Comment

Perfect sovereignty under Brexit will come at an economic cost

The EU will be back for its pound of flesh, so the Government must decide what price it is willing to pay for divergence

Michel Barnier (left), David Fros (centre), and Boris Johnson (right) against a backdrop of the EU flag, the UK flag, the Gherkin and Big Ben
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It seems like a very long time ago that Theresa May first came up with the phrase “no deal is better than a bad deal” to describe negotiations with Europe over the future relationship. She then negotiated what many MPs thought of as an extraordinarily bad deal, and duly met her end.

Things have moved along quite a bit since. Yet with Britain’s final exit from Europe’s single market now just weeks away, the essence of the dilemma is still the same; would no trade deal at all be better than a bad deal that is more on the EU’s terms than ours, and what in any case does a bad deal look like?

Over the weekend, David Frost, the UK’s chief Brexit negotiator, sent out a somewhat downbeat series of tweets which seemed to indicate that we could indeed be heading for a no deal outcome. “We are working to get a deal, but the only one that’s possible is one that is compatible with our sovereignty and takes back control of our laws, our trade, and our waters. That has been our consistent position from the start and I will not be changing it,” he wrote.

An awful lot has since been read into that use of the word “I”. Is this the Government’s position, or is it Lord Frost’s, which many suspect of being rather more hardline than that of the Prime Minister?

But let’s work on the assumption that they are still roughly on the same page, and “Frostie”, as the PM is said to call him, is not about to get the chop alongside Dominic Cummings and the rest of the coming clear-out.

David Frost, the UK's chief negotiator, arrives for Brexit negotiations in Brussels on Monday Credit: FRANCISCO SECO/AP

A bad deal is considered to be one that impinges on UK sovereignty by in some way continuing to tie the country into the EU’s acquis communautaire, or body of laws and objectives.

A good primer of the sort of thing that might be unacceptable, ranging from ratchet clauses to ensure compliance with future European regulations and standards, to allowing the European Court of Justice to determine the governance of the agreement, can be found on the Brexit supporting website, “Briefings for Britain”.

Many of the points raised here are these days uncontentious; we are no longer debating whether it is to be a hard or a soft Brexit.

That boat has sailed, with the Government determining to leave both the single market and the customs union. Whether or not a Free Trade Agreement is reached, this is a hard Brexit, quite different from the much more integrated relationship that both Norway and Switzerland have with the EU.

But because Britain has nearly half its trade with the EU and starts from the position of full integration, the EU is refusing to give the UK the same sort of FTA as, say, Canada got a few years back.

Instead, it demands much more in the way of level playing field provisions – on state aid, environmental and labour market standards – than is common in a conventional FTA. It is easier to converge, it would seem, than to diverge.

We know the main areas of disagreement, but the detail remains opaque and the exact state of play confidential, which is pretty odd given the significance of what is under negotiation. The intention seems to be to present whatever transpires as a fait accompli, leaving parliament as little room to change the outcome as possible.

What we also know, however, is that the EU has shifted quite a bit since the start of the negotiation and that a fair few of the red lines on the “Briefings for Brexit” list are no longer as much of an issue as they were.

For instance, the EU is no longer demanding that the UK abide by EU state aid rules and procedures, but instead sets up equivalent ones of its own. No such regime has yet been published by the UK.

Similarly with the ratchet clauses the EU wanted to attach to non-regression provisions, obliging the UK to match the EU on any hardening up of environmental and labour market standards.

If this kind of thing was set in stone, it would indeed amount to a big intrusion on UK sovereignty. But again, the EU has shifted somewhat, and now seems willing to concede that any ratcheting up would only occur if both parties agreed it.

Parking the sovereignty issues for the moment, let’s now focus on the economics of a deal.

Boris Johnson has said that Britain will “prosper mightily” even if it fails to reach a deal. This is very hard to square with the likely reality, for to trade with the EU without an FTA would immediately put UK industry at a significant competitive disadvantage to those countries that do have one.

If these countries used that advantage well, they would eventually come to displace the UK in trade with the EU.

In any case, as Sam Lowe, a trade specialist with the Centre for European Reform, points out, it makes no sense to argue on the one hand that there is a big economic dividend to be had from freedom to negotiate FTAs with other countries, but on the other that there is no economic penalty in not having such an FTA with the UK’s biggest trading partner, the EU.

If the ultimate purpose of Brexit is to use our new-found sovereignty to change the UK’s economic model, then we ought to be told what the plan is; there isn’t on the face of it much public support for the sort of radical deregulation of labour and environmental standards some Brexiteers advocate.

As it happens, the difference between leaving the EU with an FTA or on World Trade Organisation terms is unlikely to be that great – just three percentage points of GDP over 15 years, or 0.2pc a year, according to the Government’s own modelling of the two outcomes.

As with a lot of supply-side reform, the tangible benefits of FTAs tend to be much exaggerated for political purposes. The overriding question therefore becomes whether it is worth ceding any amount of sovereignty for such an apparently small economic gain.

Yet equally, those who argue for departure on WTO terms need to show that there is some economic upside to be had from having more sovereignty, and to boot that departure from the single market on terms which the country is still quite plainly not prepared for is worth the short term disruption and pain. Answer comes there none.

There were some relatively positive noises coming out of both sides on Tuesday on the prospects of a breakthrough.

But even if there isn’t one, my own guess is that under cover of the Covid emergency, something will be cobbled together on a temporary basis to ensure the continuation of tariff and quota-free trade, with the more difficult issues parked to be resolved at a later stage – a kind of temporary but informal FTA, if you like.

But make no mistake; the EU will be back for its pound of flesh.

Significant divergence, in the meantime, will be punished with more limited access. Just how much sovereignty is the UK prepared to cede, and how would it use that sovereignty if it determines that the price of a deal is too high? These always have been, and remain, the big unanswered questions.

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