nationals over EU nationals, the parliament adopted a compromise – sometimes referred to as ‘priority for nationals light’ that satisfied the EU. In professions with above-average unemployment, employers are obliged to register open position with the regional job centre. The latter exclusively advertises these positions for five days to unemployed registered with the job centre (with the expectations that they are mostly swiss nationals). Only after the five-day period can people not currently registered as unemployed in Switzerland apply. The State Secretariat for Economic Affairs (SECO) considers these measures to be well implemented (although a systematic statistical analysis is lacking as of yet).

The Eurosceptic SPP’s party on the other hand talked of a betrayal of the people’s will and launched a Begrenzungsinitative (‘limitation initiative’ - as in limiting immigration) that would have led to the cancellation of the free movement of people agreement. Yet, in a popular vote in September 2020, voters clearly rejected the initiative with at 62% to 38% majority. The result was interpreted as a vote by Swiss citizens for the ‘bilateral track.’

Yet, it is interesting to note that it is the 2014 anti-immigration result that is the odd one out. The Swiss voters have time and again confirmed their support for the bilateral agreements with the EU – even when it means opening Switzerland’s borders to immigration. Since the introduction of the free movement of people in 2002, the SPP has launched one initiative or referendum after the other attempting to cancel the AFMP and related policies. Thus, in June 2005 54.6% of voters approved Switzerland joining the Schengen/Dublin agreement despite a SPP referendum against it. In September 2005, the SPP launched a referendum against the extension of free movement of people to the ten new EU member states after the East extension. 56% of voters backed the government’s decision to accept the extension. A referendum against Switzerland’s CHF1bn contribution to the EU’s “Cohesion Fund” also failed with 53% of Swiss voters accepting the payment. In February 2009 60% of Swiss voters accepted the extension of free movement of people to Romania and Bulgaria. In 2018, the SPP’s ‘self-determination Initiative’ – which carried the sub-title ‘swiss law instead of foreign judges’ (in a reference to William Tell’s mythical opposition to Habsburg judges). This initiative sought to place the Swiss constitution above international law and at the same time prevent any agreement with the EU that would establish the European Court of Justice (ECJ) as final arbiter in disputes under the agreement. This initiative was rejected by 66% of the voters. Finally, the above-mentioned Begrenzungsinitative failed in Sept 2020, again with a nearly 2/3rd majority of Swiss voters confirming their support for free movement of people. As such, the narrow 2014 vote can be seen more a s fluke.

What is interesting about this rather dry list of referenda result is this: Despite the fact that a long series of popular referenda show strong support of a (often large) majority of Swiss voters for the bilateral track and for free movement of people, for populists in various right-wing parties, it is the single instance of the 2014 result that is elevated to the ‘will of the people.’

Thus, Foreign Minister Ignazio Cassis – who is member of the FDP.The Liberals not the right-wing nationalists of SPP, but in many respects resembles a right-wing populist rather than a liberal  – stated in a radio interview this week that the Swiss voters would have rejected the framework agreement and that it was hence the right thing for the government to pull the plug on the negotiations. The most recent polls speak another language though: The institute GfS’s found that 64% of voters would have said “yes” or “rather yes” to the agreement.

Fake Populism

In this context, Wednesday’s decision by the Federal Council – Switzerland’s 7-members governmental college – is very significant in many respects. Not only because it seems like a reckless decision to stop negotiations after eight years and thus jeopardise all current agreements with the EU without having a ‘plan B’ (see below). But it is even more significant that this decision was made by the government without consultation of the Parliament or the people, when Swiss political opposition to the EU is mainly driven by right wing populists. It very strikingly illustrates something that will be familiar to people following the British Brexit saga: Namely the fake populism of the populists.

The “will of the people” is set in stone. It cannot be changed. It is expressed in a quasi-mythical initial situation – such as the Brexit referendum in Britain and the 1992 vote against the EEA (which I continue to believe was the right decision, because there are better solutions for third countries than the EEA) and more recently the 2014 referendum. All other expressions of the ‘will of the people’ are disregarded (in Switzerland) or prevented (in the UK – Second referendum anyone?). The ‘will of the people’ is a great device to brandish at the ‘unpatriotic’ or ‘elitist’ opposition, but only as long as the people will what the fake populists want! In the process, divisions are created: The 50.66% percent of Swiss voters who voted for the limitation of immigration in 2014 become the ‘real people’ and the 66% of the voters who supported the continuation of free movement of people in September 2020 are being ignored. They are not the ‘real people.’

Wednesday’s decision is hence not explained by the ‘will of the people’ but by the particular power relations within the 7-headed federal government. As a ‘consensual democracy’ the Swiss government’s composition reflects the relative strength of different parties in the lower house of parliament (the National Council) and different regional, cultural and linguistic groups.

Its composition evolves only slowly and tends to lag behind the evolution of voter preferences as expressed in the elections to the National Council (for instance the right-wing FDP obtained 15.1% of votes in the 2019 GE and has 2 Federal Councillors, the Christian Democrats obtained 11.4% and have one Councillor, The Greens with 13.2% have none). The composition of the Swiss government is hence tilted towards the right-wing parties: There are 2 ministers from the formerly dominant FDP.The Liberals, 2 from the now largest party SPP, 2 social democrats (SP) and 1 Christian Democrat (CVP).  The SPP ministers were of course always likely to oppose the agreement. The two representatives of the FDP.The Liberals – traditionally the party of business interests who were in favour of the InstA – would normally be more supportive. However, perhaps not insignificantly, Foreign Minister Ignazio Casiss, represents the Italian speaking canton of Ticino which has a strong anti-immigration majority. Indeed, Ticino is particularly exposed to labour market pressures and high unemployment due to the proximity to Italy. At least 3 of the five right-wing and centre-right councillors are hence firmly anti-immigration.

In addition, the two social democratic councillors face a paralysing dilemma that will be well-known to observers of British politics: Torn between their traditional, working-class and trade union basis and the increasingly important urban middle-class voters, the Swiss social democrats have essentially stopped taking any position on Europe. The trade unions vocally rejected the framework agreement [FR] – due to the justified fear that it might undermine labour protections and put pressure on salaries – while much of the middle-class SP voters are in favour of a close integration of Switzerland in the EU. The SP councillors are said to have wanted the InstA to simply go away [DE] so that they would not have to face a potentially bruising referendum campaign that would expose the contradiction’s in the party. With the Green Liberals and the Greens the only parties unequivocally in favour of the InstA, but not represented in the government, it is easy to see how the government reached the decision it did. But it is not a story of the government defending the will of the people, but rather a conservative coup against an increasingly progressive Swiss population [DE].

Consequences and alternatives

The FT reported on the Swiss government’s decision saying  that “[m]any Swiss are also optimistic Brussels will come around to Bern’s plan B — referred to as the “bilateral track” — whereby existing agreements can be rolled over individually.” That assessment is somewhat misleading. The ‘bilateral track’ is the current system not a new Plan B. Yet, Brussels has made it very clear that it is unwilling to accept this status quo any longer. That was precisely why the negotiations on the InstA were launched back in 2013/2014. Just like Brexit, the government halted the negotiations without any obvious plan of what comes next.

The EU has already reacted by cancelling the equivalence recognition for medical equipment manufacturers [DE]. Swiss companies in this sector thus lose EU single market access unless their products are also certified in an EU country (which increases costs). Other branches now fear that their industry may be next. Thus a speaker of SwissMem [DE], the employer association of the machinery industry, which is exports 80% of its products, 56% into the EU, expressed fears that the Mutual Recognition Agreement (MRA) covering that branch will not be renewed when it expires, making exports to the EU more difficult and costly.

It remains to be seen what will happen next in the relationship between Switzerland and the EU. There is the possibility that a pro-European organisation launches a popular initiative that asks for the voters to get a say in what happens with the InstA. Similarly, there was a petition pending asking that Parliament not the government [DE] got to decide about the next steps with the InstA negotiations. It is unclear what will happen if the Parliament decides to pass this petition in spite of the government’s decision.

The root cause of all problems: A misunderstanding about sovereignty

Yet, the really depressing fact about all this, is that the Swiss’ struggles with the EU are essentially due to a misunderstanding. The same misunderstanding that explains Brexit: namely a misunderstanding of what ‘sovereignty’ means in today’s world. Indeed, at the heart of much right-wing Euroscepticism in Europe lies an ill-conceived and outdated notion of sovereignty (see for instance here and here). Rather than acknowledging the (increasing) economic, cultural, and political interdependence of countries in Europe, which make cooperation across borders inevitable, Euroskeptic forces pretend that it is possible to go back to a ‘simpler time’ when each country could live in a state of autarky where it did not rely on others for is prosperity. It is doubtful that such a simpler time ever existed – given that the territorially defined nation-state is not that old by historical measures and that trade, migration, and cultural exchanges have been part of human society for millennia. But the interpretation of sovereignty as meaning the undivided and absolute control over one’s borders and the attitude ‘we won’t be told by others how to live our lives’ has certainly become a complete illusion in the 21st century. Given the advances in information technology, travel, and communication. Given the science-driven technological progress and the technical opportunities to split companies’ value chains into ever more specialised steps, interdependency across national borders has simply become a fact of life. It seems difficult to imagine that it can be avoided – other than in extreme cases such as North Korea and perhaps Cuba until a few years ago.

Accepting that does not mean that we have to unthinkingly buy into a supra-nationalist project that seeks to replace national processes of democratic legitimation with supra-national ones. That is neither realistic not desirable. As Anthony Barnett aptly put it a few years ago: “Democratic nation-states are not going to fuse into a superstate”. But it does require us to acknowledge that a simplistic view of sovereignty needs to be replaced with something else.

In the Swiss case, Swiss historian André Holenstein pointed out after Wednesday’s decision that since the foundation of the modern Swiss federal state in 1848, the country’s political system has been – very successfully – based on a conception of divided sovereignty.  Sovereignty is distributed across the local level of communes, the regional level of cantons, and the national level. Competences depend on the matter at hand, but clearly it is not a fundamental problem that interdependent territorial units with distinct histories, cultures, and languages share sovereignty. It is not obvious why something similar cannot apply to the EU. Yes, there is no European demos – but equally Swiss people continue to have strong local and cantonal identities, which – I would argue – can be as strong as their national one. Such multiple identities are precisely what makes it possible to share sovereignty across units.

Regardless, I suspect that these discussions around notions of sovereignty will not worry the false populists anyways. For them ‘sovereignty’ is a political tool to help their power grab, not a constitutional concept that needs to be taken serious to provide a solid foundation to the country. The call for sovereignty by the false populists often seems more like a power grab than a real concern for people having their voices heard. Thus, it is beyond ironic that the TCA for instance by creating the Partnership Council has in some respects moved power away from the UK Parliament to the government, when Brexit was done in the name of giving the UK Parliament – and hence supposedly its citizens – back its sovereignty.

Time for the EU to rethink its approach to third countries?

On the other hand, the EU’s struggles with third countries like Switzerland and the UK does suggest that the EU itself may need to rethink what it can offer countries who are seeking close economic and cultural ties with the EU, but who are not ready to commit to the political integration project. Indeed, the EU is currently not very successful establishing stable and productive relationships with such countries, including not just Switzerland and the UK, but also Turkey and – to some extent – the Ukraine for instance.

Since its inception in the 1950s, the European project has considerably moved towards more supranationalism. With the deepening economic and political integration, joining the club – or getting a ‘guest membership’ - has become more costly in terms of commitment for third countries. The EU insisting for guest members to sign up to its rules can hardly be seen as ‘bullying.’ Rather it is a perfectly legitimate consequence of the EU exercising the ‘pooled sovereignty’ of its member states in certain areas and guaranteeing the integrity of the single market. Doing so guarantees that members states – who commit to adapting to EU legislation – do not get a worse deal than non-member states. But of course, third countries’ reluctance to sign up for a full membership is also a legitimate position to have. Indeed, in certain cases – most notably Turkey – it is the EU who reluctant to offer anything else than an associate status. Yet, this position of ‘associate third country’ is becoming difficult and onerous not only because of the deepening and widening of integration, but also because of a tendency driven by the European Court of Justice, to insist on uniformity across European economies rather than allowing the co-existence of different varieties of capitalism.

This leaves countries with a very stark choice of joining and adapting their institutions very extensively or staying outside at the cost of losing access to the single market. None can really blame a more deeply integrated Europe for asking compliance with its rules; nor can anyone blame third countries for shying away from the increasing commitment required for joining the club. The Swiss example illustrates that this dilemma poses serious problems to some of the EU’s closest partners. The EU may have to come to terms with the fact that it will not be enough to simply provide third countries with an ‘in or out’ choice. The more the EU integration progresses, the more third countries may be politically unable or reluctant to accept that choice. And the ‘take it or leave it’ approach is not in the interest of the EU either. As Andrew Duff recently argued, it might be time for the EU to think about a new model for affiliate members.

Such a model cannot be of a ‘have-your-cake-and-eat-it’ type. Remaining outside the EU cannot offer all the advantages of full membership without any of the duties and commitments. Gaining access to the single market necessarily needs to imply conforming with EU standards. But a new model for affiliate members could solve two key problems without undermining the integrity of the single market: Firstly, the model would need to provide more flexibility for third countries to have higher social and labour standards; one of the key sticking points in the Swiss negotiations. Within the EU, such higher standards have increasingly come under attack from the ECJ which seeks to remove them in pursuit of an ill-conceived notion of ‘competition.’ Yet, these attacks on social standards are not intrinsically related to the integrity of the single market. Rather they are imposed in pursuit of a different goal; that of promoting competition. The EU needs to reign in the ECJ in this respect. Secondly, the model would need to provide a creative alternative to direct ECJ jurisdiction over the agreement (the TCA and the InstA both contain elements of such an alternative). This is necessary, because the ECJ’s evolving jurisdiction may mean that new demands on third countries emerge that it did not initially sign up for. It seems to me that both these issues could be solved without compromising the integrity of the single market (which essentially only requires alignment on a common set of minimal regulatory standards). Such a new model of affiliate membership would allow it to pacify increasingly fraught relationships with some of the EU’s closest neighbours – including the UK.

Brexit Impact Tracker 23 May 2021 – The Double-edged Sword of Ruthless Politics

Brexit is increasingly turning out to be the embarrassing and horrendous farce many of us expected it to become.

The far-right pro-Brexit newspapers continue pumping out ludicrous announcements intended to convince their readers that Brexit is a huge success. The most ludicrous one I have spotted this week was ‘Britcoin bonanza! Revolutionary plan could score UK £90 BILLION – EU left in the dust.’ This is referring to a report by the CityUnited ‘think tank,’ which counts Lord Hannan amongst its advisors, that suggests if Britain were to follow the Chinese example of developing a Bank of England-led digital currency, it would gain a first mover advantage over other countries including the EU. Meanwhile, influential public figures such as UKIP founder Alan Sked or Brexit Minster Lord Frost misconstrue trade news and figures to claim that Brexit has been great for the British economy, but backfired for the EU.

At the same time, the very same Brexiteers increasingly seem to acknowledge many of the negative effects of Brexit – albeit in a contorted way: The same border checks at the EU border that are declared unproblematic for UK exports to the EU via France and the Netherlands, are declared a disaster for Northern Ireland. The NIP has been declared not sustainable and Frost now seems to admit that it was not the deal the UK wanted. The relocation of financial services firms from the City of London to European cities, which various pro-Brexit outlets declared is not happening, is now also decried by other pro-Brexit publications as an ‘EU power grab’ that sees ‘thousand flee the City of London.’

Worse still, after having set up a government taskforce to go looking for the benefits of Brexit earlier in the year, the government will now turn to external advisers to try and achieve this task. Let me repeat this: The UK government, five months after having boasted about securing its ‘have-your-cake-and-eat-it Brexit,’ and five years after having sold Brexit to the UK public as a win-win decision, is now scrambling – and clearly struggling – to identify opportunities that could arise from it!

Conversely, evidence keeps mounting that Brexit was not just as bad as expected (as a reminder all serious forecasts I’m aware of expect a decline in UK GDP due to Brexit net of Covid19 and relative to having remained a member of the EU), but possibly considerably worse. Thus, Eurostat data shows an even steeper decline of EU-UK trade since January than ONS data (among other things, because it also measures trade between subsidiaries of the same firm, not just trade between firms). Other studies show that in the first quarter of 2021 alone, Brexit has already reduced trade with the EU by as much as long-term estimates had  expected to see in the long run, suggesting that ‘project fear’ is becoming ‘project fact’. The Resolution Foundation and the London School of Economics have launched ‘The Economy 2030 Inquiry;’ a research programme that seeks to identify policies that could help prevent “the UK becoming the sick man of Europe.“

It is obvious that we continue to live in a deeply divided country where two parallel realities co-exist. Meanwhile, the government does nothing to try and heal the division left by five years of acrimonious Brexit debates. To the contrary, it does everything to further fuel division and resentment. This, to me, is the key insight from this week’s news about the NIP and new Free Trade Agreements (FTA). They illustrate increasingly clearly that the Johnson government will continue to pursue a confrontational and reckless domestic and international strategy that I call ‘ruthless politics.’ This strategy may allow the government to score some quick political points, but will ultimately prevent the UK from establishing a productive relationship with its allies and trading partners.

 Northern Ireland Protocol (NIP)

The Northern Ireland situation continues to worsen in worrying ways. This week the content of the 20-page letter the UK sent to the EU commission in response to the Commission’s legal action over the UK’s alleged violation of the NIP started to emerge. According to RTE’s Europe Editor Tony Connelly, the UK’s response letter ‘levelled a series of accusations at the Commission for its handling of the Protocol, its apparent disregard for the sensitivities of unionists.’ Connelly quote a diplomat as saying the letter was “politically aggressive, rather than any effort to deal with the substantive issues that were raised in the original letter.”

By now, such a reaction by the Johnson government will come as no surprise. It is part of an emerging pattern of ‘ruthless politics’ whereby the government tries to bully its way through the post-Brexit world, making unreasonable and often untruthful claims about past actions, its partners’ intentions, and by regularly rewriting history. Thus, it seems sheer unbelievable that the EU is now accused of disregarding unionist sensitivities, when it was the EU that since 2016 insisted that an alternative to a hard NI – IRL land boarder need to be found to maintain peace.

It becomes increasingly clear that the Johnson government signed up to the Trade and Cooperation Agreement (TCA) and the NIP, not believing that the EU would actually hold the UK to the terms of these agreements. Whenever the EU does treat the UK as the third country that it has chosen to become, the UK government (and the pro-Brexit media) respond with outrage and victimisation. This week, for instance, Lord Frost complained about goods being shipped from Britain to NI being treated just like goods arriving in Rotterdam from China. It would seem that Brexiteers within government did not expect that for the EU Brexit means Brexit!

Paradoxically, the UK government’s bellicose victimhood, which mixes bullying with sulking, undermines its own preferred way forward in its relationship with the EU. Namely, a flexible implementation of TCA and NIP based on mutual trust. This is at the heart of the idea of ‘equivalence’ – whereby each side recognises the other’s standards and rules not as similar, but as of equal quality – and the ‘risk based approach’ to sanitary and phytosanitary (SPS) checks on food and animal products (whereby the EU accepts that UK exports are safe even though following different rules than the EU’s rules). Equivalence and the risk-based approach precisely require a level of trust and goodwill on both sides that the UK government continues to torpedo with its bullying and sulking.

Meanwhile, the situation in NI is edging closer towards a dangerous stand-off which risks spiralling out of control. This week’s news also brought us news of the UK Parliament’s Northern Ireland Affairs Committee, which was told by 19-year-old Joel Keys – a member of the Loyalist Communities Council (LCC) – that he would “not rule” violence “off the table”. The possibility of violence during the marching season starting in June, is also increasingly invoked by the DUP and other parties in NI to put pressure on the UK and EU sides to ditch the NIP – it is not always clear whether this is a genuine concern or a threat.

Yet, a solution to the issues surrounding the NIP seems a remote possibility. The key question of course is, what will replace it if it were to be ditched? The UK government envisages a system whereby the EU simply accepts that exports from Britain to NI do not need to be checked, either because UK rules can be considered equivalent to EU rules, or because the risk of products entering the EU from NI can be considered low. Conversely, the EU’s only acceptable alternative would be the UK’s ‘dynamic alignment’ with the EU’s SPS rules.’ The former possibility seems unlikely due to the above-mentioned squandering for trust; the latter has been rule out by Lord Frost as a matter of ‘fundamental principle’ (because sovereign countries don’t align their standards on other sovereign countries’). Beyond this principled reason for the UK to refuse alignment, a more ‘pragmatic’ one is the fact that that it might limit the UK’s ability to conclude trade deals with other countries. The US FTA is particularly often invoked as a stumbling block to a solution in NI, because alignment with EU SPS standards would mean the UK could not offer any concessions on that front in its trade negotiations with the US. The UK government adopts hence a ruthless approach that consist of insisting on non-alignment with EU rules and accepting the risk of a flare-up of violence in NI, in the hope of concluding a trade deal with the US.

Here, recent developments in the US are interesting. On Tuesday, the US Senate’s foreign relations committee passed a resolution reaffirming its ‘unwavering support for the Good Friday Agreement (GFA).’ Together with Biden’s unhurried approach to an FTA with the UK, the US insistence on peace in NI suggests that the US may not be willing to sacrifice the GFA on the altar of an FTA with the UK. Conversely, the UK’s ruthless approach most definitely harms UK’s ability to solve the NIP issues in cooperation with the EU. Indeed, the UK government seems to continue to slowly manoeuvre itself into a lose-lose situation in NI.

Free Trade Agreements (FTAs) with Australia and India

The other big news this week was that the UK is moving closer to agreeing the terms of a trade deal with Australia. This is a development I would not necessarily have thought possible a few months ago. The same goes for the India Trade deal, which some experts now consider a real possibility.

Am I one of Alan Sked’s ‘idiot Remainers’ who doesn’t get it? Perhaps, but the reason why I did not get it is that I underestimated the UK Government’s ruthlessness. In international negotiations, governments tend to try and protect their citizens from possible negative consequences. Since the impact of trade liberalisation is complex and can be extensive, governments tend to be careful and negotiations are protracted and difficult. Not for this government. This government confidently enters negotiations seemingly without any red lines, willing to essentially agree to anything (e.g. an Irish sea border, or zero tariff, zero quote agreements in deals with farming super-powers). If you are entering negotiations without any red lines, willing to happily throw your citizens under the bus, then of course you can have a trade deal with any country in the world.

What should make us think though is, why do other governments – or the EU – not adapt such a ruthless approach to concluding trade deals? Partly the reason is due to concerns about the trading partner’s environmental or human rights record (e.g. the EU decided this week to freeze an investment deal with China over human rights concerns). Partly, governments listen to local producers – legitimate or not – concerns about liberalisation.

The UK government does not have any such qualms. Unshackled by any concerns for human rights, environment, or its population, the UK government is on track to become very efficient in concluding FTAs. (Whether that is a good thing for the country or the environment is of course a different question.)  Ruthless politics towards British citizens is a key element in this strategy.

