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Vol 1, No. 5  May 24, 2017

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Hard times ahead

Brexit

 

For better or worse, depending on one’s perspective, several multi-lateral trade agreements of one sort or another are being rejected, renegotiated or renounced.  This Backgrounder focuses on one aspect of one case: hard Brexit, the UK stance calling for full-scale withdrawal from the EU.  

As we see it:

  • In theory, there are many ways out of the smish-smash that Brexit currently presents. It is too early to say whether any of them will gain traction.  The signs are not good.  This backgrounder deals with what is called “hard Brexit” option.  It does so because The UK Prime Minister is very clear that this is what she is aiming for. She has tolerated little discussion of anything else.

    One can imagine her taking her example from Trump.  Sitting in her armchair, she waves a three-page list of principles.  She argues that these principles are the basis for negotiation with the EU. 

    Once they are agreed to, or some version of an acceptable compromise is arrived at within the two years available for negotiations and agreement, others can look after the details later.  She will have met the deadline; she will have met the expectations of the right and of the “hard” Brexit people in her Cabinet. She will have used what is likely to be her majority in Parliament to ensure support for whatever gets negotiated on this three-page list. 

    She will immediately sign a trade agreement with a US President who also believes in three page lists and who is “ready to go”.

    There are not many commentators in the UK that find this scenario credible, and it fails to take account of EU response.   Polls show that most of UK is pushing for at least a softer, if not a fully soft Brexit, one that keeps the door open (both ways) on somewhat limited terms with the EU.  There is little indication yet that the UK PM is listening or that the EU is responding positively, but it is early to say.

    Needless to say, UK is only one party to the negotiations.  The other is the EU, which currently is hard-line (“No” means no significant compromises on the basic principles of the EU, i.e. access to the free market requires freedom of movement therein.)  The so- called “soft options” ( eg, of joining EFTA and thus having free trade with no free movement) comes at a price that the UK PM says she will not pay.

    Our goal here is not only to discuss the UK situation (hard option only), but to use this discussion of hard Brexit to lay some groundwork for Backgrounders on the near-future contestation of NAFTA and on the EU.

The principles guiding hard Brexit:

Two principles govern hard Brexit: 

  • The first has to do with control: the primacy of “control”, understood as being UK having control over its own legal, administrative and economic affairs.  This principle should not be underestimated.  Sometimes it is termed “sovereignty”.

  • The second principle – and it is at least as important to the UK Prime Minister – is about immigration, not just control over who and how many from where, but about putting serious limitations on the numbers of people who have either work permits or the possibility of residency/citizenship status in the UK.  Currently the proposal is 100,000 immigrants net per year.

What is not on or at the table:

  • Obviously there is both a strong nativist and a racist thread to all of the pro-Brexit  (both the hard and many versions of soft Brexit) discourse. Nothing about hard Brexit per se supports racism except insofar as it is currently undermined by the EU and the application of its policies (Note, however, nativism and racism flourish in many EU countries). 

  • It is worth stating the obvious: the “offending” Polish workers are white and often Catholic.  People from most of the Middle Eastern and Asian countries are, for the most part, not part of the problem that hard Brexit is designed to resolve.

  • The African countries contribute refugees, but UK is not the only country in the EU that is balking at dealing humanely with refugees, notwithstanding EU policies to the contrary. Currently, the UK has all but closed its door to refugees.
  • In this sense, there is only an indirect connection between the rhetoric and politics of Brexit, on one hand,  and the politics behind the travel bans proposed by Trump, on the other.

  • On another front: Although one presumes that major corporations are primary force behind state policies, in the case of hard Brexit, it is not clear that this is simply the case.  Many corporate interests would be infringed by a hard Brexit.

Legal problems: 

  • Over the next two years, the UK government has announced its intention to draft and proclaim something like a “great repeal bill” (not its final name).  The new UK law (s) would to retain, modify or remove and replace the approximately 900 EU laws (12,000 EU regulations) that currently apply to the UK, and also deal with the almost 200 references to EU law that are currently incorporated in UK law.  Areas of law affected include, for examples, non-contractual arrangements, IP, taxation, competition, data protection, cybersecurity, family law etc etc. 

  • Even with smoothest of transitions, over time, EU and UK courts will likely later diverge in their rulings especially because UK operates on precedent. Many precedents in the last 40 years are from EU courts. This situation affects corporations doing business in both jurisdictions, perhaps even more than possible tariffs.

  • Many legal decisions require implementation in another jurisdiction, for example, custody cases.  An arrangement for jurisdictional complexity will also have to be created.