The prospect of a trade deal with Australia has caused anxiety with UK farmers. The SNP has warned against the impact a zero-tariff trade deal with Australia would have on Scottish family farms due to the prospect of the UK market being inundated with cheap, industrially produced meat. The SNP has warned the Government of what they would consider a ‘blatant betrayal’ of Scotland’s farmers. Similarly, the National Farmers Union (NFU) president Minette Batters warned the government that ‘throwing farmers under the bus’ would go against the goals of the ‘levelling-up’ agenda, which aims to reduce regional inequalities. Mark Drakeford, labour First Minster of Wales, asked “how can our hill farmers compete with the space that is available for the huge farms that they have in Australia? How can we compete when our standards of animal welfare and environmental standards different and are higher than they are in Australia?”

While the government seems divided on the matter (Michael Gove and Environment Secretary George Eustice reportedly defend the interests of UK farmers), the Prime Minister rejects any concerns with his usual pompous but vague arguments about ‘massive opportunities’ to export British products to the other side of the world and thus making up for the lost access to the EU single market. The PM likes to shame those who are ‘frightened of free trade.’ And Brexiteers attribute farmers’ very real and legitimate concern for their livelihoods to producers’ ‘vested interests’ or lack of ambition.

Would an FTA with Australia that contains zero tariff zero quota rules for agricultural exports really destroy UK family farming? The honest answer is that we do not know. There are models that show that it would be difficult for UK farmers to compete with the more efficient Australian farming sector (due to lower standards, more industrialised and intensive farming methods, and larger size of farms). On the other hand, trade experts point out that it is not certain that Australian farmers would choose to flood the UK market with cheap lamb and beef. There is at least the theoretical possibility that they would instead opt to export higher-end products to the UK, putting thus less pressure on prices in the UK market.

So, the impact of an FTA with Australia would not be known until well after it comes into force. But the important point here is that the UK government is happy to give it a try and see what happens without listening to UK farmers’ or environmentalists’ concerns and suggestions (e.g. to keep at least quotas). This government is perfectly happy to throw an important part of its population under the Brexit bus for a very small and uncertain payoff (the government’s own estimate of the benefit of the AUS FTA is a very small positive effect of around .01 or .02 % on GDP growth).

These ruthless politics in the area of FTAs are explained by the fact that for the government concluding FTAs is no longer a means to achieve and end (increasing the UK’s economic prosperity), but an end in itself. FTAs are mentioned in the 2019 conservative manifesto as the ultimate goal not a tool. The Conservatives want to have 80% of UK’s trade covered by FTAs. It does not seem to matter what the substantive content of these FTAs is and at what domestic price they were bought (“quantity over quality” as one analyst has suggested to call this approach). It is part of the symbolic politics of Brexit that substance does not matter anymore. What matters is showing the world that we can go places where the EU cannot (or chooses not to!). It is about proving wrong the Remainers who doubted we could get a trade deal with India, Australia, the US. The pro-Brexit press also follow this approach and have started announcing new trade deals (usually already before they are actually concluded) with a bold headline and a large number estimating the ‘value’ of the deal (but without any analysis of who wins, who loses from the deal). For now, this seems to be sufficient to keep the pro-Brexit half of the country content. I am reminded of a scene – fictitious or based on real events, I’m not sure – in Netflix’s The Crown that depicted people in council estates chanting ‘Maggie, Maggie!’ in the streets upon the announcement of the UK’s victory over Argentina in the Falklands War. However economically or geopolitically irrelevant the Falklands were; no matter how pointless a war over a small archipelago in the South Atlantic was, the fact that we won it is what matters. In the post-Brexit climate, I can imagine similarly people dancing and chanting in the streets upon the announcement of an FTA with Australia, China, or the US. That’s how far we have moved away from problems- and issue-focused policy-making into the realm of symbolism and identity politics where the main thing is to prove to the world that Britain still is a global power.

Beyond that Brexit does not and cannot deliver anything. Brexit always simply was a tool for a number of would-be politicians – from Sked, to Johnson, to Gove, to Frost, to Farage, to Rees-Mogg – to advance their political careers. There never was any plan. There never was any believe in it actually working. It was a tool for a part of the right-wing elite to compete for power with other members of the right-wing elite. Now that they have achieved their goal of conquering power it becomes apparent just how power-hungry, reckless, incompetent, and mediocre they are. All they can offer is ‘ruthless politics.’ That sort of politics is useful for them to stay in power for some time by scoring quick political points, but ultimately will turn out to be a double-edged sword that will wreck the basis for any sustainable post-Brexit relationships between the UK and its allies and trading partners.

Brexit Impact Tracker 15 May 2021 – An unsustainable situation…and how we will eventually get out of it

This week’s Brexit-related news were dominated by the continuing change in the political landscape due to Brexit. With the Queen’s Speech, the UK government revealed its legislative plans for the first post-Brexit parliamentary year and the DUP elected a new leader after the downfall of Arlene Foster over the Northern Ireland Protocol (NIP).

Yet, what I found particularly interesting this week is an increasingly wide-spread acknowledgement that the current relationship with the EU – based on the Trade and Cooperation Agreement (TCA) and the NIP – is neither stable, nor sustainable, nor settled. It is not surprising to hear that from critics of the government’s handling of Brexit. But this week Lord Frost himself acknowledged that the NIP is unsustainable. This is actually a remarkable development. Of course, in the Brexiteers’ universe, the TCA and the NIP have now become a victory for the EU and the biggest sell out in a generation. But we should not forget that it was Johnson’s – and hence Frost’s – preferred alternative to Theresa May’s backstop. It is a protocol that the UK government negotiated, agreed, signed, and sold to the British public as part of the ‘have-your-cake-and-eat-it’ deal that Johnson miraculously secured for the country. That was of course always going to be an illusion, but the person at the heart of Johnson government’s post-Brexit UK-EU relationships admitting as much should raise eyebrows. Lord Frost acknowledging it is de facto an acknowledgement of his failure in the negotiations with the EU.

Except, of course, that in post-Brexit Britain, the discourse of a strong, sovereign country that has regained its freedom and power, can live alongside the continuing discourse that we are still being ‘shafted’ by the EU, as a DUP MP recently put it. So, the UK is at the same time a World Power that does not have to fear anyone and can fend for itself on the world stage and a victim of continuing EU bullying. The fact that a large part of the population does not seem to find this dual narrative inconsistent and unconvincing, shows just how well the Brexiteer propaganda works.

Brexit Propaganda: The ‘Brexit Boom’ according to the Express

Reading through pro-Brexit newspapers always feels like entering a different reality. Chief among the Brexit cheerleaders, the Express ran an article following the Queen’s Speech on Tuesday, which announced that “Brexit boom starts now: SEVEN new laws announced to exploit UK's freedom from EU.” The seven (actually there are only six listed as the NI contributions bill is listed twice) laws referred to were the Subsidy Control Bill, the Procurement Bill, the National Insurance Contributions Bill – mentioned for creating “Freeport's in England to increase investment, trade and jobs” and once for helping “employers access professionals across the world to fill vacancies” – the Planning Bill, the Turing Scheme, and “an unspecified Bill” on animal welfare. The article does not explain how any of these will lead to a ‘Brexit Boom,’ other than the usual libertarian argument that “Bureaucratic EU red tape will be scrapped, and new international markets for trade will be opened to help with the economic recovery.”

Beyond the usual involuntary Brexiteer irony in the article (e.g. celebrating a bill that essentially aims to make immigration to the UK easier), the victorious tone about post-Brexit realities largely ignores evidence to the contrary. Thus, the benefits of free ports have been questioned by most experts (for shifting the location of investments rather than generating new investments as well as for creating opportunities for money laundering). Also, it has recently come to light that the newly negotiated trade agreements with 23 countries contain a clause that will make it impossible for firms producing in one of the new free ports to benefit from these FTAs.

The Express also regularly runs articles announcing the new trade and investment deals discussed with various countries – before they are actually concluded – e.g. most recently reporting on the discussions with Canada under the headline : Vindicated at Last! Mega £17bn deal looms – as fishermen celebrate new record.

(Incidentally, the record level of exports of Scottish salmon to the EU mentioned in the article’s headline also requires some contextualisation and nuance: The Scottish salmon producer organisation reported a 74% increase in exports to the EU during the first quarter of 2021 compared to first quarter of 2020 – but with MORE red tape and at an extra cost for producers. So, the right way to interpret that news story is that demand inside the EU for Scottish Salmon has increased (which in all likelihood has nothing to do with Brexit). Brexit does not prevent Scottish farmers from satisfying that EU demand (thanks to the TCA – as opposed to a no deal situation). But it is more costly and more difficult to do so after Brexit than it was before, because Brexit has created extra red tape and costs and therefore reduces the profitability of Scottish salmon farmers (which has everything to do with Brexit)).

The Express’s triumphant reporting on anything Brexit related, may of course soon be hit by reality. Indeed, while the Indian Covid19 variant may slow down – or even reverse – the return to normality, as restrictions start easing, post-Brexit Britain will discover new ways in which Brexit has changed our lives and reveal additional ‘unsustainabilities’ in the current arrangements, beyond the ones we already know about; most importantly the NIP.

NIP – Shifting the political landscape towards confrontation?

The fact that the NIP is unsustainable and a threat to the Good Friday Agreement has been patently clear for some time. Now, pressure is mounting to find a solution to the issues surrounding the NIP, as politicians fear that the fragile situation could further escalate when the Protestant ‘marching season’ starts in June. This week, the UK has replied to the EU Commission’s letter from March initiating legal action over the UK’s unilateral extension of ‘grace periods’ for border checks. It is not clear what the response contains, but the EU’s reaction to it could either contribute to diffusing tensions somewhat or add a further complication to an already complicated situation.

Pressure to find a solution is also mounting with Edwin Poots’ election as the new leader of the DUP. While NI politics are too complex to allow any simple analyses, Poots’ leadership may very well lead to a further hardening of unionist position over the NIP. Indeed, given suggestions that Poots shares responsibility for the NIP in its current shape, he will be keen to mark a clear break with his predecessor Arlene Foster and take a hard line on the protocol. This will limit the UK government’s leeway in renegotiations with the EU.

It is currently not clear where the renegotiations are at, but a key roadblock on the way to a solution seems to remain unsolvable: The UK insists on a ‘risk-based approach’ to sanitary and phytosanitary (SPS) checks. It also wants an ‘equivalence regime,’ whereby both sides recognise each other’s rules as not aligned but achieving the same level of consumer protection. The EU, on the other hand,  insists that it cannot create a precedent for other third party states by exempting British goods from complying with EU rules. On the British side, business start putting pressure on the  government to align its SPS rules on the EU’s in order to solve the problems around post-Brexit trade. Yet, given the government’s focus on ‘sovereignty,’ accepting such a unilateral alignment is of course impossible. It would also limit its leeway in negotiations of FTAs with other countries, most importantly the USA where considerable concessions on SPS would probably have to be made to make a trade deal possible.

Regardless, the SPS rules are emerging more clearly as one of the ‘unsustainabilities’ built into the post-Brexit ‘eat-your-cake-and-have-it’ arrangements under the TCA. A UK-EU SPS agreement will be necessary, but it will will not be easy to negotiate.

The return of normality and the true impact of Brexit

Another ‘unsustainability’ that will very likely soon rear its ugly head is the sheer unbelievable neglect of services in the TCA. Given that the UK is a heavily service-based economy, with service making up around 70% of GDP and nearly half of its exports, it seems reckless not to have included the relevant sectors in the TCA. So far, the impact of Brexit on this important economic sector has been tempered by the Covid19 pandemic. But as service companies are preparing for the easing of restrictions, more and more evidence emerges for the severe disruptions caused by Brexit. As the FT shows, they can be classified into (at least) four different categories: First, there are the direct restrictions to provide services in person or remotely in EU members states, due to limitations to the number of days a third country national can work in any given EU members state or the non-recognition of professional qualifications. Secondly, there is the opposite problem of the difficulties that UK immigration rules posit to UK-based firms when they seek to hire EU nationals to provide services in the EU (e.g. an Italian speaker to service the Italian market). Thirdly, this then has knock-on effects in terms of creating disincentive for EU nationals to buy UK services (e.g. refraining from hiring a band from the UK for a festival due to the red tape and costs associated with obtaining work permits). Fourthly, this situation will create disincentives for foreign companies to set up operations in the UK to service the EU market. On the latter, there is already clear evidence emerging that the UK has become less attractive for Foreign Direct Investment due to its lost position as an English-speaking country from where the EU market can be served without restrictions.

Once the pandemic is over, the full impact of this quadruple blow to UK services will start to become clear. It will also become apparent that the current arrangement is hardly sustainable in terms of the costs and red tape it imposes on UK services firms. So, unless the government is really willing to sacrifice one of Britain’s key competitive advantages on the altar of sovereignty, the negotiation of a services agreement with the EU seems inevitable.

(Re)negotiating with our ‘European Friends’

These unsustainabilities clearly show that nothing has been solved with the TCA and the NIP. Urgent renegotiations of the NIP, the SPS rules, financial and other services will be necessary to create a more sustainable basis for UK-EU relationships.

However, in order for such renegotiations to be successful, a good relationship between the negotiation partner seems key. Especially if the UK government want to convince the EU to consider the use ‘equivalence regimes,’ which are based on the two partners trusting each other’s regulatory and legislative standards. Such trust is undermined by the UK government on a daily basis because of its confrontational approach to virtually anything concerning the EU.

Indeed, this week has brought more news about the deteriorating UK-EU relationship. The tense relationships with our ‘European friends’ – to use Johnson’s cynical term – start affecting the UK’s negotiating position. Thus, France has threatened to block an agreement on financial services over the fisheries dispute. Similarly, the reports about the treatment of EU immigrants in UK immigration centres have sparked concern in the EU, further reducing any post-Brexit goodwill the UK can expect from the EU.

As long as the UK government remains stuck in a ‘culture war’ where nationalist posturing prevails over solving real economic problems, the prospect of finding sustainable and mutually beneficial solutions for the post-Brexit ´unsustainabilities’ seems remote.

A look into the crystal ball

It’s impossible to predict what arrangement will emerge to replace the TCA and the NIP, but it is a bit easier to predict how it will emerge. What needs to happen and what eventually will happen is that people will get tired of the false promise of ‘sovereignty’ (you can’t eat sovereignty!). They will then want to see progress on actual social and economic issues they are facing. When this ‘return to reality’ – as I called it in last week’s post – happens, the realm of the politically feasible will shift. Rather than being debated and decided in the arena of the ‘noisy politics’ of nationalist posturing for the benefit of the domestic electorate, a space will open up for the ‘quiet politics’ of substance-focused policy making. This will also mean that businesses will have it easier to voice their concerns over the current arrangements and to be heard. Business influence over politics is of course not an unmitigatedly desirable thing (as the lobbying practices around Greensill Capital and the PPE procurement illustrates). But representation of sectoral interests through business associations or other formalised channels (as opposed to personal connections to people in power) is important in any advanced capitalist economy for policy makers to formulate policies that are based on economic realities and knowledge of any given sector. Moreover, in the current context, business influence over policy making would almost certainly also imply a return to reason.

An increasing number of academic studies show that economic actors have been surprisingly indecisive and ineffectual in representing their interests in the Brexit process. Including the City of London. This is partly, because before 24 December 2020 none knew what Brexit would look like. While businesses in some sectors (e.g. logistics) did perceive Brexit as a threat, others saw opportunities, e.g. due to the promise of far-reaching deregulation. As Brexit reality kicks in (e.g. in terms of further shifts of derivative trading away from London), businesses and their associations will start discovering how exactly they are affected by the new arrangement. This may soon lead to more decisive mobilisation of some sectors in favour of a new UK-EU arrangement. The preferred arrangement of many businesses is likely to be a closer alignment with the EU than the current one. Indeed, it seems difficult to imagine that businesses will accept being cut off the largest market at their doorstep forever in the name of sovereignty.

Of course, this will also lead to a resurgence of anti-EU sentiment and possibly a resurrection of UKIP. Indeed, some Brexiteers already warn of a return of Brexit in Name Only (BINO) and urge the government to more decisively diverge from EU rules. But the more the impact of Brexit becomes visible, the more having to make the case for a hard Brexit a second time will be difficult given that people now have had a taste of what Brexit reality is like.

Brexit Impact Tracker - 8 May 2021 - Mad May: Gunboat Diplomacy and the Firm Grip of Nationalism

It has been another eventful post-Brexit week. I have blogged about the Johnson government’s gunboat diplomacy attitude in international trade negotiations before. I did not expect that analogy to become reality. But this week the government actually did send navy vessels to “resolve” a row with French fishermen who attempted to block the Port of Jersey over post-Brexit fishing licences! This episode, while materially rather trivial (except of course for the fisher(wo)men whose livelihoods depend on the licences), constitutes another stark reminder of the type of post-Brexit foreign policy the Johnson government privileges.

The other big Brexit-related news were the local elections on Thursday and the Hartlepool by-election, which was considered a major test for Kier Starmer’s leadership of the labour party and the popularity of Johnson’s government. In England, the Tories emerge as the big winners from this electoral test – which speaks volumes about the perception in the population of how Brexit is going.

Taken together, these two events show just how much Brexit has shifted the (domestic and international) political landscape in the UK.

Why do people like the Johnson government?

It became quickly clear on election day May 6th that what labour supporters had feared, and conservatives hope had become reality: Hartlepool had elected a conservative member of Parliament for the first time in nearly 50 years. And it was not a close victory either: Jill Mortimer received nearly twice as many votes as Labour’s Paul Williams. The conservative victory is a major blow to Kier Starmer’s attempt to recover from Corbyn’s historic defeat in the 2019 General Election. Seeing another ‘red wall’ constituency turn blue is particularly significant, because Corbyn cannot be blamed anymore, Brexit has now become a reality, and incumbent governments tend to lose by-elections.

To many of us Johnson government’s popularity is astonishing. We are at the tail end of a pandemic that has so far claimed 127,598 lives in the country (on7 May 2021 6:45pm BST). The fifth highest death toll world-wide; topped only by the US, Brazil, India, and Mexico. The PM’s personal integrity is once again in question, with the Electoral Commission currently investigating the financing of the renovation of the PM’s Downing Street flat. Plus, Brexit – while not the cataclysm that it could have been in a no-deal scenario – has fallen short of all the promises (e.g. about frictionless trade), as this and other Brexit blogs illustrate regularly.  

And yet, the more I read about and around Brexit, the more I think I understand why people vote leave and why – even once the Brexiteers’ promises can be compared to reality – they continue supporting the Brexit government. Here is my explanation.

Brexit: A promise not yet broken?

The first key element in understanding why people continue to think Brexit was a good idea and therefore continue supporting Johnson’s government has to do with the subjectively lived reality post-Brexit. There is much evidence that shows that Brexit is hitting UK companies hard (60% report facing difficulties) and that optimistic predictions about the post-Brexit perspective of industries like Fishing have quickly evaporated. Yet, this does not mean that people perceive Brexit as a disaster for their everyday lives. Indeed, a recent survey by Ipsos Mori finds that 69% of people feel Brexit has made their daily life better or made no difference. Only 28% felt it had made it worse. Partly this is due to the fact that Brexit will take time to filter down and start affecting individual living standards. Partly, it is also due to the fact that from a leave voter’s perspective Brexit may actually work.

Indeed, to understand why people are quite happy with the Johnson government we need to remember why people voted leave in the first place. Here, immigration played a key role in the Brexit vote. Indeed, after the economy and ahead of ‘sovereignty,’ immigration was the second most important issue that made people vote leave.

As with any Brexit-related outcome it is really too early to know what the impact of Brexit on immigration will be in the medium- and long-run. Yet, for now immigration is probably the one aspect where Brexit may look like it has delivered on its promise. Recent figures show that in the past year, the UK has seen the largest population decrease since WW2. While the effect of the Covid19 pandemic and of Brexit are confounded here, there is ample evidence that Brexit is part of the story, especially where the reversal of immigration from Eastern Europe is concerned.  This may be bad news for the UK economy in the long-run (because it relies on immigrant works to keep prices and inflation low). Yet, for someone who voted for Brexit in order to ‘take back control’ of our borders, this may certainly sound like good news (even though after years of trying to get rid of immigrants, the pro-Brexit press doesn’t hesitated to blame EU citizens for refusing to return to the UK to work in hospitality after the lockdown).

Holding the Purse Strings and ‘Levelling up’

Another key issue motivating voters to choose ‘leave’ over ‘remain’ in the 2016 referendum was the concern with a lack of investment in local public infrastructure and services and the promise that leaving the EU would somehow free-up funds to increase such investments.

Here, the government’s ‘levelling up’ agenda to redress regional economic inequalities is a crucial element of the government’s post-Brexit strategy. The levelling up agenda has been criticised for being a slogan rather than a clear and substantive policy programme. However, the government has used its control over the treasury and over the civil service to make some symbolic investments in northern towns. Thus, in March, Chancellor Rishi Sunak approved conservative Mayor of Tees Valley Ben Houchen’s bid for a ‘free port’ that includes Hartlepool. This decision was hailed by the Mayor as marking the “the day Teesside, Darlington and Hartlepool was reborn as an industrial powerhouse.” He promised the ‘free port’ had the potential to create 18,000 jobs in the next six years.

These sort of investment decisions by the conservative government have been increasingly criticised by academics and journalists, who found evidence that funding decisions are skewed towards marginal conservative areas rather than areas most in need of investment.

For the leave-voting majority of people in Hartlepool, however, the Johnson government’s decision means that there is hope. Moreover, while it is not true that free ports are only possible thanks to Brexit, voters in Hartlepool certainly are told that this is one of the great benefits resulting from their Brexit vote. So, why wouldn’t they vote for the government that supposedly made all this possible, when voting labour for 50 years did not halt the industrial decline of their town? Whether or not Labour directly responsible or the decline, is of course another question, but from the voters’ perspective, there seems little risk in supporting another party now that there is an alternative; which brings me to my next point.

New Toryism: There is an alternative!

Another key element in the Tories electoral successes since 2019 is labour’s flawed strategy to run ‘the same old campaign against the same old Tories, and to keep on losing because Britain doesn’t have the same old politics, or the same old voters’ as Rafael Behr aptly put it. Labour does not seem to understand one thing that red wall voters do understand, namely that Johnson’s Tory party is a very different proposition than Michael Howard’s, John Major’s, or Margaret Thatcher’s Tory party. The latter may have been unelectable for many working-class voters in the North of England. Yet, with Brexit the Tory party has been taken over – some would say hijacked – by a very different type of politicians who stand for a very different type of policies. The European Research Group (ERG), whose power over the party has dramatically increased due to Brexit, is an ultra-conservative group within the party, which pushes for a nationalistic line. But Johnson’s leadership has also made space for a move away from ideological conservative monetary, financial, and economic policies, towards more pragmatic and even state interventionist ones. Here, the Northern Research Group is playing an important role.

The combination of nationalism and recovering ‘national pride’ – another important concern for leave voters in 2016 – and public investment makes for an appealing programme for many labour supporters in post-industrial regions. To be sure, for now these ideological changes have not led to a coherent and encompassing economic strategy. Yet, the fact that Tory candidates are now able to make credible commitments to public spending and investment in infrastructure in the North of England does mean that they can shed their image of a mine- closing party of the rich and thus become an electable alternative to Labour. As a first-time Conservative voter from Hartlepool – interview on Radio4’s Today Programme on 8 May 2021 (@18’) – put it ‘I want change’ and there was a ‘viable alternative, the conservative party.’

Gunboat diplomacy to win fake wars

A final factor that explains why the conservatives are doing well in elections at the moment has to do with a strategy I blogged about before, namely fanning nationalist sentiment by framing any Brexit-related policy issue in cultural, identitarian terms of ‘us versus them.’

The government and the pro-Brexit press blames anything that does not go well on the EU and frames any decision by the EU or its member states that displeases the government as ‘punishment’ for leaving. This stokes popular resentment against the EU and allows the government to portray itself as fighting a war against the EU rather than trying to establish a collaborative relationship. This fake war the government has created is one that – of course - one that it is winning ; not just on the fisheries front with gunboats off Jersey, but also on the ‘vaccine war’ front.

This strategy continues to work well for the conservatives with many voters rallying around the flag, making everything else seem secondary – including the scandals around the PM’s finances and questionable behaviours.

‘Reckless and irresponsible’

Conservative supporters may be tempted to support the government’s approach to managing its post-Brexit relationship with the EU. Afterall, so far the approach has brought both electoral support at home and some successes with the EU. Thus, the EU has signalled flexibility with the implementation of the Northern Ireland Protocol, which some may be tempted to see as a sign that playing hardball is working.

Of course, quite the opposite is true. Indeed, the Government’s approach to its relationship with the EU and its members states is ‘reckless and irresponsible’ (I’m borrowing here a phrase the PM has used referring to a possible indyref2 – the irony!). While grand standing and posturing may allow the Tories to score points domestically, the impact on the relationships with our trading partners and allies should not be underestimated. The government sets the tone for interactions, which can quickly lead to lose-lose tit-for-tat strategies and escalation. For instance, this week the EU Commission recommended to reject the UK’s bid to join the Lugano Convention. Similarly, the French maritime minister’s threat to cut Jersey’s power supply over the fishing licence row, for instance, illustrates that silly provocations may be met with similarly silly responses. The worrying escalation of tensions between the Trump administration and North Korea may serve as an illustration how quickly such posturing can become very dangerous.

 A lasting ‘northern realignment’?

Does all this mean that Brexit is shifting the political landscape in a way comparable to the Democrats in the the USA essentially losing the South to the Republicans after 1964? Has Brexit brought about a ‘Northern Realignment’ that will see northern England and the Midlands turn blue for the foreseeable future? Nothing is less certain than that. Both the 2019 General Election and the local elections this week are still fundamentally Brexit-related elections. Brexit politics have proven a powerful force, but their effect will wear off eventually. Looking at the conjunctural factors explaining this week’s results can shed some light on this question.

The incumbent “jab bonus”

One thing to note is that while the local and byelections in England have been disastrous for Starmer’s labour party, they did much better in Wales. Here the incumbent labour First Minister Mark Drakeford held on to his post. Given the SNP’s victory in Scotland, one interesting fact of the local election is that in all three nations the incumbent party managed to cling on to power. This is quite astonishing, but largely explained by the ‘jab bonus:’ The successful roll out of the Covid19 vaccination programme in the UK has increased support for the parties in charge of handling it in the three nations. The above-mentioned first-time Tory voter from Hartlepool mentioned the successful vaccination roll-out as the key reason he chose to switch from labour to conservative. The vaccine programme lends the Johnson Government an air of competence which is reassuring in a pandemic and will have led many voters to give the conservatives their vote.

The ‘jab bonus’ is very significant: Even 20% of the remain voters surveyed by Ipsos Mori consider that Britain was ‘able to respond to the Covid-19 pandemic better’ due to Brexit. That’s in spite of the fact that the UK is the European country with the highest death toll. The vaccine success since January makes all this forgotten and becomes a post hoc argument for Brexit that even seems to convince a considerable number of remain voters. Yet, this is of course not a long-term shift that will hold on beyond the pandemic.

Brexit demographics

Another reason why the shift to the conservatives in the North of England may not be as permanent as many commentators predict or fear, is the above mentioned fact that what is happening right now is still ‘Brexit politics.’ Professor John Curtice observed on Radio4’s PM Programme (7.5.2021) that heavily leave voting constituencies have seen a double-digit shift from labour to conservatives, but remain areas have not seen such a shift. In other words, the conservatives are seen as the new Brexit party and therefore anyone who wanted Brexit is currently more likely to give them their vote than Labour who has been vague and unclear about its position on Brexit.

Yet, we should remember what the demographics of the leave vote were: Leave voters were to a very large extent older and even elderly voters, while the young overwhelmingly voted for remain. Any credit for Brexit and hence support that the conservatives are currently enjoying in former labour heartlands may therefore be temporary phenomenon in that respect too. Eventually, the conservatives will not be able to rely on the reputation of being the actual Brexit party, but will need to mobilise sufficient numbers of younger voters. This will mean attention will have to shift to addressing real problems.

The return of reality? Actual policies to address actual problems

While the handling of the vaccine role out and the still to be tested promise of the levelling up agenda has bought the conservatives time, eventually people will want to see the economic promises turn into reality. If that does not happen, support may crumble again.

In this area, I am sceptical the Johnson government is currently lying the groundwork for future electoral victories. As mentioned above, the levelling up agenda (or ‘slogan’) has not been translated into any clear and comprehensive policy.

Similarly, the second important leg of the government’s post-Brexit economic strategy is the conclusion of free trade agreements (FTAs) around the world. However, as I argued in a short piece on the Encompass web page this week, the government’s free trade strategy is completely disjoint from any domestic industrial strategy. Indeed, earlier in the year, the government decided to drop the industrial strategy elaborated under the May government in 2017. It seems very doubtful that a free trade strategy that does not go together with a plan for how to make companies competitive in the – supposedly more competitive – post-Brexit world economy will make up for the impact of Brexit on the UK economy. The FTAs that the government has promised will only be possible if the UK grants the trading partners access to the UK market. This may put more pressure on non-university educated workers in heavily leave voting areas, rather than solving their economic concerns.

Given the absence of an actual plan for economic policy, when economic reality – rather than hope and promises – moves back up on the voters’ priority list, the conservatives may be caught wrong-footed. The Brexit campaign was dominated by win-win arguments about more sovereignty and economic gains. Currently, whenever the reality belies the win-win outcome of Brexit, Brexiters change tack and argue instead that the gain in sovereignty is worth the economic cost. Yet, as Chris Grey pointed out this week, “If Brexiters want to justify themselves in economic terms, then they can’t use ‘priceless’ sovereignty to escape a proper accounting.” In particular, once young people in the former industrial labour heartlands will grow impatient for the promised economic benefits of Brexit to materialise, the ‘pricelessness of sovereignty’ may sound like a cynical rhetorical stunt that drives new-found voters away from the conservatives.

For the opposition parties, that shift from patriotic jingoism back to economic realities cannot come soon enough, because very few of them have any chance of beating the Tories at that game. The one exception of course is the SNP in Scotland. It is no coincidence that this nationalist party continues to thrive (although narrowly missing out on an outright majority in Thursday’s Holyrood elections) in the current climate.

Brexit Impact Tracker – 1 May 2021 – Little people, big responsibilities

Trade continued to be trending amongst the Brexit topics this week. Most importantly, the EU Parliament finally – and clearly grudgingly – ratified the Trade and Cooperation Agreement (TCA). TCA is now officially the basis for trading relationships between the UK and the EU for the next five years.

It is to be hoped that the ratification will encourage both sides to work on a constructive relationship. There were some encourage news in that respect. Thus, it also emerged that the UK would finally recognise the EU ambassador to the UK – ending a childish manoeuvre that had created bad blood for no good reason. There were also news that – despite continue problems with red tape at the UK-EU borders,  trade was down merely 2 per cent in March 2021 compared with March 2020, which constitutes a recovery from February figures (these figures are based on the amount of traffic however, not the amount, type, or direction of goods that are being transported between the UK and the EU).

Politically,  turmoil in the Democratic Unionist Party (DUP) in Northern Ireland and the various scandals surrounding the Brexit government have made the question of political accountability and responsibility for Brexit rise to the top of the news cycle. An issue that has gained further relevance due to more and more groups in society speaking of their betrayal by the Johnson government, most notably this week fishermen.

Fisheries: Taking back control in a multilateral world

Last week, angry French fishermen told British fishermen to ‘keep their fish.’ This week ended with the Norwegian government telling the UK government that they want to keep theirs. Indeed, the week finished with some really bad news on the trade agreements front. On Friday morning the media reported the breakdown on Thursday night of negotiations between Britain and Norway over access to each other’s fishing waters.

The breakdown of negotiations means UK fishermen have no access to Norwegian waters for the rest of the year. Radio 4’s Today programme on Friday 30th April interviewed Jane Sandell – CEO UK Fisheries Ltd in Hull – who owns the long-distance trawler Kirkella and is particularly reliant on cod-fishing in North Norwegian waters. UK Fisheries Ltd declared on its web page that the UK government has just sunk the ‘British distant waters fleet’ leaving hundreds of crew members out of work.

What Sandell had to say (BBC Radio 4, Today 30 April 2021 at 6:16am) was both heart-breaking and very revealing of one of the key features of the Johnson government. Namely, that – in spite of all the populist rhetoric, the ‘one-of-you’ theatrics, and in spite of making fisheries THE key sticking point over which the government seemingly was willing to sacrifice a Brexit deal – when it comes to it, the last thing the Johnson government cares about is the ‘ordinary (wo)man’ (as Chris Gray has nicely illustrated this week referring to that photoshopped Bullingdon Club photograph).

Sandell’s interview illustrates what ‘ordinary people’ are facing after Brexit. She said to be completely surprised and shocked by the ‘absolutely devastating’ news, which meant her fishing opportunities were 60% down due to the failed negotiations. She continued “We just don’t understand why the Government has failed our crews. […].” Asked about the future of the Kirkella, she replied: “What would anyone do with a multimillion-pound investment? We can’t leave it there in the hope the Government - that so badly let us down – does something. […] At the moment we are in total shock. We never believed that this would actually happen.”

Asked whether the government getting a deal done next year would allow UK Fisheries to keep the Kirkella, her answer was: “The government has so disastrously let us down, that, can we take that chance that they will rectify this? Defra has failed to deliver on all of the deals that we’ve previously had through the EU with countries. So, Faroe and Norway the deals have failed. Greenland they didn’t even bother starting. […] The Secretary of State needs to be explaining to each and everyone of the crew exactly why they have been let down so badly and why they don’t matter.”

These strong words are striking. But the full extent of the feelings only becomes clear when put in the context of the optimism that UK Fisheries and other Humber voices expressed before Brexit, about the opportunities presented by leaving the EU. In an article in the Hull Daily Mail, from June 2018 – a month before the Kirkella was delivered – the same Jane Sandell is quoted as ‘hailing a bright future’ for her company and the UK fishing industry. In 2018, the paper explained: “As a member of the European Union, the UK currently has to rely on negotiators from Brussels to determine the amount of fish it can catch in Norwegian waters. Outside the EU, ministers will be able to strike their own quota deals with Norway after taking back control of British waters.“

On April 30th, 2021, Brexit reality has kicked in for the Hull fishing company and its crew. Ministers’ ability to strike the promised deals has been confronted with the harsh realities of the trade negotiation world outside the bloc. Here it should be noted that this episode does not involve the EU in any capacity. It was a negotiation between the Norwegian government – not an EU member – and the sovereign UK government. It will be difficult to blame the EU for the failure of the negotiations. Indeed, this was one of the many deals that was meant to show that the UK is in a better bargaining position outside than inside the EU. And yet, even when negotiating a fairly simple deal (over just one product: fish), with a country of 5.5m people, the UK government failed to reach a deal that was “balanced and in the interests of the UK fishing industry” (the government’s self-declared criterion for not walking away from the negotiations). It does make one wonder what this implies for negotiations with the USA, India, and Australia among others.

 One may argue that this is just one company – Fisheries UK Ltd. – suffering from a Brexit whose benefits ultimately will far outweigh such individual anecdotal stories. That argument, of course is not entirely false in the sense that we should not overly rely on individual cases. It will take time to systematically compile the comprehensive data needed to assess what exactly Brexit is doing to the UK economy. But for now, the negative anecdotes are ‘piling high’ to use one of the PM’s phrases.

Britain’s competitive advantages – What’s happening with services?

The lack of including services in the TCA also increasingly turns out to be disastrous for people working in this industry. Thus, in the 30 April episode of Radio 4’s Today programme (@6:20am) a UK-based conductor was interviewed about the travails that UK musicians are facing following a Brexit deal that does not cover their profession. What used to be a very straightforward thing to do while we were a member of the EU – namely go on tour in Europe – has become an administrative nightmare for musicians and orchestras. Indeed, each EU member state applies different rules for work visas, with some limiting the number of days a national from a third country can reside in the country to 90 days in any 180 days period, others to 30 days etc. Rules also vary by nationality of the person seeking the work permit, which makes – as one can imagine – the organisational aspects of a tour with an orchestra unmanageable. There are also stories of musicians having to turn down work, because they knew they would otherwise overstay their visa.

Asked whether the UK could negotiate a deal on services with the EU that would apply one rule to all EU countries. David Henig of the European Centre for International Political Economy rightly pointed out that no third country had such a deal with the EU while staying outside the single market. Indeed, the EU did not have any strong reason to seek such a deal with the UK. As the world’s second largest service exporter, the UK is ‘a super power’ and the EU will not see much benefit in granting extensive market access without receiving anything significant in return. The UK Government – on the other hand – still according to Henig – currently does not show much interest in striking extensive service deals with other countries, which is surprising – given that this is where the UK’s real competitive advantage lies - and not surprising – given the government’s (lack of) understanding the nature of post-Brexit trade world – at the same time.

Regardless, the failure of the Norway deal on fishing water access is a big blow for the people concerned and once more illustrates the lack of pragmatism of the Johnson government. Those of us whose livelihoods are not directly affected by the latest post-Brexit trade negotiations disaster may be forgiving for hoping that something good will come out of it. Namely, that another key part of the pro-Brexit faction will realise who they have put their trust in. Indeed, it may be hoped that fishermen (and women) from Devon to Yorkshire who feel betrayed by the Brexit government, will stop supporting this brand of nationalist-populist conservatism. Feelings of betrayal do seem to be an antidote against the Brexit delusion, as developments in Northern Ireland this week seem to show.

Brexit accountability 1: The Irish Sea boarder betrayal

Early in the week, it emerged that DUP members of the Northern Ireland Assembly and DUP Members of the Westminster Parliament had signed a letter of non-confidence in DUP leader Arlene Foster. By Thursday, she had announced her resignation.

The revolt against her was to an important extent attributed to her role in the adoption of the Northern Ireland Protocol, which de facto meant border checks between Britain and Northern Ireland, instead of border checks between NI and the Republic.

While some observers may feel some satisfaction about one key actor in the Brexit tragedy paying the political price for the unfolding disaster, it is far from clear whether Foster’s departure will make things better or worse in NI. The front runner to replace Foster is NI agriculture minister Edwin Poots. It is possible that he will take a hard-line stance on the NIP, thus creating further problems for the implementation of the NIP. Irish sources even consider it possible that the current Stormont assembly may break down over the issue, leading to early elections. It remains to be seen what will happen in the DUP leadership contest, but it might well be that Foster’s being held to account may make Brexit more difficult still in NI.

Brexit accountability 2? The May 6 local elections and the Brexit success

Some observers have recently expressed the view that the Johnson government may eventually be held accountable – if not for Brexit, then for breaches of the ministerial code and other inappropriate behaviours by the PM and his ministers. I see very little evidence for that happening anytime soon. Indeed, ahead of next week’s local elections, it looks like the Tories are pulling further ahead of Labour and Johnson will be rewarded rather than punished. Much of this may have to do with the successful Covid19 vaccine roll out, which really has gone very smoothly (I got my first jab last week. Well ahead of my three-year older sister back in Switzerland – not an EU member state by the way. So, no, it’s got nothing to do with the EU!).

But Johnson’s reward at the ballot box next week is not only due to the vaccine, but also because many of the people who voted for him and for Brexit remain convinced that Brexit was a success. To understand this – to me flabbergasting – assessment, I have tried to read through some articles by Brexiteers published this week.

One Billy Stokes – writing for the Conservative Woman – penned an op ed entitled ‘A common man’s fanfare for Brexit.’ The author summarises his reason for supporting Brexit in the following way “‘How can 28 countries, all different socially, economically, historically and culturally, fit into one rulebook without the strong bullying the weak?’ He goes on to suggest, that the reasons why the EU cannot work is human nature and in particular the tendency of the stronger to bully the weaker. The – involuntary? – irony in the piece is priceless: here is someone justifying their support for Brexit and – presumably – for Johnson – the PM who refused to sack one of his senior minsters despite evidence of bullying – with an aversion towards bullying!

But more importantly, Stoke goes on to argue that the EU cannot function because ‘a Greek youth grows up in a different social way, with different attitudes, from a German, Polish youth or British youth. Economically the difference in development of youth into adulthood will have differing economic implications on what is important to spend money on. Yes, some similarities exist, such as smartphones and fashion, but after that a gulf in what is important for our futures comes into the equation.’ Undoubtedly, such differences between EU members states do exist;  but by that logic the UK should not exist either of course! After all, a Scotsman (or woman), a Welshman, an Englishman, and a Northern Irishman all grow up in different social ways and have different attitudes to many things. Indeed, even a person from Newcastle will have grown up with very different attitudes and economic realities from someone from Plymouth, Slough, or London. That’s precisely why political systems – such as pluralist and liberal democracies – exist that put in place protections of minorities and allow for diversity rather than requiring homogeneity.  But such a liberal understanding of democracy is of course far from a Brexiteer’s mindset, which is based on the view that any political community has to be homogenous. It is no coincidence that the Brexit government seems to value the Union so little. For Brexiteers, pluralism (or even worse ‘multiculturalism’) are aberrations. Therefore, they cannot understand them.

The answer to Billy Stoke’s question (how can 28 countries live together without the stronger bullying the weaker?) is of course fairly easy to answer in the case of the EU, i.e. unanimity voting. The veto right of every member state (however big or small) over important issues forces the big bullies to compromise and listen to the minnows. That’s one – of many – ways in which a heterogenous political union can protect its weaker members.

But Brexiteers remain unperturbed by any arguments and confidently declare victory over project fear five months after real existing Brexit. Thus, a piece in the Spiked declared that Remainers had been wrong about literally everything. The piece contains the usual assembly of statements about politics (such as the prediction that Change UK may be a success) and economics (such as predictions about post-Brexit investments) made by all sorts of people at all sorts of moments in the Brexit debate. The author then picks a handful of facts or events that seemingly contradict these predictions to conclude: “Elite Remainers thought they had a right to rule. They thought their knowledge of politics, economics and the EU made them superior. But events since the referendum have shown how divorced these people are from reality. They should never be allowed to forget it.”

Clearly, the author has had enough of experts – which he calls ‘know-it-alls’! But of course, the true expert is someone who precisely does not pretend to know it all, but is very much aware of the limitations of any predictive model. Any real expert will acknowledge the limits of their knowledge and will carefully avoid conclusions that cannot be supported by evidence at hand; any prediction will always be prefaced by a statement about margins of errors and ceteris paribus (all else equal) conditions. That’s what distinguishes an opinion from a scientific insight.

In that sense, contrary to the author at Spiked, I am pretty confident that no serious Remainer ‘know it all’ will ever have predicted that investment in the UK would drop to zero post-Brexit or that there would be a complete exodus of firms from the UK. Only if those had been the predictions, would the counter argument provided by the Spiked author that Remainers were wrong because Nissan decided not to close down their Sunderland plant and the fact that 1000 new finance firms have applied to operate in the UK since Brexit, be valid.

Of course, there will be good news stories. Nissan’s commitment to Sunderland is one of them. But even such good news stories will ultimately be affected by the new economic reality that Brexit created. Indeed the viability of Nissan’s electric vehicle plans for the UK crucially depends on the UK’s ability to increase its production capacity in batteries. The fact that Nissan’s CEO has committed to Sunderland for now is not evidence that Brexit is working. Only if the Sunderland plant is thriving in the long run; and thriving more than it would have with the UK inside the EU would that be the case.

Of course, there will also continue to be inwards investment into the UK in other areas. Indeed, new trade barriers may encourage such inward investment: Wherever the flow of goods and services across border are hampered by new trade barriers, incentives are created for firms to set up shop in the market behind the barriers to avoid them. Thus, where German firms previously may have serviced the UK market through trade from their German plants, it may now make more sense to establish a subsidiary in the UK to avoid the barriers at the border.  So, like I wrote back in February, as a large consumer market with 66m people, there was always going to be some increased incentive to invest in the UK post-Brexit.

Now, the problem is this: trade is a two-way street. The same incentives that may make EU companies choose to set up shop in the UK after Brexit, will make UK-based companies move to the EU, rather than service the EU market from their UK base.

The question for the success or otherwise of Brexit is what it will all mean on balance: Will there be more companies setting up shop in the UK, than will be leaving to establish shop inside the EU? One key factor here is the relative market size: the EU post-Brexit has a population of around 400m people. The UK has 66m. Moreover, many foreign companies established operations in the UK, because it was an English-speaking country with access to the EU market and as such an attractive location for European operations. While some of them may not be deterred by border controls and red tape, and while some may stay to just service the UK market, in future any company looking to establish operations in Europe will have one less reason to choose Britain. That will not mean an immediate collapse of the country and its economy, but it is a freely chosen competitive disadvantage that may cost dearly in the long-run.

But again, like I wrote last week, I should not even engage with these arguments about Remainers having been wrong and hence Brexit being a success. The premises is simply wrong: Even if – which undoubtedly is the case –  some Remainers were wrong on some of the predictions they made (which incidentally often were warnings about the ‘no deal scenario’, which thankfully did not come to pass and is hence irrelevant as a benchmark), that of course does not make Brexit a success. We should be measuring the success of Brexit compared to the Brexiteers promises, not the Remainers warnings.

What about the promise of frictionless trade? What about the promise of bonfire of red tape? Why did we get more red tape not less like we were promised? Why do newspapers now celebrate as a success the fact that the ADDITIONAL red tape is not having a negative effect on trade in some goods, when we were promised there would be LESS red tape and MORE trade?

But this is the reality that Brexiteers have created with their rhetorical strategy that has turned a politico-economic question into a question of identity; allowing them to shirk any responsibility for the situation we are in. Facts do not matter anymore, because it’s a question of us (the hardworking little people) versus them (the arrogant, know-it-all liberal elite). It seems impossible to convince anyone who voted for Brexit to look at the facts and listen to the arguments. Instead, we are stuck in a sterile battle of words where the same flawed arguments have to be rebutted over an over again.

Johnson and his government will not care. They are set for yet another show of electoral strength next week. He will be encouraged to continue pursuing his current strategy and behaviours both as a politician and privately. Betraying the ‘little people,’ shirking his big responsibilities and causing more damaging to UK politics, the economy and society. Unless Johnson suddenly decides that he has had enough of politics, we may be stuck with his pernicious government for a long time. Ahead of the local elections, one voter was interviewed for Radio 4’s PM programme on April 30, 2021. He said: ‘I’ve got a lot of time for Boris. I think he has done the best he can.’ Sadly, that is probably true.

Brexit Impact Tracker 25 April 2021 – Trade Deals: Johnson’s Brexit Vaccine

It has been another busy week with Brexit-related developments on all fronts, which illustrate that Brexit is far from over and that it continues to create new divisions in the UK and Europe.

French fishermen – angered by the delays to the issuing by the UK of licences necessary for them to fish in UK waters – erected blockades at Boulogne-sur-Mer to prevent lorries with fish from Britain entering France. PM Johnson was quick to deny any responsibility for the delay in issuing licences.

Tensions remain high with the EU institutions as well. The European Parliament finally set a date for the ratification of the Trade and Cooperation Agreement (TCA), but several MEPs also warned that the agreement could be cancelled if the UK continues to disregard aspects of the deal.

Closer to home, Yorkshire police reported an increase in hate crime and attributed the rise partly to Covid, partly to Brexit. On the other side of the divide, the anti-Brexit movement SODEM has announced new anti-government protests in Yorkshire and other cities in the UK once the Covid restrictions are lifted.

Problems persist at the border between Great Britain and Northern Ireland, with a group of ponies stuck at the port for several weeks making the headlines, while the demand for veterinarians – needed to carry out border checks – is soaring.

In Scotland, polls ahead of the Holyrood elections in May, suggest that Brexit has pushed a large number of Scots to support independence. 51% of the people polled said they supported the SNP’s proposal for independence and re-joining the UE.

All this indicates that Brexit continues to create divisions in the UK and beyond.

Trade Deals: Johnson’s Brexit Vaccine

What stuck out this week, however, is the importance that the topic of free trade agreements (FTA) has started taking in the post-Brexit debate. That is not surprising, of course. For PM Johnson, FTAs are to Brexit, what the Covid19 vaccine is to the Pandemic: Success on that front will make forgotten – so the PM will hope – the botched initial government handling of the issue. People who have lost loved ones in the pandemic may not easily forget the botched Covid19 response, with Johnson’s reckless approach to the pandemic in early 2020. The public at large, however, will soon only remember the successful vaccination campaign. The same holds for Brexit:  Whatever happened in January to the promise of ‘frictionless trade;’ whatever promises Brexiteers have broken since 2016, if FTA agreements can be signed that make up for the loss of access to the EU’s single market, all this will be forgotten. Therefore, FTAs are Johnson’s ‘Brexit vaccine.’

This week brought mixed news on that front. The week started with a bizarre episode of leaked disparaging comments that Trade Secretary Liz Truss is said to have made about her Australian counterpart Dan Tehan ahead of a meeting to discuss a UK-Australian FTA. Some observers saw this as part of a ‘trade bullying’ negotiation tactic, although it is far from clear what the UK government may have hoped to achieve with snubbing one of its closest allies.

It might also be a sign of the lack of expertise in trade negotiations in Whitehall after 30 years of outsourcing of trade negotiations to the EU. The view that the Johnson government adopts an amateurish approach to trade negotiations may also be supported by news this week about the EU outflanking the UK on its trade partnership with Mexico. The UK rolled over a previous deal between the EU and Mexico in December, which was hailed as ‘great news’ in spite of the fact that a House of Lords committee found several important ‘flaws’ with the deal. Last week, the EU has concluded a new deal with Mexico that is likely to provide EU companies with significant advantages over UK companies. Nevertheless, on Friday, some outlets reported ‘major breakthroughs’ in the negotiations with Australia.

The UK-India trade deal and the promise of the ‘Indo-Pacific tilt’

The other important development regarding trade was PM Johnson’s cancelled trip to India where he was hoping to make progress towards an FTA with India. The UK-India FTA holds a lot of promise if you ask the pro-Brexit side of the debate. In particular, it is a key element in the UK government’s Indo-Pacific Tilt strategy. Therefore, the stakes are high. Yet, like I wrote last week finding common ground with India on an FTA is considered difficult given that the country has not concluded any FTAs since the 1990s.

In this context, it is interesting to see a new paper from the Institute for Economic Affairs’ (IEA) Shanker Singham on ‘The Eastern Promise,’ which provides an optimistic outlook on the likelihood of a UK-India trade deal.

Reading IEA publications always feels like a trip down memory lane; Into a time when trickle-down economics - which WB president Jim Yong Kim defined as “that assume any undifferentiated growth permeates and fortifies the soil and everything starts to bloom even for the poor” – was the dominant development paradigm and when few economists doubted that unbridled markets were the most efficient way of organising an economy. Since then, the world has changed of course. Not only was there the largest Global Financial Crisis since the 1930s, but also increasing evidence that the current model of capitalism is both creating inequality and destroying the environment. The World Bank – previously a champion of the neoclassical approach to economic development – rejected trickledown economics already in 2015. These developments seem to have passed by the IEA, which still advocates a simple approach to growth focussing on property rights and reducing trade barriers, with everything else falling into place as a result.

Based on this ‘theory,’ Shanker considers that the chances for the UK to conclude a deal with India are good. Shanker’s optimism is based on the assessment that India will mainly be asking that its agricultural produce are not banned from the UK market and for progress on ‘mode 4’ service liberalisation. Mode 4 – in WTO-speak – means nothing else than the free movement of natural persons to provide services in the partner country. Singham’s analysis suggests hence that if the UK lowers its Sanitary and Phytosanitary (SPS) standards and liberalised the movement of service providers, a trade deal could be reached. On the former, he is optimistic that the UK will show a greater willingness to compromise on agricultural product standards compared to the EU. Indeed, the paper castigates the EU’s ban on Indian Basmati Rice due to “low Maximum Residue Levels allowed in agricultural products – far lower than sound science would suggest” (p.8 – no reference for the scientific evidence is provided). The suggestion seems to be that the UK could use its new-found freedom to lower its residual levels for agricultural products, coming dangerously close to the chlorinated chicken strategy that we were told would not be pursued after Brexit

If the UK government were to envisage such a deal, it would essentially betray two important promises made during the Brexit process: maintaining food standards and limiting immigration.  On the latter, recent evidence in the negotiations with the EU suggest that that the UK government would hardly agree to anything that smacks of free movement of people. Yet, assuming for a moment the government would go down that route, would this make up for the lost access to the EU market?

It depends of course on what the UK would get in return. Here Shanker’s analysis of UK interests is telling. The table on p.4 of his paper, setting out the countries’ main offensive and defensive asks, is almost comically empty. Indeed, besides high-end business services, the only British produce mentioned is Whiskey. Will the export of Whiskey to India make up for the lost access to the EU common market? I will let readers reach their own conclusion on this one.

Of course, export of business services – an area where the UK is undoubtedly world leading  - may have a considerable effect on increased UK exports. However, the paper neglects a fundamental truth about trade deals that Brexiter still seem reluctant to accept, i.e. that they cut both ways. If India grants access to its service industry, it will want similar access in return. Here, the fact that the UK and India are two countries with vastly different levels of development – and hence wages – is important. While India can hardly compete with the UK in high-end business service, India is a provider of a wide range of services in the area of IT, retail etc. For instance, many call centres have of course been moved from Europe to India in the past decade or so. Due to the strong wage differential between the UK and India, it is unlikely the UK could compete with Indian rivals on price in the area of low skill services. If Indian providers of such low-skilled services are granted wider access to the UK market, considerable competition could arise to UK companies. There is growing evidence of a ‘China shock’ in the USA, whereby areas that were particularly exposed to import competition in manufactured products from China, have seen long-lasting negative effects on labour markets and living standards. Would a UK-India trade deal along the lines of Shanker’s Eastern Promise, imply an ‘India shock’ in the UK?

Of course, Shanker considers a UK-India trade deal not just economically desirable, but also as an important geopolitical move to start forging a democratic alliance to counter Chinese influence in the Asia-Pacific. The paper however does not provide much by way of explanation of its optimism about the possibility of such an alliance, which other commentators find rather unlikely. Thus, the FT’s editorial board notes  “[m]any countries, including India, are wary of being part of anything that might be construed as a global anti-China alliance.”

 Sovereignty: The discovery of a double-edged sword

Shanker’s arguments about the advantages of trade liberalisation in services illustrates a more fundamental point that Brexiteers clearly have not yet gotten used to. Namely, the fact that sovereignty cuts both ways and trade deal imply reciprocity. The British voted for Brexit because they wanted their ‘country back,’ placing sovereignty over market access. That’s the choice ‘we’ have made. Yet, Brexiteers cannot accept that other countries will retorque with the same strategy in in the post-Brexit world. Contrary to DUP MP Paul Grivan, who told the House of Commons Select Committee on International Trade this week that “we’ve been shafted and we’ve been punished by the EU for leaving” – I think we can hardly blame the EU for sticking to the deal that the UK government wanted. Surely, taking back control over your borders also means that you take back control over the goods and services that are sold in your country. Or as the French fishermen demonstrating against the delay in getting their licences to fish in UK waters after Brexit – agreed on by the Johnson government under the TCA put it: “If you want your waters, keep your fish!” If you do not want products to be sold that were produced using procedures you deem unfair or sub-standard by your country’s standards, isn’t that the very definition of sovereignty? Only in the age of gunboat diplomacy could you reasonably expect trade deals to grant you far-reaching market access without making any concessions on the alignment of regulatory or product standards. Yet, Brexiters keep insisting that the UK should be allowed to set its own rules, while denying the same right to the EU.

Is export-led growth an option for the UK?

This week’s news has highlighted the great importance Brexiters attribute to FTAs to deliver on the promise of continuing growth and increasing living standards in the UK. Yet, this raises two more fundamental questions. Namely, whether an export-led growth model is desirable (There are of course also downsides to export-led growth model, as German experts increasingly recognise. Andreas Nölke for instance calls Germany an ‘export junkie [DE]’) and secondly whether the UK could successfully implement an export-led growth model.

On the second point, despite all the rhetoric about Britain’s great past as a trading nation (e.g. in a report by the Institute of Export published this week), Britain actually has not been particularly successful in establishing an export-led growth model after World War 2. Since 1948, it has had yearly trade surpluses (the value of exports exceeding the value of imports) only eighteen times, all but one instances coming before 1985. Since then, the country has seen trade deficits every year. To be sure, service exports have grown, and the trade balance is mostly positive there. But overall, Britain spends more on importing than it earns through exporting. This hints at the fundamental fact that the UK has become an economy where aggregate demand is driven by domestic consumption – which is increasingly financed through private debt and the financialisation of real-estate assets. As a result, the contribution of exports to growth in the UK is more limited than in countries like Germany, Switzerland, and even Canada.

Were the UK to go down the German road of setting on foreign demand to generate demand for British products and services, what would its options be?

This questions hints at another important point that the IOE acknowledge in its report, namely that the international trade strategy needs to be aligned with the domestic industrial strategy. Indeed, you can only be a successful exporter, if you produce something that can be exported. This seemingly obvious point is often neglected in the current debate, and the government does not seem to attribute much importance to a domestic industrial strategy. Indeed, as Chris Grey aptly put it: we probably should not credit the Johnson government with having ‘plan’ where there simply there is none. This is illustrated by the fact that the Government recently dropped the latest UK industrial strategy elaborated under the May government in 2017 and instead replaced it with a much vaguer Plan for Growth earlier in the year.

As Damian Raess – of the World Trade Institute at the University of Bern – pointed out in the above mentioned International Trade Committee companies and national economies essentially have two ways to compete in the global economy: Either using the ‘high road’ of competing on quality in high value-added sectors, or the ‘low road’ of competing on price. Raess rightly pointed out that there may be a temptation in the UK to compete on price rather than quality. That is the case not only because of the UK’s tradition of a laissez faire approach to capitalism, but also because of the absence of necessary ‘beneficial constraints’ - – i.e. regulations that constrain firms’ leeway in undercutting certain standards, tame market forces, and encourage long-term investment in the workforce and equipment. Such beneficial constraints are considered key for high quality production and services.

The IEA, the government and other pro-Brexit actors clearly do not believe in such beneficial constraints. Rather, the intuition is to start a ‘bonfire of regulation’ and thus allow companies to purse any strategy they like. The latter can only lead to a race to the bottom, which makes high quality competition impossible. Competing on price, however, can quickly lead to a trap in the new post-Brexit trade world: One wonders, for instance, how much lower employment costs in the UK would have to be to compete with India in low-skill services.

Some actors seem to be aware of that, with the City of London for instance opposing far-reaching deregulation that would undermine the City’s reputation for high quality services. Indeed, the high-end service sector seems to be the area where such ‘beneficial constraints’ do exist in the UK. This week KPMG’s CEO Karim Haji confidently stated that the UK could live without an agreement on Financial Services with the UK, due to its leading role in developing such regulation allowing the provision of such business services.

The IEA on the other hand is moving towards a new terminology on regulation, distinguishing between anti-competitive, growth-restricting regulation and pro-competitive regulation. Such distinctions may make perfect sense (for instance they are integral part of ordoliberal theory). However, the IEA’s controversial Plan A+  is exceedingly vague on what distinguishes one from the other. Rather, any regulation coming out of the EU seems to be classified in the former category almost by assumption. The IEA clearly does not acknowledge that there are two strategies for competition and that one of them requires ‘beneficial constraints’ for market forces not preventing companies from making commitments to invest in skills.

To get his ‘Brexit vaccine’ PM Johnson will need to develop a joint-up trade and industrial strategy, that makes it possible to make concessions to trade partners without putting undue competitive pressures on domestic businesses. For now, such a strategy does not seem forthcoming.

Brexit Impact Tracker - 17 April 2021 – A Tale of Two Universes – Brexiteers versus reality

This has been an interesting week, rich in Brexit-related news, which marked the first 107 days since the end of the transition period. The week brought a continuous flow of stories about trade disruptions, job losses that employers blame partly on Brexit, and worries about the long-term impact of Brexit on trade.

 There were also many – mostly worrying – news stories about Northern Ireland (most notably that the British NI secretary rejecting calls for a meeting with the Irish government) and slightly more positive news on Lord Frost’s continuing negotiations with the EU over the Irish Sea border (which seem take us back to proposals that had been discussed and rejected during the pre-Trade and Cooperation Agreement negotiations).

 There have also been news about delays on the UK side with establishing the necessary governance structure under the TCA in particular the dispute resolution bodies; and the EU Parliament in turn refusing to set a date for ratifying the TCA (which is still only provisionally applied) over concerns of a lack of proper implementation by the UK side.

 On the other hand, on Tuesday, the Office for National Statistics (ONS) released data that showed that trade between the UK and the EU had bounce back by 46.6% between January and February 2021. These figures led to comments and interpretations in the press that perfectly illustrate the populist discourse that is still dominating the debate five years after the referendum. Indeed, the public sphere in Britain is currently dominated by a deep divide that seems to make a reasonable approach to the issues at hand impossible. These discursive strategies are important to understand and challenge, because they may very well undermine the functioning of British democracy for decades to come.

 The ‘teething problems hypothesis’

 This week, the Brexiteers latched on to the ONS figures and declared that Brexit is over (and has been a success)!  Indeed Brexiteers saw in the ONS trade figures for February confirmation of the ‘teething problems hypothesis’ which states that the unprecedented drop in trade between the UK and the EU in January was due to stockpiling ahead of Brexit and companies and border posts not being ready for the new rules. The most optimistic Brexiteers announced that “the Brexit ‘chaos’ is already over“

 This statement must feel like a slap in the face for businesses and people whose livelihoods are still threatened by the impact of Brexit, including seed potato producers, producers of shellfish, and people in Northern Ireland. Hannah Essex co-executive director at the British Chamber of Commerce (BCC) is quoted as saying “difficulties exporters are facing are not just 'teething problems’.”

 Meanwhile, Brexiters confidently use the ONS figures to trumpet the UK is now back to a ‘normal’ level of trade with the EU proving all Remainers and the so-called ‘project fear’ wrong. The Spectator’s Matthew Lynn commented that “the UK’s exports to the EU rose to £11.6bn in February, up from £7.9 billion in January. Overall, they were only slightly below last year’s £12 billion monthly average.”

 This argument is flawed in several respects. One issue is that by January 2021 trade in goods in advanced economies was largely back to pre-pandemic levels. So, the relevant comparison should not be the monthly average for 2020, which was of course much lower than in a normal year due to Covid. A better comparison is therefore February 2020, which was the last month not impacted by Covid19. As EY’s Sally James pointed out on BBC 4’s Today Programme (14 of April 2021 @24:37), compared to February 2020, exports in goods to the EU were down nearly £2bn (£1.64bn to be precise), or 12%. On the monthly average for 2019, which was £14.3bn, they were down 18%.

 More generally, while Covid of course still impacts the UK economy, it is possible to estimate the effect of Brexit net of Covid. Thus, the Centre for European Reform (CER) has devised a sophisticated method to estimate the impact of Brexit on UK trade net of Covid. Based on this method, the CER estimates that UK’s goods trade in February was 5% lower than it would be had the UK remained in the EU.

 Of course, even a 5% decline (rather than the trumpeted 46.6% increase) is definitely an improvement on the January figures, which were the worst on record. Yet, we should not forget that monthly trade figures are sensitive to one off events and special factors. Thus, the February figures may look better than expected, partly because the ‘volatile trade in precious metals’ rose sharply. If precious metals go down this month or in the future, the picture may change again.

 Regardless of the economic and statistical realities, the ONS figures seem to have unleashed pent-up optimism amongst Brexiters, which spilt over into the papers and media outlets. Another piece in the Spectator went on to bust ‘five Remainer predictions’ that supposedly have turned out to be wrong. Let’s look at the arguments behind this claim.

 Myth busting busting

 The first one of these ‘wrong doomsayer predictions’ was Osborne’s declaration that by 2030 each household would be £4,300 worse of. To be sure, then Chancellor Osborne used and interpreted this figure in a way that was indeed questionable and perhaps even dishonest. But the figure came out of a serious analysis from April 2016 called The long-term economic impact of EU membership and the alternatives, which econometrically modelled the potential impact of Brexit. The report found that under a bilateral agreement with the EU, UK GDP would decline by an amount equivalent to £4,3000 per household (note: this was not worst-case scenario the report predicted: for a no deal Brexit the report predicted a £5,200 decline). While predictions are of course almost always wrong to some extent – i.e. they do not correspond 100% with reality – and there are assumptions and methodological choices in such analyses that can be questioned, the basic figure was based on sound analysis (albeit admittedly not interpreted in the proper way by Osborne).

 Yet, what is more interesting still is how the Spectator uses this figure in 2021 to prove that Remainers were wrong. The author refers to ONS statistics to declare that ‘in the five years since that real disposable income per head has risen from £5,177 in the second quarter of 2016 to £5,354 at the end of 2020.’

 This is another frivolous use of statistics by Brexiteers, which seems as disingenuous as Osborne’s use of the £4,300 figure during the Brexit referendum campaign. In fact, it shows an astonishing confusion between the Brexit referendum vote and the actual action of Brexit, i.e. the coming into force of new trading rules between the EU and the UK, which or course only happened in January  2021. In the five-year period up to January 1st, 2021, the anticipation of Brexit of course affected businesses’ and households’ choices and hence the economy. But the government’s modelling was based on ‘actual Brexit,’ i.e. the impact of different scenarios for possible new trading arrangements with the EU – including EEA membership, a loser FTA, and a no-deal scenario. The Spectator also ignores the fact that the figure that Osborne (mis)used was a much longer-term prediction (2016-2030) than the five-year window the spectator compares it to, which makes the comparison entirely baseless.

 But let’s stick with the figures about disposable household income for a minute and assume that a rise in disposable household income between the point Brexit actually happened (i.e. end of transition period on 1st of January 2021) and a future point in time would prove Remainers wrong. Even that is a false argument, as the Spectator’s own Nelson Fraser pointed out in response to Osborne’s figures back in 2016: whether or not disposable income rises/declines is not the issue. The question is whether it would have risen more inside than outside the EU. Remainers will probably argue it would have risen more inside the EU, Brexiteers will insist it would have risen less or declined. As Fraser calculated at the time, the government’s April 2016 report would have predicted a rise in disposable household income of £5,400 by 2030 outside the EU and of £6,880 inside the EU, which would amount to a ‘Brexit cost’ of £1,480 (instead of £4,300). Whether that would be a cost worth incurring for regained ‘sovereignty’ and could be off-set by a ‘modest tax cut’ is another question, but the point here is that any assessment of whether or not Remainers were right has to be made against assumptions about the counterfactual: what would have been had the UK not left the UK? Estimating such counterfactuals are difficult exercise, especially when applied post hoc to complex political processes.  But the impact of Brexit can only ever be meaningfully compared to such hypothetical scenarios. Thankfully some sophisticated methods exist – like the CER approach for instance. Yet, the Spectator confidently ignores this basic truth and makes huge claims based on flawed logic.

 It is not worth going into the busting of the four other ‘doomsday predictions’ mentioned in that piece. They are essentially all based on the same flawed logic of comparing Remainers predictions to figures taken over a period when Brexit had not actually happened yet and when it was anyone’s guess whether we would end up closer to an EEA-style arrangement or be trading under WTO rules after Brexit. That’s the case of the discussion of GDP growth predictions, job losses (both compared between 2016 and 2020) and the budget implications.

 The fifth and final prediction that turned out to be wrong according to that piece was the ‘collapse of the West’, which the columnist attributes to both Donald Tusk and David Cameroon. The fact that Western civilisation still exists four months after Brexit is taken as evidence that Remainers were wrong. Similarly, the columnist takes the fact that Scottland still is a member of the UK four months after the end of the transition period as prove that Remainers’ warnings about the future of the Union were wrong. I think it would be an insult to readers’ intelligence to seriously engage with such naïve arguments, given the upcoming Holyrood elections and whatever they may mean for Indyref 2. But it should be obvious to any reader that the long term impact of Brexit on geopolitical power balances will be subtle, complex, and intricate and will take time to be visible (which Donald Tusk of course acknowledge by saying he was talking with a historian’s hat on).

 Readers may think it’s not worth getting all worked up about two silly opinion pieces. However, this type of disingenuous right-wing populist discourse is also evident in more serious fora. This can have very real implications on public opinion and hence politics.

 Another news item this week seems to indicate that Brexiteers’ disingenuous discursive strategies are working, and journalists and economic actors start buying into it.

 Financial Services: The focus on the size of the self-inflicted wound

 The New Financial Think Tank has published a report on the impact of Brexit on the UK financial sector with three key findings: Firstly, at least 440 firms have relocated from the City of London to destinations inside the EU; secondly, £900bn in assets have been moved out of London; thirdly, 7,500 jobs have been lost in London.

 The extraordinary thing about the report, however, is how various media outlets reported about it. Some outlets did consider the findings to be worse than expected, but for many it was turned into a good news story. This happened in the following way: In an interview with William Wright, CEO of the New Financial think tank, a journalist at BBC’s Today programme (16.4.2021 at 6:20am) pointed out that 7,500 lost jobs was actually not as bad as predicted before the referendum (referring to an oft-quoted PWC report which predicted up to 100,000 job losses). Wright had to acknowledge that, but pointed out that – only 100 days after Brexit – over 440 firms had left the city and £900bn worth of assets moved out of London. But even that ended up being presented as good news: The firms that have moved activities out of London now have access to the EU’s single market and they do not depend on any (still to be concluded) trade agreements on services. This is how the loss of 7,500 jobs and the move of 10% of the assets of the banking system out of the UK, becomes a good news story in Brexitland.

 A consequence of this sort of reporting is that Remainers end up having to defend their predictions rather than Brexiteers having to defend the reality of 7,500 jobs losses.  Which can be done of course: There are various problems with using the 7,500 lost jobs as an argument that Remainers were wrong about the impact of Brexit: For one, the PWC report predicted that figure to be reached by 2020, but was investigating the impact of actually exiting the EU rather than the impact of being stuck in a five-year limbo where none knew which way Brexit would go. It is therefore important to remember that we are only four and a half months into ‘real existing Brexit’ and 7,5000 jobs have been lost (albeit starting in 2016 of course). For the other, the relationship with the EU around financial services is still up in the air and some firms may still wait and see what agreement might be reached before they decide what to do.

 It is important to deconstruct the false arguments made by Brexiteers. Yet, the really shocking thing is that in Brexitland a loss of 7,500 jobs and the move of £900bn in bank assets out of the country is considered good news, because it is not as bad as some – arguably not without political motives – said  it might be. We are hence debating the size of the self-inflicted wound rather than who wounded us in the first place. indeed, it is not clear why the benchmark for judging whether Brexit is a success or a disaster should be the Remainers’ predictions about how bad it could get, rather than the many promises Brexiteers have been quietly dropped,  abandoned,  or turned out to be wrong at various stages of the process. Had Brexit really been an incontestably ‘good thing’ as promised, of course Brexiteers would not have to use this type of discursive strategies. Yet, in Brexitland the onus has been reversed so that now Remainers were wrong because things are not as bad as they thought they would be. Worse still, that assessment is made a mere 100 days after Brexit, based on one single data point (‘See, exports bounced back in February!’), on exceedingly low expectations (‘See, only 7500 jobs were lost in the City!’), or completely neglect any realistic timeline within which some of Brexits’ worst consequences might materialise (‘See, Scotland is still part of the UK!’). The reversal of the onus allows Brexiteers to celebrate a monthly loss of around £1.7bn of exports, a 5% decline in trade, or the loss of 7,5000 jobs like a victory.

 The blame game

 A further weapon in the Brexiteers’ arsenal is blame apportioning, whereby any Brexit-related figures that cannot be turned into a good news story, are blamed on the EU. A striking example of this mechanism at work came this morning on Radio 4’s Farming Today (17.4.2021) programme. The (pro-Brexit) Institute for Economic Affairs’ Shanker Singham was interviewed and asked what he thought about the anger expressed by shellfish- and seed potato producers who – despite Brexiteers’ optimistic proclamation that ‘the Brexit chaos is over’ – have essentially lost EU market access and continue suffering from Brexit (one shellfish producer from Northumbria called the past 100 days of real existing Brexit ‘easily […] the most difficult quarter in any period in my working life.’)

 Singham’s response is a perfect example of the above-mentioned ‘blame game.’ ‘I share their anger,’ he said, but insisted that the anger was misdirected: Rather than the Brexiteers’ broken promise of frictionless trade, the farmers and producers of shellfish should be angry at the EU. The suggestion was that the Trade and Cooperation Agreement (TCA) obliges the EU to consider accepting UK regulations as equivalent to EU standards and hence granting market access. For Singham, by banning class B molluscs and UK seed potatoes from the EU market, the EU is falling short of that commitment and hence in breach of the TCA. This seems like a far-fetched claim. While the TCA leaves the option open for unilateral granting regulatory equivalence status and market access, it does by no means follow that withholding equivalence status implies a breach of the TCA. All the EU does in these specific cases is applying its existing regulations to the UK the same way it applies them to any other third country. That we are treated like a third country, of course, is not the EU’s fault, but rather the result of Johnson’s preference for a hard Brexit. So, Brexiteers ask farmers and producers to direct their anger at the EU for exercising their ‘sovereignty’ in the name of which we UK decided to leave the EU.

 Global Britain: Le doux commerce is turning bitter

 In this context, Boris Johnson is preparing his visit to India in order to negotiate a free trade agreement (FTA) with New Delhi, which would be the first FTA agreement that India signs since the 1990s. While the government is hoping to double trade with India to £50bn a year – notably by lowering tariffs on cars and whiskey –, it is expected that India will in return ask for easier access for Indian nationals – including students – to UK visas. This of course, will put in peril another Brexiteer promise: To bring immigration figures down from pre-Brexit levels to the ‘tens of thousands.’ Given India’s track record of failed free trade negotiations over the past decade (with the EU, Australia and New Zealand among others), makes it unlikely that the Government’s envisage ‘early wins’ of cutting tariffs on whiskey and cars will materialise unless substantive concessions on migration are made.

 Ahead of the talks, UK companies like Vodafone to Cairn Energy, who have been embroiled in legal disputes with the Indian government for a number of years, insist that the UK government should support their interests. However, the need to conclude FTAs makes it unlikely that the government can afford such a position. Thus, in a reversal of the May government’s position, the government has withdrawn its support for Cairn Energy in tis long-running dispute with the Indian government. These may be early signs that the Global Britain strategy may push the government to become more accepting of breaches of international rules by its most coveted trading partners – turning Montesquieu’s ‘doux commerce’ into a bitter pill for many.

 In sum then, this week has provided ample evidence that – contrary to Brexiteers’ claims - Brexit is far from over (or as Chris Grey put it ‘we are still Brexiting’). Yet, Brexiteers are keen on closing down any debate and on declaring victory by staunchly defying reality. In the process, they use populist rhetorical devices, which may very well damage the British democracy further by undermining any basic norms of reasonable and honest argumentation. This in turn makes it more difficult for scientific evidence-based argumentation to have any impact on public opinion. Instead, in the Brexiteer universe, events and figures are twisted and distorted and the onus for the failure of Brexit is placed on the Remainers. These sort of bad faith arguments do not bother Brexiteers of course. But while these strategies may lead to electoral success, they do not bode well for the political culture in this country after Brexit.

Brexit Impact Tracker - 11 April 2021 - The (Predictable) Return of Violence in Northern Ireland and the (Possible) Shape of Things to Come

This week, the now usual stories about the impact of the new UK-EU trading arrangements on consumers and the various issues faced by Britons with second homes in EU countries were overshadowed by the predictable, but nevertheless deeply saddening, news of a return of violence to the streets of Belfast and other towns and cities in Northern Ireland (NI).

Any reasonable commentator prefaced their analysis of the situation in Northern Ireland by saying that what is currently happening in NI is due to a complex set of circumstances – both long-term and short-term – and attributing it solely to Brexit would be an oversimplification.

But equally, there can be no doubt that the Johnson Government’s Brexit deal and in particular the Northern Ireland Protocol (NIP) have played a crucial role in the resurgence of violence. Unionist objection to the NIP has been one of the key Brexit-related stories since the end of the transition period on January 1st, 2021. Various commentators – including myself – have noted that the writing was – literally – on the wall for the situation to spiral out of control.

Ultimately, the outbreak of violence came less than a month after the Loyalist Communities Council (LCC) announced in a letter to the PM its withdrawal of support for the Good Friday Agreement until “our rights under the Agreement are restored and the protocol amended to ensure unfettered access for goods, services and citizens throughout the United Kingdom.” While the letter underscored that “that unionist opposition to the protocol should be peaceful and democratic,” David Campbell – chairman of the LCC – had earlier stated that unionists would "fight physically" against the NIP. The DUP too had threatened earlier to fight the NIP with “any means” at their disposal. Physical violence was hence on the cards. In this heated atmosphere, it comes as no surprise that other factors – such as the decision not to prosecute Sinn Féin politicians who allegedly broke Covid19 restrictions when attending the funeral of former IRA leader Bobby Storey – would lead to the flaring up of violence.

While there had been warnings about the impact of Brexit on the NI peace process, the pace at which slowly healing wounds were ripped open is still shocking. Arguably, this is the direct result of the UK government’s ‘identity politics’ strategy that turns Brexit into a cultural battle of ‘us against them,’ rather than addressing people’s very real political and economic concerns. This turns economic and political issues into questions of culture and belonging to a given group, which makes them very difficult to solve within the framework of pluralistic liberal democracy. Thus, Stephen Farry – MP for the northern Irish centrist, cross-community Alliance Party – stated that “[t]he problem is that unionism has decided to frame the protocol as an identity issue, and it’s very hard to see how you get round that and put the genie back in the bottle.”

It is no coincidence of course that Northern Ireland – with its painful history – is the place in the UK where the government’s identity politics have caused damage very quickly. However, old divisions may break up in other places very soon too and – if the current arrangement remains in place and the identity politics strategy continues – Brexit may become a serious centripetal force in other parts of the UK. Thus, while a second independence referendum in Scotland may very well go the same way as the first one – i.e. a majority of people voting to remain within the UK – Brexit means that Scots may have one less reason to vote in favour of remaining in the UK.

Yet, beyond the hugely important NI case (although it rarely makes the front page of British newspapers), the rapidly deteriorating situation in NI after the end of the Brexit transition period is a reflection of more fundamental issues with the current UK-EU post-Brexit arrangements. Indeed, it is hard to not see it as the logical consequence of the Johnson Government’s ‘hard Brexit’ strategy, which implied taking the UK out of the single market. This choice made a either a land border between the Republic of Ireland and NI or a sea border between Ireland and Great Britain inevitable. Since the EU – and the US – strongly objected to a land border on the island of Ireland – to safeguard the achievements of the Good Friday Agreement – and ‘hard Brexit’ taking off the table the option of the UK staying in the single market, the only other option was to have a border down the Irish Sea - even though conservative politicians still deny it exists.

There have been calls for the EU to be ‘flexible’ on the issue of Irish border controls, which can only mean the EU accepting the import of goods into the EU, which may not fully comply with EU rules and standards. However, asking for this sort of flexibility essentially means denying the EU the right to set and enforce its own rules for its internal market, which is of course the very same right that Brexiters invoke as main reason for wanting to leave the EU. It seems unlikely that what is unacceptable to the UK government will ever be acceptable to the EU. Therefore, in the long run, any future arrangement between the UK and the EU will have to acknowledge that the EU will insist either on checks at its external borders, or far-reaching alignment on rules and standards beyond them. The UK’s ability to ‘take back control’ will have to take place within the boundaries of that reality. The anger over the NIP clearly shows that Boris Johnson’s Trade and Cooperation Agreement (TCA) and the associated NIP do not get that trade-off right and do not constitute a solid foundation that would do justice to the complex and fragile balance that holds the UK’s nations together.

Therefore, there can be no doubt that the TCA/NIP will have to evolve into something else if the UK is to survive Brexit. Arguably, economically speaking, a closer association with the EU than the current one would be desirable so as to increase access to the single market and reduce trade barriers. Indeed, Statista recently published a figure that illustrates just how ‘hard’ Johnson’s Brexit was.

 Yet, what are the realistic possibilities for alternatives to the current arrangements? Membership in the European Economic Area (EEA) offers one model, which does come with a need to automatically adopt EU legislation and therefore is incompatible with the ‘taking back control’ promise. Another, more complex, but arguably also more ‘sovereignty-friendly’ arrangement, is the arrangement of bilateral agreements, which Switzerland has pursued since the Swiss people rejected EEA membership in 1992.

The Norway solution: EEA maximal market access at a high price

The EEA, which entered into force on 1 January 1994, unites three European Free Trade Association (EFTA) states – Norway, Lichtenstein, and Iceland – and the EU member states under an agreement that guarantees participation in the ‘four freedoms’ of the single market, namely free movement of capital, goods, people, and services. To make these four freedoms possible and guarantee “equal rights and obligations within the Internal Market,” the EEA agreement implies that non-EU member states that are part of the EEA very largely have to comply with EU legislation. While some important areas – such as agriculture and fisheries – are excluded from the agreement, in the areas that are covered, EEA membership for non-EU members essentially means gaining full access to the single market but at the price of having to follow EU law without having a say in its adoption. Indeed, the EEA is explicitly set up as a ‘dynamic’ treaty, which implies ‘the common rules of the EEA Agreement are updated continuously with new EU legislation.’ Moreover, the treaty rules are ‘interpreted in conformity with the relevant rulings of the [European Court of Justice] given prior to the date of signature.’ In other words, the European Court of Justice has indirect jurisdiction over non-member states in relevant areas.

This trade-off between complete market access against very close alignment with EU legislation has recently given rise to political tensions in Norway – the largest non-EU EEA member state. Norway decided in 1994 to reject EU membership for fear of losing its sovereignty. Yet, joining the EEA instead arguably has compromised Norway’s sovereignty to a much larger extent than membership would have.

In the current general election campaign, the Norwegian Centre Party is campaigning against EEA membership, objecting to the ever evolving EU legislation which Oslo has to adapt without any say in its formulation. In a debate that will ring familiar to anyone who follows the Brexit debates, conservative PM Erna Solberg warns of any attempts to leave the EEA pointing at the importance of access to the single market for a country that exports 70% of its non-oil exports to the EU. Centre Party leader Trygve Slagsvold Vedum – who is polling strongly ahead of the elections – rejects her arguments as “fearmongering” and promises that Norway is “still going to have an agreement with the EU, a better agreement.”

The Norwegian case illustrates the fundamental flaw in the idea that being outside the EU will automatically mean freedom to adopt one’s own rules (what Brexiters call ‘sovereignty’). Norway currently has not found any solution to the market access-sovereignty trade off that also lies at the heart of Brexit.

The Swiss Solution: The end of ‘cherry picking’?

Another arrangement that may hold some lessons for the UK is the Swiss solution. Like Norway, Switzerland never decided to join the EU, but – contrary to its fellow EFTA members – it also rejected membership of the EEA in a hotly disputed referendum in 1992. Since then, Switzerland has established a complex network of bilateral agreements with the EU, based on 120 sectoral treaties and agreements.

Arguably, Switzerland is the country that has pushed the sovereignty-market access balance as far as any third country. Switzerland largely participates in the single market – including the free movement of people, although with some accompanying measure [DE] in place to avoid the undercutting of working standards and wages by foreign workers  – , without accepting an automatic adoption of EU law as is the case of the EEA. Instead, Switzerland practices a legal doctrine called ‘autonomous adaptation’ (autonomer Nachvollzug) whereby EU law is selectively and flexibly incorporated into domestic Swiss law to guarantee a considerable alignment with EU rules.  This approach provides Swiss policy makers with considerable leeway, while still guaranteeing market access through extensive alignment on EU rules. Yet, this also makes constant renegotiation of the bilateral agreements with the EU necessary.

This system has increasingly come under pressure from the EU side, which has insisted on a ‘framework agreement’ and the establishment of a dispute resolution process involving ECJ jurisdiction. This has led over the past years to increasingly tense negotiations between Switzerland and the EU. While a draft framework agreement was agreed on in 2018, the agreement is considered to have little chance of finding domestic support in Switzerland, where it will be subject to a popular referendum.

The sticking points will sound familiar to observers of Brexit: Besides the ‘accompanying measures’ and the question of EU citizens’ rights, the key issues are the question of state subsidies and the role of the European Court of Justice [DE] in adjudicating disputes.

Just like in Britain, the latter point is a particularly thorny question in Switzerland where the rejection of ‘foreign judges’ is baked into the founding myth of the country. Indeed, the so-called Federal Charter, one of the founding constitutional documents of the Swiss Confederation from the 13th or 14th century (depending on who you ask), explicitly rejects judges that are not ‘compatriots.’ The rejection of foreign judges is a highly politicised issue. Thus, the right-wing populist Swiss People’s Party launched a popular initiative with the title ‘Swiss Law instead of Foreign Judges,’ which aimed at placing the Swiss constitute above international law, including the European Human Rights Convention. While the initiative was rejected by two-thirds of the voters, the Swiss government is aware of the sensitivity of the issue which makes an agreement with the EU on a framework agreement difficult.

The most recent solution to the ECJ jurisdiction issue – which may bear some lessons for the UK – consists of the establishment of a court of arbitration with three judges, one each elected by the EU and Switzerland and a third one elected by the these two judges. For conflicts concerning EU law, however, the arbitration court would be required to seek advice from the ECJ and would be bound by that advice. Therefore, under the draft agreement, the ECJ does have jurisdiction over Swiss persons in some circumstances. This is indeed the EU’s own red line. Given the Swiss rejection of ‘foreign judges,’ it will be interesting to see if the proposed arrangement that limits ECJ jurisdiction to cases concerning EU law only and the addition an additional judicial layer (the court of arbitration), which makes ECJ jurisdiction less direct and hence less visible, will constitute a politically acceptable solution for the Swiss Parliament and ultimately voters. The arrangement could become interesting for any future arrangement that the UK may negotiated with the EU. In fact, TCA already contains a dispute resolution mechanism that is not dissimilar to the Swiss solution, although the ECJ’s role is less explicitly acknowledged.

Switzerland has fared very well with its nearly 30 years of ‘cherry picking,’ but clearly the EU is increasingly reluctant to offer any third country such an advantageous arrangement without subjecting itself completely to EU legislation and ECJ jurisdiction, which British policy makers may need to keep in mind.

 The End of the EU’s Territorial Expansion?

The above examples show that the UK is by far not the only country struggling to find an arrangement with the EU that strikes the right balance between ‘sovereignty’ – rightly or wrongly defined as the ability to deviate from EU rules – and market access. Indeed, Andrew Duff – former Lib Dem MEP – recently argued that Brexit constitutes a turning point not just for the UK but also for the EU. After a long phase of continuous territorial expansion, it is likely that the EU will not grow much further. Brexit may mark new phase where the focus is not on expansion but on finding a new model form managing the long-term relationships with an increasing number of important trading partners that are not members states. Indeed, such a model could stabilise relationships not just with the UK, Switzerland, and Norway, but also other countries, which for different reasons do not want to or will not be allowed to become full members, such as Turkey and Ukraine. Duff argues for  an ‘associated country’ status that would avoid the highly politicised and ineffective models of constant renegotiation and conflicts that mars the relationship with its closest non-members at the moment. It is to be hoped that the EU will indeed refocus its priorities in this respect.

From the UK perspective, on the other hand, a key stumbling block on the path towards such a stable future arrangement with the EU is the Conservative Party’s denial of the reality that the TCA and NIP are not a solid foundation for the future relationship with the UK. A striking illustration of this denial came this week in the form of a Conservative Party social media invitation to participate in a ‘Global Britain Survey.’ The Facebook post contained the statement “We secured a trade deal with the EU which fully delivered on our promises to take back control of our laws, borders, money and trade.” Question 5 of the questionnaire asked “Now that we have reclaimed our independence, we’re committed to only do deals which benefit the whole UK. Do you support this red line?”

Running this survey during the week when the failure of the TCA and the NIP must have become blatantly obvious to all but the staunchest supporters of the hard Brexit line, illustrates a lack of realism in the governing party that will prevent any reasonable arrangement with the EU impossible. As long as this denial of reality remains the dominant political ideology, the focus will remain on identity politics and on blaming the other side for any negative consequences of Brexit. The sad events in NI this week should be a stark warning about where this may lead us.

Brexit Impact Tracker - 3 April 2021: ‘Leavers and Remainers’ or ‘Winners and Losers’? How the cultural and economic Brexit divides impact British politics

There is not that much big Brexit-related news to report this past week. Actually, there has been quite a bit of good news (relatively speaking) on the Brexit front. Since my last post, there has been some progress on data protection, and on the Northern Ireland Protocol (NIP). Moreover, the UK and the EU have found an agreement on the long-awaited Memorandum of Understanding (MoU) on financial services (although observers were quick to point out that all the MoU does is establish another ‘toothless talking shop’ that was as useful as a ‘chocolate teapot’).

But there were also the by now habitual stories of concerns over the impact of trade barriers on UK companies (especially smaller ones), of relocation of businesses from the UK to the EU, of the impact of Brexit on British citizens’ everyday life (especially those living in the EU who face various issues from driving licences to their right to remain in the EU), and of its impact on EU citizens living in the UK (including children). While these may all seem like relatively minor inconveniences, they are important to keep track of, because seemingly innocuous stories oftentimes hide a great deal of personal suffering for the people concerned.

At another level, these stories are important because they may provide us with clues about where the country is headed politically speaking. Brexit so far has largely been about opinions and expectations, not reality. Now that we have entered the realm of reality, the divide between ‘Leavers’ and ‘Remainers’ may slowly be replaced by a divide between actual ‘winners’ and ‘losers’ of Brexit. While ‘Leavers’ coincides with ‘winners’ in terms of the referendum outcome, in terms of the Brexit reality – due to their predominant socio-economic characteristics – this may not turn out to be true. Similarly, while Remainers are often considered (sore) losers of the referendum, the economic realities underlying the Brexit vote imply that Remainers are less likely than Leavers to bear the brunt of the ‘real existing Brexit.’ This implies important shifts in the political cleavages in British politics, which both major parties may be struggling to react to. Time to take a closer look at the emerging post-Brexit politics.

From Remainers and Leavers to Winners and Losers – New cleavages in British politics

Populist phenomena – which in my view Brexit is an example of – can be explained in two ways: culturally and economically.

The Leave and Remain labels, as they are currently used, refer to an important extent to cultural differences in values and norms. Indeed, the leave – remain divide reflects a new political cleavage that has opened in many countries around the world and goes beyond the traditional left-right divide. It is described by some political scientists as a cultural chasm between an urban, cosmopolitan elite who celebrate values of liberalism, multiculturalism, and pluralism and the rural and industrial ‘left-behinds’ who defend more traditional – even nationalist and nativist – values. Leave voters fit the latter description quite well. Indeed, analyses of the referendum result show that the two main factors explaining the Brexit vote is age and education: the older and the lower your educational achievement, the more likely you are to have voted leave. These characteristics also tend to correlate with defending more nationalist, traditionalist values, as opposed to liberal cosmopolitan ones. Here, opposition to immigration – not just for its economic effects – but also for its impact on national culture is a key factor to vote for Brexit.

However, Brexit was not just about culture and values, but also about very real economic issues that people are facing. Economic factors are the second most important factors explaining the leave vote. Unemployment, stagnating real wages, and austerity are important – some hotly debated – socio-economic causes for voting for Brexit. Thus, an influential study found that individuals and areas affected by the austerity measures introduced by the Coalition government after 2010, were more likely to support UKIP and to vote leave than individuals and areas not affected by austerity. More generally, people with low skill levels in low-paid jobs or out of work, were more likely to vote for Brexit than people with in well-paid high-skilled jobs.

The reason for this relation between socio-economic status and preferences for and against Brexit, is that the integration of markets has undoubtably put pressure on the former groups’ living standards, while the latter in generally rather benefited from increased mobility and more economic freedom. Indeed, there is a lot of academic evidence that liberalisation of trade, capital, and migration flows puts pressure on low-skilled workers’ living standards (e.g. for the UK and for the US). In Europe, the EU has been the main driver of market integration in all three areas (capital, labour, trade) – indeed it has been described as a ‘liberalisation machine.’ A particular important issue here is that the EU’s ‘freedom of establishment’ right and the related right to provide services across borders. This has allowed companies to pay EU migrants working in the UK wages based on the conditions of employment prevailing in their home country, which explains some of the economic grievances of leave voters. It cannot be denied that the EU does bear some responsibility for these grievances by exacerbating deindustrialisation and pressures on wages.

Yet, liberalisation has not got to be a disaster, as it can be selective, managed, and accompanied by necessary social measures to soften the impact of liberalisation on low skilled workers. In the EU such accompanying social measure often have not kept pace with liberalisation. However, we should not forget that part of the reason for the lagging of social policies behind liberalisation, is precisely because successive UK governments have pushed back against the EU’s social agenda, e.g. opting out of the Maastricht Treaty’s ‘social chapter’ when it was introduced in 1992. Similarly, the domestic social policies of successive UK governments did nothing to protect domestic workers from the impact of liberalisation, but rather tried to undercut EU labour and social standards. Therefore, it was UK governments which translated the international pressures into policies that ultimately transformed the UK economy into a low skill, low productivity economy. Other countries inside the EU – facing the very same pressure – chose to invest in skills instead, leading to higher productive that kept their workers internationally competitive, and wages and living standards up. More generally, like I have argued in some of my academic work, Anglo-Saxon countries tend to ‘manufacture discontent’ by not protecting their low-skilled workers from increased competition in global markets.

Given the interplay between international- and national policies, it seems unlikely that Brexit per se will improve the economic condition of low skilled workers. It is unlikely that – especially conservative – UK governments will fundamentally change their social policies to protect workers from downward pressures on wages.  Similarly, like I wrote last week, on the capital front ‘global Britain’ will not mean lower levels of capital mobility – including the buying up of British firms by foreign investors and subsequent restructurings. Indeed, making up for losing access to the EU Single Market may very well increase globalisation pressures especially if the UK decides to follow the ‘Singapore on Thames’ post-Brexit model. This all suggests that the more culturally dominated remain v. leave divide will revert back to an (economic) winner v. loser divide that reflects underlying economic causes of political discontent.

The cultural values underlying the remain v. leave divide overlap to a considerable extent with the economic ‘winner’ v. ‘loser’ of globalisation divide, as the culturally liberal, cosmopolitan urban elite also tends to have higher levels of educational and better paid jobs than culturally more conservative and lower skilled workers outside post-industrial urban growth areas. Yet, the two dimensions are analytically distinct, and this has very important political implications. Indeed, dealing with these two aspects of popular discontent – cultural and economic – arguably requires different political strategies – and the two major UK parties may not have found the right strategies for the post-Brexit politics yet.

Dealing with cultural and economic cleavages: The emerging political strategies

So far, the Tory party’s strategy under Johnson’s leadership has primarily focused on the cultural divide. Brexit certainly has provided leave voters with some satisfaction in this respect. The ‘two-finger salute from the working class’ to the ‘metropolitan middle class’ always has been one of the goals of the protest vote which Brexit arguably was. Indeed, UKIP and Brexit supporters often report general dissatisfaction with political elites, rather than leaving the EU, as main motivation for their vote. Similarly, seeing tens of thousands foreign-born workers leave the UK, is precisely what many leave voters wanted and will be pleased to see happening. As I wrote before, so far, the Johnson government has managed to ride this wave by keeping resentments against liberal urban elites and the EU alive. From this perspective, the abrasive political style the Johnson government and his ‘Brexit minster’ Lord Frost have adopted makes perfect political sense. Nationalist grand standing about various Brexit related issues – and indeed not so Brexit-related ones – allows the government to continue blaming the EU for anything that is not going well in this country, catering thus to the frustrations about ‘wanting our country’ back and such like. However, this nationalist strategy will run its course for two reasons.

Firstly, the government will have to resign itself to the fact that it needs to start building a more constructive relationship with the EU to tackle the serious issues that need addressing. There are signs that this has already started happening this week, with the UK government’s rhetoric becoming more conciliatory over key issues like the Northern Ireland Protocol (NIP), the financial service agreement, and the Covid19 vaccine row. On all three issues, the UK government has substituted negotiating behind closed doors for public grandstanding. While this will turn what Chris Grey calls the ERG Brexit ultras against the government, it is a necessary shift in the government’s approach to make post-Brexit relationships with the EU work.

Secondly, Brexit was a battle against windmills. The windmill was defeated. But soon people will realise that the windmill was not the problem. Or at least it was only partly to blame for their problems. When that happens, people will start asking the government to actually address the economic grievances that made them vote for Brexit and for Johnson in the 2019 General Election. What substantive policies can the government offer to address those issues?

Due to the pandemic, the chancellor Rishi Sunak, has so far shown a – for a conservative – rather uncharacteristic tendency towards anti-cyclical public spending. Public spending is one way of keeping the leave-voting part of the electorate happy after Brexit. Yet, senior conservatives are already voicing concerns about current levels of public spending, which suggests that once the pandemic is over, a conservative chancellor will come under pressure to return to a more traditional conservative policy of balancing the books. Of course, the Johnson government is not a usual conservative government, but has a distinct populist streak, which may mean it is less likely to adopt an austerity policy like PM Cameron and his chancellor George Osborne did. A return of austerity without the EU to blame for people’s grievances could mean a loss in political support in key electoral battlegrounds like the ‘red wall’ constituencies, but it is unlikely future conservative governments will be able to keep public spending at the level needed to compensate the ‘losers of globalisation.’

Beyond public spending, the Johnson government’s economic policies may contain some solutions for the economic grievances felt by leave voting constituencies. Thus, the government’s ‘levelling up’ agenda that aims at shifting some of the economic activity from London and the South East to other parts of the country, makes a great deal of sense. However, so far this agenda has been mainly focussed on environmentally disastrous big infrastructure projects like HS2 and moving government and civil service departments from London to other parts of the country. It is very doubtful that such government-focused moves alone will lead to the industrial transformation needed to create a genuinely more decentralised and equal UK economy. The latter goal seems particularly compromised by the recent decision by business secretary Kwasi Kwarteng to axe the government’s plan for an industrial policy that could have contributed to achieving that goal.

Therefore, once the effect of the nationalist anti-EU rhetoric wears off and people start asking for real change, the conservative party may be exposed economically speaking and lack realistic and working economic policies to address people’s actual grievances. The conservatives seem to be aware of that at one level, which would explain the government’s focus on nurturing the cultural divide. But this may just delay the necessary step of developing an effective economic policy response to the underlying economic divide.

What does labour’s strategy look like? Here, it is becoming increasingly obvious that Labour continues struggling to find its place in the Brexit reality. Indeed, as long as the focus remains on the cultural divide, labour will be struggling to gain the upper hand in elector contests against the Tory’s outside the large urban areas. This was very clearly illustrated this week by the row over the display of the Union Jack. Labour seemed at a loss to formulate any convincing response to the conservatives’ strategy of casting doubt on labour’s patriotic credentials. The FT cites a labour frontbencher as saying that the conservatives “want to maintain the Brexit divide which has worked for them.” In the absence of being able to portray itself as the more patriotic of the two major parties, Labour will be struggling to counter the conservatives at the level of the cultural divide and win back the support of ‘red wall’ voters and other traditionally labour-voting constituencies. So, labour has a strong interest in shifting the attention from politicising the cultural divide towards the economic one. If it manages to do so, then the conservatives relatively limited economic responses may give labour a chance to win back some of the support it has lost to Johnson’s conservatives in the 2019 General Election.

A first test of this hypothesis will come in about a month time with the Hartlepool by-election. Labour is defending a narrow lead of around 3000 votes with a candidate who was pro-remain, running in one of the strongest Leave-voting constituencies in the country. Ahead of that vote, labour leader Sir Keir Starmer has indeed sought to move beyond the leave-remain divide by explicitly stating that there was no case for re-joining the EU. With this stance Starmer has disappoint many Remainers (and Rejoiners) by reneging his previous support for a second referendum and earned him a lot of criticism. Yet, based on the above analyse, Starmer’s strategy makes good sense. The sooner the voters will care more about the economic issues underlying the Brexit vote than about the cultural values of national sovereignty, the sooner labour will be able to shift the public debate onto economic policy issues where it stands a much better chance of competing with the conservatives than at the cultural level.

Regardless of where one’s party loyalties lie, it is to be hoped that such a shift from the cultural to the economic divide will indeed take place. To start healing the deep divisions in British society that were revealed and reinforced by Brexit, real solutions for people’s real problems are needed, rather than patriotic and nationalist rhetoric to further stir up popular discontent.

Brexit Impact Tracker - 27 March 2021 : Asymmetries in views and in trade: What some European papers say about the ‘vaccine war’ and the emergence of ‘asymmetric trade patterns’

The dominant (supposedly) Brexit-related story this week was the row with the EU over vaccine exports between the UK and the EU. EU Commission president Ursula von der Leyen announced last Saturday that the EU was considering more stringent rules for exports of Covid19 vaccines to allow it to ban exports of AstraZeneca doses.  

Predictably, Monday’s British papers extensively reported on the story and headlines about a 'vaccine war’ between the EU and the UK were prominent. Equally predictably, the Johnson government ministers seemed to relish the opportunity for a spat with the EU. One of them is on record telling the EU to act like ‘grown-ups’. Health Secretary Matt Hancock – referring to the UK’s exclusivity contract with AstraZeneca – triumphantly declared “Our contract trumps theirs. It’s called contract law — it’s very straightforward.”  He added: “I believe that free trading nations follow the law of contracts,” which can only be seen as sarcasm given the Johnson government’s track record of disregarding its legal commitments.

Yet, as Chris Grey and others have pointed out, the row over vaccines has very little to do with Brexit. In fact, the only reason why it is related to Brexit, is because the government wants it to be. Indeed, it is another way to keep the nationalist fire burning that brought the Johnson government to power.

Given the strong reactions to von der Leyen’s announcement in the UK, I thought a look across the Channel might be instructive. Browsing some national newspapers web pages on Monday morning, quickly revealed one thing: the vaccine row did not really make frontpage news in France or Germany.

It took me a few minutes of digging to find any reporting on the issue on the web page of the centre left Le Monde for instance. Interestingly, the article that I did eventually find provides a very different take on the story than what I found in most British news outlets. Rather than a story about the EU versus the British government (or even the British people), the focus in Le Monde was very much on the Commission’s attack on AstraZeneca as a company. Thus, the article [FR] stated that “The pharmaceutical group is in the hot seat in Europe because of delays in the delivery of doses.” The article mentions the company’s failure to live up to its contractual obligation to delivery 90m doses during the first quarter and 180m does in the second quarter (a shortfall 60m and 110m respectively according to the paper). Britain is mentioned only once and only when citing AstraZeneca’s defence that referred to export restrictions imposed by non-EU countries that prevented the company from sending vaccines to the EU, which - Le Monde points out – can only refer to the UK and the USA, as the only non-EU production locations mentioned in the EU’s contract.  The article also cites a high-ranking EU official saying that the EU was suspecting that the problem has arisen because the company has sold the same doses several times. This seems to be the real scandal according to Le Monde. Overall, then, the article very much focuses on the company – which incidentally is referred to as a Swedish-British Group (Swedish first, British second) and the AstraZeneca vaccine is not called the ‘Oxford jab’ – rather than on the UK.

It was even harder to find any reporting on the issue on the web page of Libération on Monday. However, the centre-left/left daily’s previous reporting [FR] on the EU Commission’s attitude towards vaccine exports is interesting however. When the Commission first floated the idea of export approval legislation, the left-leaning newspaper did choose very strong language … to condemn the Commission president’s actions: ”Vaccins : quelle mouche a piqué Ursula von der Leyen ?” [Vaccines: what’s gotten into Ursula von der Leyen?] and to go on “this weekend’s fuss over the export control of Covid-19 vaccines is a striking illustration of the incompetence, disorganization, and paranoia that are becoming the hallmarks of the von der Leyen administration.”

On Thursday 25th March, 2021, the 27 EU member states had moved to back von der Leyen’s policy, enabling the commission to ban exports if deemed necessary. The tone in the French newspapers had not changed much.

Le Monde commented on the member states’ decision to back von der Leyen’s policy, stating that the EU had decided on “a vaccine war with the UK.” But the tone of the reporting is not bellicose and does not suggest that the vaccine war is something desirable from the French perspective. Again, the focus is on AstraZeneca’s rather than Britain’s role in the row. Brussel correspondent Virginie Malingre in a web chat with readers [FR] did mention the British reluctance to let AstraZeneca export doses produced in the UK to the continent, but the focus is on blaming AstraZeneca for signing “contracts with Europe and the UK that are not compatible [FR].” The correspondent also regretted the EU’s naivety when signing the contract without an exclusivity clause that Britain’s contract contains (guaranteeing that the first 100m doses would be delivered to Britain). But the focus of the reporting is once again on comparing AstraZeneca’s behaviour compared to other vaccine producers, rather than dwelling on the UK’s role.

A similar picture emerges from reporting in the right-wing Figaro, which extensively cites von der Leyen’s accusations against the UK for not exporting any doses to the EU [FR] as well as the French foreign minister’s statements [FR] to the same effect. But the focus is once again on the role that AstraZeneca plays in the row and puts the issue in a broader context noting that [FR] “over the last two months, the EU has exported 43 million doses to 33 countries, including the United Kingdom (10.9 million doses), Canada (6.6 million), Japan (5.4 million) and Mexico (4.4 million). It has not received a single dose in return.” The right-wing newspaper also notes the opposing voices within the EU, namely Belgium and the Netherlands [FR] who worry about their reputation within global pharmaceutical value chains. The paper does refer to the tense relationship between the EU and Britain as a factor affecting the way the issue is dealt with; quoting a diplomat [FR] as saying “If the UK and the EU were on good terms, we would be working together to see how AstraZeneca can serve both. But we're in this argument although we have the same interests and needs.”

Overall, no comparable bellicose, ‘us-versus-them’ rhetoric in some major French newspapers then.

What about on the other side of the Rhine? The German press seemed even less interested in the issue than the French one.

The Frankfurter Allgemeine Zeitung [GER], like the French ones, focussed on von der Leyen’s attacks on AstraZeneca rather than on Britain, noting that Biontech and Moderna did fulfil their contractual obligations, while AstraZeneca did not. The Sueddeutsche Zeitung, Germany’s second largest daily newspaper, seemed even less interested in the row, leading on Monday morning with possible sanctions against Turkey ahead of the EU summit instead. The coverage of the vaccine row, was pretty much limited to a factual report of what von der Leyen had said [GER]. Germany’s largest daily newspaper – the tabloid Bild – did not seem particularly interested in the issue either. An article from March 20th, 2021 after von der Leyen’s announcement, did mention the term ‘vaccine war,’ but only when summarising the British press’s reaction to the announcement: Brits talk about ‘vaccine war’ [GER]. The rest of the article focuses on other vaccine producers’ warning about the impossibility of implementing an export ban, due to possible retaliatory measures and disruption to global supply chains.

In short, clearly the European Commission’s president and some national governments – mainly France – adopt a tough stance on vaccine exports. Yet, an – admittedly cursory – glance at some German and French newspapers leaves no doubt that for our ‘European Friends’– to use the phrase that our PM (sarcastically or hypocritically one has to assume) has started to use –, the vaccine row is not about Brexit or even Britain. It is mainly about a Swedish-British private company that has contractual obligations towards the EU. This look beyond the borders confirms the view that it is mainly the British government (and perhaps part of the red top press) that wants this issue to be about Brexit, because it fuels their nationalist agenda.

Trade: Two parliamentary reports and emerging asymmetric trade relations

The other interesting development – this one genuinely Brexit-related – this week relates to trade. The UK Parliament has published two parallel reports on trade after Brexit. The reports do not contain anything new to anyone who has followed the events since January 1st, 2021, but seeing the vast number of issues that remain unsolved under Boris Johnson’s Trade and Cooperation Agreement (TCA) is quite frankly overwhelming.

The House of Lords’ EU Goods Sub-Committee published a report that unsurprisingly concluded that trade in goods was significantly harder after the end of the transition period. Indeed, the committee’s chair Baroness Verma explicitly states that “The Brexit trade deal struck with the EU may have prevented the nightmare of a ‘no deal’ exit for the UK, but a lot of unfinished business remains between the two sides.”

The report lists an impressive list of issues where the TCA does not provide any solutions. These include: The risk of unilateral tariffs due to discrepancies in subsidies regimes under ‘level playing field’ provisions; the impact of the ‘rules of origin’ provisions on supply chains (and notably the risk for producers from poorer countries to be squeezed out of them); the failure to conclude a mutual recognition agreement on conformity assessment is called a ‘significant blow,’ as it introduces new testing requirements; the risk of permanent physical checks at borders due to sanitary and phytosanitary measures on trade of food and animal products; the urgent need to invest in and simplify customs procedures; the impact of new VAT rules on traders; various problems related to the transport of goods, including the need to conclude bilateral aviation agreements with the 27 EU members states; and the need for more support for (small) businesses to navigate the ‘the substantial increase in administrative complexities’ (bonfire of red tape anyone?).

The House of Lords’ EU Services Sub-Committee’s parallel report on services trade is only slightly more positive. While it notes that the “TCA offers unprecedented cooperation on digital trade compared with other EU free trade agreements,” the list of concerns is worrying. Thus, the committee mentions the absence of mutual recognition of equivalence in financial services as a key issue and is concerned that “over time this may lead to a big shift of people and assets out of the UK.” Another big concern is the issue of business mobility provisions both for professional services and creative industries. The committee notes that “[t]here will be real problems for UK professionals whose qualifications are not recognised in the EU under current arrangements.” Mobility provisions will particularly affect professional services and the creative industries which employ 2m people but who will find it ‘difficult […] to tour in the EU.’

Meanwhile, the attempt to ‘take back control’ keeps producing interesting unintended consequences. Other Brexit bloggers have previously noted the paradoxical situation where the UK government’s unilateral decision to delay the introduction of certain border checks – due to delays in putting in place the necessary border infrastructure – means that exports have become more difficult, imports have not. In other words, EU companies continue to benefit from relatively easy access to the UK market, UK companies exporting to the continent face much stricter barriers. The resulting ‘asymmetric trade’ pattern advantages EU companies who face less competition at home, but maintain access to the UK market.

A similar pattern of ‘asymmetric trade’  - to the disadvantage of UK companies – has emerged in aviation. Alastair Wilson – Managing Director of Titan Airways – told BBC Radio 4’s Today programme [at 6:12am] about the impact of the TCA on chartered airlines. In the absence of multilateral or bilateral agreements about the ‘fifth freedom’ (air travel), UK-based airlines need to obtain permits from individual EU member states to fly to and within the EU. For France and Germany, the permit procedures follow a so-called “non-objections process” which applies to all third countries. This procedure implies that EU carriers have a first right of refusal to operate any given job. This in turn means UK companies have to show that all national carriers are unavailable before the UK airline can obtain a permit. Consequently, many jobs involving EU destinations go to EU carriers rather than UK ones. Yet, the reverse is not true. According to Alastair Wilson, the UK authorities adopt a more liberal approach, making it relatively easy for EU carriers to obtained permits to fly to and within the UK. These instances of ‘asymmetric trade’ are hardly compatible with the ‘taking back control’ rhetoric. While these problems can certainly be put down to ‘teething issues’ and may be resolved in time, Titan Airways has started the process of moving its headquarters from Stansted to Malta.

Taking back control…and selling out

Another piece of evidence about how shallow the notion of ‘taking back control’ is, comes from the latest news about an investment deal signed between the UK and Abu Dhabi, which will lead to considerable investment from the UAE country in UK life sciences and green technologies. This multibillion-pound deal is the first one signed by the new Office for Investment, which the PM launched in November to stimulate inward foreign investment.

Of course, there is nothing fundamentally new about the UK relying heavily on foreign investment and being willing to sell off the family silver more than any other European country (remember the Cadbury takeover?). Still, the Abu Dhabi deal is another stark reminder that anyone who may have voted for Brexit hoping for some sort of control not just over ‘our laws and borders,’ but also our economy, will be bitterly disappointed. Brexit will not increase British control over companies, but will replace dependence on investments from certain regions of the globe to others. This is neither surprising, nor necessarily a big problem depending on where one stands on free trade, human rights, and other issues, but it highlights the fundamentally ambiguous – dare I say ‘two-faced’? – nature of the Brexit project: promising at the same time national sovereignty and deepened international economic linkages. Other Brexit bloggers and particularly Chris Grey have noted this “longstanding and paradoxical dynamics of Brexit […] between Brexit as a nationalist and protectionist project and as a globalist free market project.” Achieving both will be impossible, but in the process of trying, important historically grown alliances and economic relationships may be destroyed and replaced with others.  

Northern Ireland Protocol (NIP): The gathering storm?

The week finished with some really worrying news from Northern Ireland. The Independent reported stark warnings from a senior unionist figure who considers that “[w]e are perilously close to a line which, when crossed, will lock us all into a pattern all too familiar.” In the Belfast News Letter, Peter Robinson, former DUP leader and First Minister of NI, warned that unionists “[…] reflect on the commitments they were given, and which have been appallingly broken leaving the odour of betrayal in the air.”

Earlier in the week, the EU had signalled its willingness to discuss (renegotiate?) the NIP with the UK government if the UK started to follow the agreed upon procedure of providing a road map before taking any unilateral decisions on grace periods and other trade issues. Given the unionists’ warning, it would seem imperative that the UK government seizes its chance to tackle the issues around the NIP as soon as possible by engaging with the EU in constructive talks rather than persisting with grandstanding and name-calling. As, Baroness Verma also noted, a more conciliatory attitude would help to solve some of the long list of trade issues the EU Goods Sub-Committee found: “Ongoing dialogue will be crucial to achieving smoother trade. The TCA should be treated as the start, not the end of the UK’s new relationship with the EU.”

Sadly, there is not much cause for optimism in this respect. Despite some conciliatory tones from the PM himself, his ministers spent another week fanning the flames rather than starting to build a more constructive relationship with the EU. This goes beyond rhetoric: The Lords’ EU Services Sub-Committee noted with regret that the government had decided to “defer establishing the Partnership Council and other governance arrangements under the TCA,” which are essential to guarantee a smoother implementation of the TCA. This does not bode well for the governments willingness to seize the opportunities to solve urgent issues such as the ones around the NIP before it is too late.

Brexit Impact Tracker - 20 March 2021: “Global Britain” and the Integrative Review: Boris Johnson’s second “have-your-cake-and-eat-it” moment

Global Britain. That is the slogan that encapsulates the Johnson government’s ambition and vision for Britain’s place in the world after Brexit. This week we got a first glimpse of how the government intends to implement that strategy. On Tuesday, the government published its long-awaited Integrative Review of Security, Defence, Development and Foreign Policy, entitled ‘Global Britain in a competitive age.’ The haphazard and in part contradictory strategy that emerges from the document does not inspire confidence in its potential to achieve the tricky balancing act the UK government is facing between the need to strike new trade deals while not further alienating its historical allies. With the EU launching legal action, over the UK government’s unilateral action on the Northern Ireland Protocol (NIP) and the USA increasingly weighing in on the issue, the latter goal seems increasingly urgent. Yet, the UK government’s new ‘sovereignty first’ doctrine may increasingly isolate the UK and lead its government to adopt an increasingly nationalist rhetoric to try and maintain domestic support.

The post-Brexit China strategy and its contradictions

The key points of the review that the media and commentators picked up on were the ambiguous attitude towards China and the unexpected announcement of an increase in the number of nuclear warheads.

Regarding the relationship with China the government walks the tight rope between acknowledging China as a threat and treating it as a valued trade and investment partner. All the ambiguity of the UK attitude is summarised in one sentence of the review (p.62): “China and the UK both benefit from bilateral trade and investment, but China also presents the biggest state-based threat to the UK’s economic security.” The Review promises “deeper trade links and more Chinese investment in the UK,” but also that “[w]e will not hesitate to stand up for our values and our interests where they are threatened, or when China acts in breach of existing agreements.” How exactly this circle can be squared, the review does not say.

The Huffington Post published a quote by Foreign Secretary Dominic Raab, which may shed some light on the government’s priorities. In the excerpt the Foreign Secretary made it clear that the UK would miss out on future trade opportunities and reduce its influence if it only dealt with countries with good human rights records. The UK is of course not the only country that has no hesitation to strike deals with countries whose human rights records are less than perfect (for instance, the EU agreed an investment deal with China late last year). But the bluntness of the foreign secretary’s statement does not suggest that standing up for values will be high on the British government’s priority list.

Yet, human rights issues may not be the only ones standing in the way of the ‘positive economic relationship’ with China that the review promises. Most importantly, the Review also contains a geo-political strategy called the “Indo-Pacific tilt” (p.64), that would see the UK’s foreign policy focus shift towards South East Asia. This strategy is considered at least partly aimed at thwarting Chinese ambitions in the region, creating an obvious incongruity with the aim to build a better economic relationships with China . Moreover, academic observers have pointed out the pressure that the Indo-Pacific tilt will put on the UK’s limited military resources, potentially leading to the UK overstretching its capacities and undermining its security commitments in Europe and the North Atlantic.

In sum, the China strategy set out in the review is in keeping with the Government’s ‘have-your-cake-and-eat-it’ rhetoric portrayed during the Brexit Deal negotiations, which will prove difficult to translate into practical policies.

The China strategy set out in the review immediately faced fierce criticism from within the Tory party. Tobias Ellwood, chair of the Commons defence select committee, argued that China should have been labelled a “geostrategic threat.” Yet, the prime minister insisted that those who wanted “a new cold war with China” were mistaken.” This soft stance on China clashes of course not only with the ‘hawkish’ parts of the Tory party, but also with the Biden administration’s current approach towards China, which creates additional sources of tension with the USA.

Nuclear deterrence policy: More broken promises

The Integrated review’s other much-cited point concerns the UK’s nuclear deterrence policy. With the review, the UK government abandons its commitment made in 2010 to reduce its nuclear warheads from 225 to 180, by the mid-2020s. Instead, the government suggests that the number of warheads should increase by up to 40% to no more than 260. This departure from previous security strategies is telling in at least two respects. Firstly, once again, in a display of the Johnson government’s ‘sovereignty first’ approach, the UK unilaterally and without consulting its allies changed course on a matter of global importance. Secondly, while the review’s justification of the change in policy is somewhat unconvincing (referring to “developing range of technological and doctrinal threats” p.75), the move does illustrate the current government’s perception of the world as an increasingly dangerous and conflictual place in which the UK will need to play a more assertive role in military terms. The unilateral move belies the references to multilateralism in other parts of the review and risk undermining the UK’s standing with his allies. One expert – quoted in the FT –  lamented the move as “a real blow” to the multilateral process of nuclear disarmament and predicted that it will “cost in terms of the UK’s reputation in nuclear diplomacy.”

 The UK’s ambiguous policy towards China, the unilateral departure from longstanding multilateral commitments, and the general incoherence of the strategy that emerges from the review does not bode well for Global Britain’s relationships with its historical allies in Europe and North America. This is particularly worrying in a situation where relationships with even its closet allies have become fraught due to the issues surrounding the NIP.

The US weighing in on the Northern Ireland Protocol: On the path to international isolation?

The past week has indeed seen tensions around the NIP further escalate. The EU has officially initiated legal action over the UK’s unilateral extension of grace periods on certain goods traded between Britain and Northern Ireland. At the same time, at the occasion of a St Patrick’s day meeting with the Irish Taoiseach, US President Jo Biden and US lawmakers have weighed in on the UK’s approach to the implementation of the NIP. US Lawmakers from both parties have adopted a resolution threatening to block a trade deal between the US and the UK if the terms of the Good Friday Agreement (GFA) were not respected. Richard Neal – the head of the House of Representatives’ Ways and Means committee, which is in charge of trade agreements – openly expressed his annoyance and concern about what he described as an emerging pattern in the UK government’s approach to the NIP, which consisted in taking unilateral action and ‘concealing’ it as temporary measures. Similarly, in a joint statement following their Patrick’s day meeting, the US President and the Irish Taoiseach ‘called for the good faith implementation of international agreements designed to address the unique circumstances on the island of Ireland.’

 Cranking up the nationalist rhetoric

Given the incoherent strategy outlined in the Integrative Review, the escalating tensions around the NIP, the US increasing pressure, and the UK government doggedly persisting with its ‘sovereignty first’ approach, there is a risk that the UK will manoeuvre itself into a corner where it will get neither its sovereignty back, nor be able to offset the self-inflicted economic damage resulting from Brexit. However, instead of addressing the issues at hand directly, the government increasingly resorts to an age-old coping strategy for governments under pressure; namely: nationalism.

To deflect international and domestic criticism the government continues to appeal to nationalist resentments by portraying the EU as “bullying” the UK. The UK Government’s insists that its infringements on the Trade and Corporation Agreement (TCA) and the NIP are reasonable temporary measures that are normal in the early implementation period of new international treaties. Referring to healthcare and residency cards for UK nationals in the EU, the government claims that the EU side too “are not yet fulfilling commitments.” Spurred on by Eurosceptic Tory MPs – who called for a halt to payments to the EU agreed on under the divorce bill – the government seizes on every opportunity to portray the EU as the unreasonable side. Thus, this week, several EU countries’ decision to halt the role out of the AstraZeneca vaccine has led the UK government to publicly defend the vaccine – which it tellingly refers to as the “Oxford jab” – and Ursula von der Leyen’s threat to block exports of vaccines manufactured within the EU, has been described as ‘vaccine war.’

The UK government is not necessarily wrong to criticise some of the actions the EU commission and EU member states have taken this week. Yet, the fact that a public health issue is turned into a political issue at the highest level, imbued with nationalist undertones is deeply worrying. The Johnson government tends indeed to turn mundane, social, and economic issues into highly emotional politicised ones, that appeal to nationalist sentiments and conjure ‘us versus them’ thinking. A striking example was the Pick for Britain campaign launched in 2020 to encourage British workers to replace immigrant workers during the fruit and vegetable harvest. The campaign used language that smacked of wartimes propaganda; calling for a ‘land army’ of Brits to “[c]ome help pick for Britain to feed the nation!” While the Pick for Britain campaign was a reaction to Covid-related travel restrictions not Brexit, it reflects the UK Government’s increasingly patriotic and nationalistic rhetoric. The more it becomes clear that delivering on the many promises made during the Brexit campaign will be difficult, the more the government will seek to blame the EU for it so as to sustain anti-European feelings and nationalist sentiments on which it relies to maintain its legitimacy. While this may sound overly dramatic, there is a real possibility that the UK may inadvertently head down a dangerous path of increasing international isolation and nationalist reaction. Indeed, political philosopher Hanna Arendt considered that the sort of politicisation of social questions that we currently observe in the UK rarely ends well.

Brexit Impact Tracker - 14 March 2021

The past week saw the publication of the first official trade figures by the Office for National Statistics (ONS) since the end of the Brexit transition period on January 1st, 2021. As could be expected, the figures show a steep decline in trade with the EU since January and further obstacles to trade are still to be introduced from the EU side next month. This has sparked a debate between the UK government and UK businesses over whether or not the slump is a permanent effect of Brexit or rather a transitory phenomenon, with the government insisting the slump was due to inevitable ‘teething problems.’

 The UK government’s defiant stance is not limited to its relationship with British businesses, but also increasingly marks its interactions with the EU. Different statements and actions by the UK government and David Frost – its minister responsible for EU relations – have led to tensions between the two sides escalating further. The EU is now preparing for a more conflictual approach to managing its relationship with the UK, which may be in the interest of the current UK government, but is likely to damage both the UK economy and the integrity of the United Kingdom in the short- and medium-term.

 Trade: Slump in trade with the EU, delays, and more red tape to come

 The ONS figures on trade show a 40.7% drop in exports of UK goods to the EU, while imports from the EU dropped 28.8%.  Trade with other countries does not show a similar decline over the same period, which indicates that much of the drop is indeed due to Brexit rather than the economic impact of the pandemic.

However, a controversy has erupted over the interpretation of these figures. The UK Government insisted that trade volumes went back to normal in February and that the January slump was largely due to companies’ stockpiling ahead of Brexit as well as some teething problems. Yet, certain sectors – Food producers and hauliers in particular – contest the governments’ figures and interpretation and urge the government to take business concerns over increased barriers to trade seriously. The FT quoted the Chief Executive of the Cold Chain Federation of perishable good producers as saying “I wish the government spent as much time listening to business concerns as they do searching for ways to spin the trade figures.”

 The food industry has already been particularly hard it by Brexit. Thus, seafood exporters for instance reporting a 83% drop in sales to Europe and producers of Stilton cheese have discovered that exporting to the EU is no longer economically viable. Some have started reorienting their business towards North America instead. However, more trade barriers on food-products are still to come. From April 21st the EU – following the agreed timetable – will introduce additional checks on shelf-stable products containing dairy and eggs. This is expected to lead to a very significant increase in paperwork including the need for vet-stamped export health certificates for such products. The consequences will include increasing costs for firms (up to £300,000 a year according to one estimate), and a shortage not just of veterinarians but also customs agents.

The UK governments has reacted by delaying additional sanitary and phytosanitary (SPS) checks on products imported from the EU, because the necessary border control posts will not be in place by the original July deadline. Other than that the government mainly reacted by promising support and appeal to the EU – in the words of a spokesperson for the Department for the Environment, Food and Rural Affairs (Defra) – ‘to act pragmatically.’ The Defra’s reaction is representative of other parts of the UK government’s approach to the UK businesses and the EU.

The UK Government’s Post-Brexit Strategy: Nationalism dominates economic and political interests

The differences between the Government and some UK businesses was illustrated this week by calls from business groups and exporters for Brexit Minister David Frost to abandon his abrasive style in dealing with the EU.  

Lord Frost’s first weeks in his new role as Berxit Minster were indeed marked by what EU diplomats and member states perceive as outright “provocations.” The PM’s unilateral decision to extend ‘grace periods’ for the introduction of additional customs checks on supermarket goods and parcels exported from Britain to Northern Ireland was followed by an article by Lord Frost in the Telegraph where Lord Frost accused the EU of ‘sulking’ and of ‘ill will’ towards the UK. Lord Frost’s confrontational style was further illustrated by EU Commission Vice President Maroš Šefčovič, complaining about Frost not using the ‘hotline’ that was established under Frost’s predecessor Michael Gove to facilitate communication between the UK government and EU commission.

The EU reacted to the extension to the ‘grace periods’ by initiating legal action, but has also started considered other retaliatory measures to prevent the UK government from reneging its commitments under the Trade and Partnership Agreement. According to news reports, EU diplomats chose undiplomatic language to voice their discontent with the UK government’s current approach. One diplomate is quoted as saying  “We can’t accept that we are being taken for granted or being taken for idiots.”

Reportedly, the EU is considering various retaliatory measures, including denying the UK membership of a European legal co-operation pact, further delaying market access for the City of London, and rejecting the UK’s request to join the Lugano Convention, which would ensure the UK’s civil and commercial court judgments are recognised abroad.

 While these possible retaliatory measures are currently only being discussed informally, they do illustrate just how fraught the relationships between the UK and the EU have become. Between the pressures from UK businesses, the EU, and the pro-Brexit Tory constituency that brought Boris Johnson to power, the government resolutely chooses the path that keeps the latter happy – whatever the impact on its relationship with two former.

 The Johnson government’s abrasive relationships with business is in keeping with the attitude its most senior representatives have adopt for some time. During his time as Foreign Secretary in the May government, the now PM made it clear that business interests were secondary; famously replying ‘F**k business’ to a question about business interests under his favoured hard Brexit strategy.

 UK businesses themselves, however, remain divided over Brexit and over the best approach for the UK government to take. Unsurprisingly, depending on how reliant different businesses are on the Single Market, or how vulnerable to competition from the EU in the home market, businesses seem to be more or less supportive of a hard line towards Brussels. Recent academic research found that the fragmentation and division of the UK business elite over its stance towards Brexit is a key reason why Brexit happened in the first place.

 The UK government’s seemingly unheeding approach towards its relationships with the EU is not necessarily irrational though. One businessman is on record saying “Adopting a ‘madman’ negotiating strategy might be great politics, but it’s terrible for food supply chains."  A senior Tory goes as far as suggesting that Lord Frosts appointment was a deliberate attempt by the PM to have “a row with the EU.” It is indeed hard to avoid the conclusion that many of the Government’s actions towards the EU – such as denying full diplomatic status to the EU’s mission in the UK – were motivated by anything else than an attempt to provoke a strong reaction. Keeping emotions running high allows the UK government to continue the strategy that brought it to power in the first place and that crucially hinged on portraying the EU as a “bully” and the source of the UK’s problems. Thus, sabotaging the emerging relationship with the EU post-Brexit constitutes a way of maintaining popular support for the government without having to find a new source of legitimation now that Brexit has happened.

So far, the strategy seems to work. Together with a successful Covid19 vaccination campaign, stirring nationalistic resentments against the EU may help the government regaining some of the popularity lost due to the initially botched Covid19-response. According to YouGov ratings of the PM’s performance have gone up from 34% in October to 41% in February 2021 with the number of people answering that he is doing badly as PM declining from 59% to 52%. The strategy also receives strong support from within the party: Tory grandees like Ian Duncan Smith blame the EU for ‘bullying’ Britain and support Lord Frost’s tough stance.

 The ultimate consequences of this political strategy may be dire for two reasons, however.

 For one, the UK government’s repeated violation of international agreements that it signed only a few months earlier – as happened before with the Internal Market Bill and now again with the unilateral extension of the ‘grace periods’ – undermines its credibility as a reliable partner respectful of the rule of law. Beyond the moral issues involved, this may ultimately have very concrete consequences of the UK-EU relationship post-Brexit. While the post-Brexit relationship with the EU will always be subject to re-negotiation and regular updating of agreements, the current TCA was signed for five years, which provides citizens and business on both sides with some planning certainty. Yet, the UK government’s continuous disregard for various provisions contained in the TCA, means that Brexit is more likely to become a situation of constant political negotiations and legal action, rather than a more stable and certain state where the relationship is settled and governed by international treaties for a number of years.

 For the other, and more immediately, if the UK persists with the extension of ‘grace periods’ for goods shipped from Britain to Norther Ireland, the EU might find itself very soon manoeuvred into a corner where it faces the choice between imposing border checks on the border between Northern Ireland and the Republic – and thus jeopardising the achievements of the peace process –, or refraining from imposing such checks and thus undermining the integrity of its Single Market regarding product standards. The latter move would arguably constitute a major overstepping of the EU’s own ‘red lines’ and an existential threat to its Single Market. Conversely, jeopardising the peace process in Northern Ireland is something the EU wanted to avoid at all cost – not least because of US pressure to save the Good Friday Agreement. Given that legal action over the breach of the TCA will take between one and two years, we are headed towards a first ‘moment of truth’ where the EU is pushed by the UK government into making a very difficult choice.

 This situation may be the result of a conscious strategy the UK government. The PM visited Northern Ireland this week in an attempt to mend the strained relationships with the unionists. The Democratic Unionist Party (DUP) First Minister Arlene Foster increasingly insists that the Northern Ireland Protocol (NIP) needs to be abandoned to protect the integrity of the UK. In this context, forcing the EU into making a choice between the integrity of its Single Market and abandoning the key stipulation of the NIP that there cannot be a physical border on the Island of Ireland, may be an attempt  by the UK government to force the EU into renegotiating the NIP.

 Whatever happens to the extension of the grace periods, it is likely that the relationship between the EU and the UK will worsen in the coming months. As long as the nationalist fringe of the Tory party remains in control, it is also likely that political interests will continue to dominate economic ones – unless of course the economic pain resulting from the hard Brexit strategy becomes too acute.

Brexit Impact Tracker - 7 March 2021

This week’s Brexit-related news saw more evidence emerging that trade in goods is considerably affected by Brexit. At the same time, in search for its place in the post-Brexit world economy, the UK Government continues down the path of a ‘hard Brexit’ approach, which sees the government adopt a rather confrontational stance towards the EU and pursuing regulatory reforms that focus on Global competition rather than seeking continuing alignment with European standards.

Trade – teething problems or permanent shift?

As more EU countries publish their trade figures for the beginning of the year, it seems increasingly clear that Brexit has led to reduced trade between Britain and the EU beyond the impact of the Covid19 pandemic. The French customs office reported a decline a decline of 13% of French exports to the UK and a 20% decline of imports from the UK. This is in the context of otherwise raising trade activity in France in January 2021.

Brexit is also reshaping the shipping routes between Ireland, Great Britain, and the European continent. In order to avoid new custom checks and red tape at the EU-British borders, shipping companies have increased capacity on the – longer – routes linking the Republic of Ireland directly to the continent while reducing services on the shorter ‘land link’ via Great Britain.

The UK government, however, maintains that trade volumes are back to normal after a sort slump immediately after the end of the transition period on January 1st, 2021.

It is of course still too early to know whether any of these changes in trading patterns will be permanent or are simply the result of companies still having to adapt to the new formalities that were introduced at very short notice.

The emerging relationship with the EU – between nostalgia and humility?

A more important issue that continues to make the headlines is the emerging relationship between the UK and the EU.

A recent study by a group of researchers at King’s College London and Harvard, investigated how the ‘Global Britain’ slogan may be transformed into an actual policy after Brexit. The report points out the inherent ambiguous nature of term, which seeks to signal openness and international orientation, while smacking of nostalgia for Britain’s lost imperial power. The authors – based on interviews with politicians and civil servants in the UK and overseas – suggest that to be successful the Global Britain narrative needs to be outward looking and collaborative not adversarial, humble not arrogant, and appeal to both international and domestic audiences. Yet, this week’s developments in various areas suggest that the UK Government currently is not inclined to adopt a collaborative and humble approach towards the EU. The Northern Ireland Protocol (NIP) and financial market regulations are two cases in point.

Northern Ireland Protocol

This week, the UK Government unilaterally decided to extend the so-called “grace period” on the introduction of border checks on agri-food products and parcels entering Northern Ireland from Britain. The full set of checks and procedures – agreed between the UK government and the EU under the NIP – was due to be introduced by April, but has now been pushed by the UK to October. Unsurprisingly, the EU’s reaction was robust, calling the move a breach of international law and announced that it would take legal action. The UK’s new “Brexit Minister”, in return, accused the EU of ‘ill will’ insisting that the UK’s unilateral move was in accordance with the NIP.

The continuing issues surrounding the implementation of the NIP stoke further tensions between Unionists and Nationalists in the NI Assembly, but also undermine the UK Government’s credibility in further negotiations with the EU. Thus, the Irish Foreign Minister publicly state that the UK could not be trusted in further post-Brexit talks.

Regulatory alignment with the EU – financial services

One crucial area in which the UK has started initiating important post-Brexit reforms concerns financial services.  This week, Lord Hill has published a review of UK stock market listing requirements. The review makes it clear that the main goal of post-Brexit financial regulations is not primarily financial stability, but rather maintaining London’s competitiveness as a global financial centre. Indeed, the review suggests “that it would be helpful if the FCA [the financial Conduct Authority – UK’s financial market regulator] was also charged with the duty of taking expressly into account the UK’s overall attractiveness as a place to do business.” As such, the review has been seen as part of a ‘post-Brexit fightback by the City of London.’

Substantively, the review suggests a series of relaxations of the London Stock Exchange listing requirements. The most consequential recommendations concern the minimal level of free float and dual class shares. Regarding the former, the review suggests that the the number of shares that can be publicly traded and are not held by an insider (‘free float’) should be reduced from 25% to 15%. This implies that the founders of a company can maintain a larger influence over the business after it is publicly listed. Similarly, allowing shares with different voting rights (dual class shares) to be listed on the Premium segment would also implies founders could potentially maintain control over the company by controlling shares with higher voting rights than listed shares. This would allow founders – for instance – to prevent a hostile takeover.

Furthermore, the review suggests relaxations that would make it possible for Special Purpose Acquisition Companies (Spacs) to list in London. Spacs – also referred to as ‘blank-cheque companies – are companies that list on a stock exchange based on a promise to acquire a non-specified private firm and take it public. Spcas have become an important growth market in the US over the past year and the UK government is keen on London becoming an attractive market for such companies.

Taken together these changes would make the LSE a much more attractive place for companies to list – in particular high-growth tech companies which have increasingly chosen Hong Kong and New York over London.

A key question is what the proposed changes would mean in terms of regulatory alignment with the EU, which is key for the UK to obtain recognition as equivalent to EU in regulatory terms and thus maintain access for UK financial service firms to the EU single market.

Lord Hill insists that “this report is not about opening up a gap between us and other global centres by proposing radical new departures to try to seize a competitive advantage. It is about closing a gap which has opened up” (p.10) and that “[i]t makes no sense to think in terms of ‘ripping everything up’ or that we should diverge for the sake of diverging. We clearly need to maintain the high standards of investor protection for which the UK is known” (p.4).

However, reactions to the Hill Review were very mixed. Important investors voiced concern over the weakening investor protections and changes seemingly driven by a rush to participate in the current Spacs frenzy. Indeed, the proposed measures can be considered to shift power from minority shareholders to insiders and thus increasing risks for minority shareholders. As such, the changes may be interpreted as initiating a ‘race to the bottom’ in terms of investor protection.

Be that as it may, the proposed changes clearly deviate from EU regulations, for instance in terms of the recommendations for changes to the prospectus requirements, where Lord Hill freely admits that they “would take us closer to the kind of system we had before the Prospectus Directive and Regulation were introduced in the EU.” Indeed, according to the FT, Sir Martin Sorrell, Founder of S4Capital digital market and advertising business (which has a dual-class share structure), approvingly considered that the review “signals that the government’s ‘Singapore on Thames’ vision for a post-Brexit Britain is on the way to becoming a reality.”

Clearly then, regulatory alignment with the EU does not seem to be a priority for the UK Government, which will almost certainly eliminate any chance of the UK financial market obtaining regulatory equivalence status from the EU Commission. At the same time, the approach is in line with the UK government’s current adversarial rather than collaborative approach to its emerging relationship with the EU in other areas too. This approach, may reflect the fact that the UK Government is confident that its ‘Global Britain’ strategy can work regardless of its impact on the relationship with the EU.

Brexit Impact Tracker - 28 February 2021

This week has seen a series of interesting news related to Brexit. Four key elements start to emerge has important factors potentially determining the direction of travel of the UK post-Brexit. Firstly, the UK Government’s preferences regarding the market access versus sovereignty trade-off; Secondly, and not unrelated, the strategic decision for the UK on whether to engage in a regulatory ‘race to the bottom’ with the EU or a geographic ‘race to the East;’ Thirdly, the role of the state in the economy post-Brexit; and fourthly, the coinciding of Brexit with the Covid19 pandemic.

Sovereignty v. market access

Two news items this week suggest that the current UK government will maintain its ‘hard Brexit’ stance even in its approach to establishing a new relationship with the EU.

In the area of energy, UK energy producers have waited for some time for the UK government to announce its new carbon trading scheme. The FT reported that energy producers were increasingly worried about the prospect of the UK carbon emissions trading scheme not being linked to the EU’s scheme. Indeed, the government is yet to determine key aspects of the new scheme, most importantly the price at which carbon emissions will be traded. So far, the government has not committed to linking its scheme to the EU scheme. Significantly, a policy White Paper published in December 2020 acknowledges the possibility of international linkages of the new UK scheme, but does not mention the EU as a particularly likely partner. The uncertainty created by the absence of clarity on carbon trading prices, increasingly worries energy companies, but the government does not seem keen on alignment with the EU in this area.

In the area of financial market regulation, the media reported this week on a first draft of the Memorandum of Understanding (MoU) that the UK and EU are currently negotiating and which it is hoped will be signed by the end of March. According to the FT, the MoU explicitly contains a statement that “[t]he regulatory dialogue should not restrict the ability of either jurisdiction to implement regulatory or other legal measures that it considers appropriate.” This suggests, once again, that market access does not seem to be a key priority in these discussions. The impression that the current UK government strongly values sovereignty over market access is reinforced by statements made by the Governor of the Bank of England in relation to the EU’s purported attempts to force clearing of EUR denominated trade to take place within the EU from next year, suggest that in this area too, the British side is currently minded to accept a loss of market access in exchange for the ability to diverge significantly from EU rules.

Race to the bottom – or race to the East?

The ‘sovereignty approach’ to the post-Brexit relationships with the EU implies necessarily that UK companies will lose access to the EU’s single market. It therefore raises important questions about alternative markets UK companies may be able to access. Two basic – not mutually exclusive – strategies are emerging here: firstly, seeking increased competitiveness through regulatory competition with the EU by deregulating and attracting investors to Britain; or seeking to create closer ties with other geographic regions – in particular rapidly growing Asian markets – through bilateral or multilateral trade agreements.

Speaking at the National Farmers Union (NFU) annual conference, Trade Secretary Liz Truss announced this week a new governmental programme called ‘Open Doors campaign,’ which suggests that the geographic orientation towards East is an important part of the UK governments strategy in making up for the reduced access to the UK market. The programme seeks to support UK food and beverage businesses in reorienting their exports towards the increasing large middle-class consumers in Asian countries. Pre-Brexit, 60% of a total of £23bn in UK food and beverage exports went to the EU (2019 figures). This figure is bound to decline given numerous non-tariff trade barriers that are hampering food exports to the continent. Whether or not exports to Asian countries will compensate for the decline in exports to Europe will also depend on future trade agreements with countries in that region. Already in January, the UK has applied to join the Asia-Pacific free trade area CPTPP. Joining this regional agreement would help the governments geographic reorientation strategy. Whether membership of the CPTPP would make a material difference in the short run and allow exporters to compensate the expected losses from reduced trade with the EU is not certain. Currently, UK exports to the 11 CPTPP member states corresponded with 8.4% of GDP in 2019, approximately the same as the UK exports to Germany – and that in spite of the fact that the UK already has free trade agreements with 7 of the 11 member countries.

There was also some news this week, that indicate that the UK government will be pushed to play the regulatory competition card as well. The Association of British Insurers (ABI) urged the government to reduce the capital requirements for UK Insurers – that were set by the EU’s Solvency II regulation – and to simplify reporting requirements. This would constitute a considerable divergence from EU financial market regulation and almost certainly kill any hopes that the EU may still grant the UK equivalence status. However, the ABI clearly sees an opportunity to benefit from Brexit that would compensate for the loss of access to the single market. Whether or not that calculation is correct remains to be seen; what this push does suggest though is that certain industries may put considerable pressure on the government to go down the route of diverging from EU regulations rather than remaining closely aligned. This will add further incentives – besides more ideological ones – for politicians to choose sovereignty over market access. It may also create tensions between different sectors in the financial industry, with UK banks publishing a report this week that urges to government to work towards regulatory convergence not just with the EU, but globally.

State intervention

Another set of news that reach us this week was that the government is likely to take a very active role in reshaping the UK economy after Brexit.

Thus, already in November, the Chancellor had announced the establishment of a new public Infrastructure Bank, which will make up for the loss of access to the European Investment Bank (EIB). This week, ahead of the 2021 budget, the Chancellor specified that £12bn in capital investment and £10bn in loan guarantees would be committed to this new public bank. It remains unclear, however, what exactly the remit of the bank will be and therefore whether it will be able to live up to its potential.

The government also announced a new Standard Buyer Loan Guarantee (SBLG), under which the UK government guarantees loans of up to £30m by UK lenders to overseas buyers of UK products and services. This scheme is meant to boost exports by small and medium-sized enterprises (SME).

Together with another – Brexit-unrelated – announcement of state investment in high-growth firms through a new ‘Future Fund’ of £375m, it seems increasingly clear that the UK government does not shy away from a very hands-on role in the economy to shape the UK economy’s post-Brexit future.

 Covid a blessing for Brexiteers?

Finally, another aspect of Brexit that becomes increasingly clear is that contrary to what some may have expected, Brexit is not over but a process that has just begun. As such, politically too, Brexit is not settled – as many had hoped – with the departure of the UK from the EU, but it will remain a politically important issue for decades to come. In this respect, for the advocates of Brexit the coincidence of the end of the transition period with the Covid19 pandemic – and hence one of the most severe economic crises in living memory – may turn out to be a blessing in disguise. Indeed, while carefully designed academic studies may one day be able to disentangle the economic impact of Brexit from the economic impact of the pandemic, in the political arena it is unlikely that the two will ever be kept completely separated. A striking example was this week’s announcement of Italy’s trade figures. Italy is the first major EU economy to publish its trade figures for January 2021. They show a stunning 70% drop in imports from the UK. To be sure, much of this decline can be attributed to the pandemic. Yet, comparing this decline to that other countries exports to Italy have suffered, suggests that Brexit-related disruptions played a very major role. For instance, Italian imports from China, Russia, and Switzerland declined by less than 10%. Yet, in the political arena such subtleties can easily be forgotten and ultimately in public discourse the impact of Brexit may remain confounded with the impact of the pandemic. This may turn out to become an important element in future political discussions about the UK’s relationship with the EU.

Brexit Impact Tracker - 21 February 2021

This past week has seen further developments that provide interesting glimpses into what the future relationship between the EU and the UK may look like after Brexit.

Data Protection

Regarding data protection regulation, Brussels has granted the UK data protection regulation ‘equivalence’ status. This means, UK data protection regulations are considered equivalent to EU standards and data can continue flowing across the channel. This decision was important in particular for industries where data exchange across borders are particularly important - such as the insurance industry – and for law enforcement cooperation. While this is certainly good news, like in financial services – where the EU currently refuses to grant UK regulation equivalence status – this decision can be unilaterally revoked. Indeed, the commission has announced regular checks and a review after four years. This reinforces a trend that was to be expected once the terms of the UK-EU Trade and Cooperation Agreement (TCA) had become clear, namely, that the UK would be locked into a system where the UK government can choose to deviate from EU regulation, but will lose market access as a result. The two months since Brexit have clearly shattered any illusions that “taking back control” can be done without considerable costs.

Trade Barriers

A recent survey by IHS Markit amongst UK manufacturing companies found further evidence that the new non-tariff trade barriers have a real impact on UK exporters. A majority of companies reported export losses and disruptions to their supply chains due to Brexit. The manufacturing sectors is thus another sector that reports a considerable negative impact from Brexit, after other sectors – in particular fishing and seafood – have struggled with very considerable disruption.

Free movement of labour

There is also an increasing number of sectors that are mainly negatively impacted due to the new restrictions on free movement of labour across UK-EU borders. This week, growers of ornamental flowers have issued a stark warning that part of the harvest of daffodils and other spring flowers will be lost due to their inability to recruit the required number of pickers. While the government has adopted a seasonal workers pilot scheme, which guarantees that UK food producers can continue drawing on EU workers for harvesting, ornamental plants do not fall under this scheme. The impact is potentially large for a sector where pre-Brexit more than half of the pickers were recruited from EU countries.

Governance and UK’s international relations

The most significant news around Brexit in the past week, however, concerned the appointed on Wednesday of David Frost – UK’s chief Brexit negotiator – to a cabinet position in order to coordinate the UK-EU relationships.

This is a remarkable move in several respects: For one, many commentators were quick to point out the irony in Lord Frost – an unelected civil servant – joining the Cabinet Office as a Minister of State.

More importantly, the appointment of a Cabinet Minister in charge of EU relationships raises important questions about the governance structure that will govern both the TCA and the UK’s relationships with the EU more broadly. In particular, managing the relationship between the UK and EU countries like France and Germany is currently the role of the Foreign Secretary Dominic Raab. While part of Lord Frost’s brief will also overlap with Secretary of State for International Trade Liz Truss’s portfolio. Some observers fear that Lord Frost’s appointment risks duplicating some of these relationships and creating confusion over the respective responsibilities of Lord Frost, the Foreign, Commonwealth and Development Office, and the Department for International Trade. It remains to be seen how these uncertainty will affect the UK’s negotiation position at a time when it becomes increasingly clear that the EU will treat the UK mainly like the competitor it now has become for the block and is not inclined to grant the UK any easy victories.

Most importantly perhaps, Lord Frost will replace Michael Gove as co-chair of the Joint Committee overseeing the implementation of the TCA. This comes at a time where Gove has just started delicate talks with the EU side over the implementation of the Northern Ireland Protocol. So far, Lord Frost has mainly made a name for himself as a staunch advocate of an inflexible hard-line approach to Brexit. He’s credited for the hard Brexit strategy of PM Johnson, a very minimal trade deal, while reportedly also convincing the PM back in December to threaten to break international law with an Internal Market Bill that would have overruled parts of the Brexit agreement. As such, Lord Frost does not seem like the person who will seek to appease the growing tensions with the EU over various issues including the NIP, the ‘regulatory equivalence’ of the City of London, and a possible renegotiation of the rules governing exports of shellfish. Indeed, the unexpected appointment may signal that PM Johnson’s vision for the relationship with the EU remains one that favours sovereignty over market access even when it entails tensions and conflicts with Brussels.

Brexit Impact Tracker – 14 February 2021

Week six after Brexit continues to be dominated by discussions about the implementation of the Northern Ireland Protocol (NIP), stories about disruptions to exports, and changes in patterns of trading in financial products; but also the emergence of stories about companies benefiting from the UK’s exit of the single market.

The Northern Ireland Protocol

Discussions between the British Government and the EU Commission continued about the implementation of the NIP. The tone continues to be ‘robust’ on both sides with the FT citing one EU diplomat’s rather undiplomatic statement that ‘[i]t would already be a step forward if Britain put as much energy into the implementation of the NI protocol as it puts into complaining about it,’ while Michael Gove blamed the EU to follow an ‘integrationist theology.’ A joint statement following a meeting on Thursday 12th of February, between Gove and the Commission’s vice president Maroš Šefčovič, unsurprisingly did not hint at much progress in the talks, with the EU insisting on a full implementation of the protocol and the UK appealing to ‘pragmatism.’

The substantial issues seem to remain unsolvable. The best the UK side currently seems to be hoping for is an extension to the various ‘grace periods’ accorded to certain products before full custom checks are introduced. The EU side makes such extensions dependent on the UK first fully implementing the existing rules. Meanwhile, unionists in Northern Ireland remain hostile to the NIP and the post-Brexit trade agreement in general. DUP leader and First Minister Arlene Foster stated that a ‘more rigorous implementation of the Northern Ireland Protocol is “not going to work”.’ It is currently difficult to see how the UK government can successfully navigate between the imperative of not jeopardising the Good Friday Agreement, reducing disruption to trade between the UK and Northern Ireland, while delivering on the promise of the UK exiting the single market without overstepping Brussel’s read lines.

Non-tariff trade barriers: Rotting fish and meat

Stories about the impact of the new non-tariff barriers to trade also continue to emerge, from tons of rotting UK meat at the EU boarders, to continuing problems with seafood and fish exports, notably due to insufficient water quality in parts of the UK.

Simultaneously, several industry bodies have started producing member surveys that give a sense of the impact of Brexit on trade during the first month after the end of the transition period. The Road Haulage Association (RHA) reports a drop of 68% of volume of trade compared to January 2020. Similarly, the British Chambers of Commerce’s (BCC) member survey found that 49% of UK exporters surveyed face problems with the new rules.  

The Government contests some of these figures and speaks of teething problems, while suggesting export levels were nearly back to normal by February. At the same time, the lorry queues many feared would form in Kent following Brexit did not materialise, although this may precisely be due to the decreased economic activity due to Covid19 and the anticipation of disruptions.

One interesting figure that has been widely reported, is that 50 to 60 per cent of lorries returning to the EU from the UK are empty. This hints at a certain imbalance in the impact of Brexit on the two parties, with EU firms exporting more goods to the UK than UK exporters sending back to the EU. This of course may be due that the UK has adopted a gradual approach to introducing boarder checks with full checks only to be in place by July 1st, 2021.

Equity trading and finance

Another story that hit the news was the shift in trading of European shares and derivatives from London to Amsterdam and other stock exchanges inside the EU. For the first time, the value of stocks traded on Euronext Amsterdam surpassed the volume traded on the London Stock Exchange. This is a highly symbolic moment that observers and some industry insiders see as the beginning of London losing its status as undisputed financial centre in Europe. Others, however, do not see this shift as much more than symbolic and do not consider it having a major impact on jobs in the City of London.

The change in trading patterns of financial products does indicate though that the UK is now facing a crossroads and has to decided whether it will seek to negotiate a formal agreement with the EU that would re-establish and enshrine the recognition of regulatory equivalence of its financial sector in a formal agreement, or whether to go its own way by deviating from EU financial regulations to attract business that cannot take place inside the EU. One example of the latter has been provided by the UK allowing trading in Swiss stocks currently banned from EU exchanges.

The Winners

Finally, while the media are dominated by negative news about the impact of Brexit, we should not forget that not all sectors are negatively impacted and that there will necessarily be winners as well as losers. The FT reported an interesting geographical effect of Brexit, whereby ports in the North of the country benefit from changing shipping routes following Brexit, as exporters from the EU are seeking to avoid congested ports in the South.

Another element potentially leading to a positive effect of Brexit on certain sectors and locations, relates to the fact that wherever trade barriers are erected, incentives to establish operations ‘behind’ the barriers are increased. In other words, the new trade barriers may create incentives for Foreign Direct Investment (FDI) in the UK. Indeed, all the negative headlines about disruption to exports and trade may presage that companies will look into restructuring their supply chains to avoid such disruptions. There have already been reports of UK companies setting up shop inside the EU and thus reducing their operations in the UK accordingly. However, EU companies will of course consider doing the same thing in the opposite direction. With a population of nearly 67m people, the UK remains an attractive market for many consumer and manufacturing goods destined for the UK market, which may encourage EU companies from certain sectors to set up operations in the UK to avoid the trade barriers.

It is unlikely that this effect will completely off set the expected decline in FDI, which is mainly driven by the loss of attractiveness of the UK for companies from outside the EU who establish operations in the UK to export to the EU single market. Nevertheless, for certain sectors and regions, the increased trade barriers may mean an increase in FDI. The precise pattern of these changes in motives for FDI and its differential impact on different sectors and regions will depend on the evolution of the trade arrangements and will take time to materialise.

Brexit Impact Tracker – 05 February 2021

A lot of speculation has taken place in the past five years around the impact of Brexit on the EU and UK economies, societies, and politics. Much of the debate took place in a politically heated and acrimonious context, which was not conducive to a level-headed analysis of what the impact of Brexit might be. Five weeks after the end of the Brexit transition period, stories start emerging about the actual impact of Brexit on the British and EU economies, societies, and politics. Until we have enough data to carry out systematic scientific studies, these news stories will be an important source of information. Little by little these stories will form a picture that will allow us to assess the accuracy of the promises made and fears expressed in a hugely emotional and political process since the referendum campaign was launched in early 2016. By keeping track of these stories, the Brexit Impact Tracker seeks to contribute to this important task.
This blog does not pretend to be exhaustive, but collects those stories that seemed particularly important, interesting, unexpected, and consequential to us (comments on stories we missed out on are of course welcome). We focus on news items, expert and journalistic comments, and emerging academic work and seek to summarise the key developments while providing some comment to contextualise them.

This first post of the BIT summarises some of the key stories that have emerged since the end of the transition period on 1 January 2021.

Short-term trade disruption due to new non-tariff trade barriers and taxes

The first accounts of disruption to cross-Channel trade emerged soon after the end of the transition period. Various online retailers stopped exporting to the UK altogether due to increased costs and/or uncertainties around value-added tax (VAT); and UK consumers complained about unexpected additional charges on goods ordered from the EU. Some companies stopped trading across the Channel in the short term to get to grips with the new trading regime, for which they only had seven days to prepare. More worrying are stories about the possibility of UK companies having to establish warehouses and sales hubs inside the EU to service the EU market more efficiently. At least in one case this has led to the scrapping of plans to invest in warehouse capacity in the UK. Of course, this trend may be counterbalanced by EU firms deciding to adopt a similar strategy to service the UK market and avoid increased VAT payments. The overall impact on employment in the UK will not be known for a while.

Northern Ireland Protocol

The by far most serious event around Brexit in the past week or so were political tensions arising from the Northern Ireland Protocol (NIP), which aimed at avoiding a new physical border between the Republic of Ireland and Northern Ireland. Such a border was deemed a key threat to the achievements of the peace process and the Good Friday Agreement. Two major events in the past week exposed the fragility of the solution enshrined in the NIP:

In the midst of a row between the EU and one of the main Covid-19 vaccine producers over the delivery of vaccines to EU member states, the EU Commission decided to trigger Article 16 of the NIP, which allows either party to override the NIP and thus impose customs control between NI and the Republic. This decision was motivated by the fear that vaccines could leave the EU via the land border between the Republic and NI. While this drastic step was taken without broad consultation and quickly reversed, the political damage of this ‘blunder’ is considerable, because it undermines the EU’s own insistence throughout the Brexit process that establishing a board between NI and the Republic would be disastrous.

At the same time, local councils in NI temporarily suspended new border checks at Belfast and Larne ports after menacing behaviour and threats by unionists sparked concerns over safety of customs staff. Simultaneously, the DUP and other unionist forces urged the UK Government to invoke Article 16 of the NIP to guaranteed that there would be no non-tariff barriers impose on trade between NI and the Great Britain and thus no boarder in the Irish Sea would be established. However, the existence of such checks is a necessary for NI to remain inside the EU customs Union and for a border between NI and the Republic to be avoided.

This week’s events around the NIP show how fragile and potentially devastating for the Union the solution is that had been a crucial element in sealing the Brexit Deal.

The Environment

Another news story that emerged soon after the end of the transition period was that the UK Government – contrary to reassurances prior to Brexit – decided to temporarily lift a ban on certain pesticides banned in the EU due to their known negative impact on bees and other wildlife. This decision contrasts to some extent with the New Agriculture Act 2020, passed in November 2020, which marked a departure from the EU’s environmentally harmful Common Agricultural Policy (CAP). Most importantly, the Agriculture Act makes it possible for farmers and landowners to receive public money not just for food production, but also for the delivery of public goods – such as wildlife. This may provide a glimpse of things to come in the area of environmental protection: Freed from the constraints of the CAP the UK has leeway to significantly improve its approach to the environment and wildlife, but is also more likely to adopt policies to please small, but vocal interest groups such as sugar beet farmers and the British Sugar when it seems political opportune.

Financial Services

The Financial Services industry was largely neglected in the TCA. Instead, the UK government and the EU currently rely on a so-called ‘equivalence regime,’ where mutual market access depends on both partners recognising the other’s regulatory regime to be of equivalent standard. If the UK decided to depart from the current standard to go its own way after Brexit, Brussels could unilaterally withdraw market access to London-based financial services firms.
Interestingly, a similar ‘equivalence regime’ between the EU and Switzerland had let to a ban on trading in Swiss stock in the EU, after the EU revoked the recognition that Swiss supervisory regulation was equivalent to EU regulation in 2019. It was announced this week that after Brexit, the will lifted the ban and trading in Swiss stock in London is expected to resume.
For the UK, the Swiss example may provide a cautionary tale in terms of regulatory competition with the EU in the area of financial services. However, in an interesting interview, Barclay’s CEO Jes Staley made the case for the UK not to go down the deregulation route. Indeed, while the government has repeatedly promised a “bonfire” of red tape and regulations as one of the main benefits of Brexit, Staley insisted on the competitive advantage a high level of regulatory standards provides for the City of London. Indeed, he insisted that he “wouldn’t burn one piece of regulation.” This is an interesting development and challenges the wide-spread idea that less regulation is always better for business. For some business strategies, regulations are necessary to deliver high-quality services and products. This insight seems generally accepted by British businesses not just in the financial industry but also in manufacturing, but not amongst politicians, which may lead to interesting discussions after Brexit.

Fish & Seafood

Fisheries – and specifically fishing quotas in British waters – were high up on the Brexit priority list and one of the key sticking points of the TCA negotiations. Ironically, while agreement on quotas was key to making the TCA possible, the deal does not seem to do the industry much good. Rather, the Seafood and Fish industries seem to be among the hardest hit sectors by the new trading arrangements between the UK and the EU. The new non-tariff trade barriers in the form of customs declarations and checks, affect the perishable seafood exports strongly, as time to market has increased from between 12h to 24h to a multiple of that. Stories have emerged o British Seafood delivers arriving in EU countries in bad condition, which has started adversely affecting the reputation of UK companies in the sector. The new regimes involving large amounts of paper work, also implies increased costs for businesses. The increased workload may of course also lead to companies that can afford it creating new posts for administrators dealing with the paperwork, although given the small size of the sector, this is unlikely to have any significant impact on employment at a national level.

Cars

For the car manufacturing industry, the UK-EU Trade and Cooperation Agreement (TCA) concluded on Christmas Eve 2020 has secured continuation of tariff-free exports under certain conditions. The key condition are so called Rules of Origin (RoO) whereby for electric- and hybrid vehicles a minimum of 40% of a finished car’s value needs to be produce inside the EU or UK (increasing to 55% bey 2027); for internal combustion engine vehicles (ICEVs) the corresponding figure is 55%.
The conclusion of the TCA has led Nissan to announce their commitment production at its Sunderland plant, whose survival was threatened by a no-deal Brexit. This good news story, has to be qualified however: Nissan decision was made possible by its exclusive contract with battery producer Envision, which is crucial for the company to be able to produce within the RoOs contained in the TCA. Yet, the UK’s capacity in EV batteries is limited and will be a crucial challenge for most other car manufacturers operating in the UK. Given the RoOs and the important contribution of batteries to the overall value of EVs, the future of UK EV manufacturing will crucially hinge on the UK’s ability to build its own capacity in battery production for EVs, rather than relying on imports from Asia or the US. Here, the TCA may provide some opportunities in the sense that foreign car manufacturers may be incentivised to move their battery production from non-EU countries to the UK in order to continue benefiting from tariff-free exports to the EU market. The urgency to build battery manufacturing capacity is increased by the government’s announcement of a ban on internal combustion engine vehicles from 2030, which will likely lead to a rapid decline in traditional car manufacturing.