Administrative problems:

  • There are two types of administrative problems that follow from both hard Brexit and the new laws:
    • the extreme paucity of expert trade negotiators in the UK (the expertise lies in the EU)  
    • the need to create in two years  a huge omnibus law and/or many many new laws, and up to 38 new agencies in the UK to take over the legislation and the regulatory functions now carried out by the EU.

  • Lest anyone think that regulation will simply be set aside (after all this is a right wing initiative), regulation includes nuclear waste and air traffic control among other things.

  • But no one knows yet what a final agreement looks like, and thus which of these agencies will in fact need to be set up at all. There are few reasons to get moving quickly. 

 

Economic problems:

  • Much was made by pro-Brexiteers of the money sent to Brussels, but little account was taken of either the services provided to the UK by this EU money (see also Administrative problems, above), or of the grants of various kinds, especially for science, that UK citizens/organizations/corporations applied for and received.   The EU has no taxation powers and thus funds each project undertaken by the EU (and its own operation) by contributions from member countries.

  • Companies doing business between and among EU countries must have EU ownership (majority of shareholders).
     
  • Under hard Brexit, UK-based corporations, such as Easy Jet, would not be able to offer services that are provided within the EU unless Easy Jet either sets up a separate EU company, or moves and headquartered itself in Europe or it was satisfied with offering UK-EU services only.

  • It goes without saying that, were UK to face restricted trade opportunities and tariffs in connection with its single largest market, or were major UK sectors or industries to relocate, there would be economic consequences for the UK.  How serious these would be is obviously a matter of some contention.

 

Personnel/ residency/citizenship Issues:

  • A sticking point with the immigration principle is the number of EU nationals currently in the UK legally, only some of which are eligible for UK residency, and the number of UK citizens resident in EU countries.  The first is a political problem; the second is an economic one because UK is liable, for example, for pension costs of UK citizens in the EU.

 

The limited time frame for negotiations:

  • The two-year (from March 2017) is a hard deadline.   Extending the two-year deadline requires a unanimous vote in the EU and can only be done if the parameters of a final agreement have been agreed to. 

  • This extension may be what the UK PM is thinking in presenting her three-page list of “parameters”.  An extension for five years, she probably thinks, would allow time to sort out the many complications, pass new laws, arrive at new regulations and negotiate the details.

 

The voting structure and procedure of the EU:

  • The voting structure of the EU is a double-barreled one involving the Council (heads of Member states) and the EU Parliament.

  • To get any policy or agreement through the Council requires a majority of votes from the 27 (not including UK) EU member countries, but each member country votes according to its population size  (and own interests).  Thus if any one or more of the remaining big countries (Germany, Italy and France) votes negatively, it is unlikely that a policy or agreement can pass. 

  • The EU parliament has four blocs of voters, at least one of which would adamantly oppose any concessions to UK. 

  • None of this is fully determinant when matters are discussed that require only a “qualified majority”.  However some decisions, including trade agreements and extensions of the time to negotiate , require unanimity, a situation that gives power to the smaller countries, each of which has very specific interests to promote, interests not necessarily related to the matters at hand.

  • Note: as of March 29, 2016, UK has no voice, and certainly no vote, in the EU decision-making process.

 

The border problem in Ireland:

  • Ireland is a member of the EU, with no desire to exit.  Northern Ireland is part of the UK.  Well before and not affected by the Troubles (1919 actually) the notion of a free-crossing border was written into law.
     
  • With hard Brexit,  the EU/UK hard border principle obviously clashes with the free-crossing Irish principle.
     
  • There does not seem to be any straightforward resolution. Closing the border is bound to stir up a currently mainly quiescent relationship between Northern Ireland and Ireland. Keeping it open is contrary to the basic principles of hard Brexit.

 

Trade talks with other nations:

  • Most nations outside the EU have trade agreements either with the EU or with other trade alliances.
     
  • They could not agree to terms that put into jeopardy their current trade agreements.  Thus UK would be forced to accept terms of these other alliances, i.e. alliances not under its control.  This is a violation of the first principle of hard Brexit.

 

Student and worker problems

  • Foreign students are a major source of UK university revenues, but currently are counted as within the immigration targets. 

  • Low skilled foreign workers are essential especially in agriculture and home/health care (although it has been proposed that students be required take these jobs (sic).  A partial-year “guest worker” program (with all of its problems)  would need to be created to which foreigners could apply. 

  • UK universities and the science and high tech and research-intensive industries are heavily dependent on non-UK workers. A provision would have to be created for them too.

 

The significance of the financial and service sectors:

  • Trade agreements falter on issues about subsidies (in various guises), and standards (see below), industrial and science policies (including “Buy American”), government procurement and uncompetitive pricing practices. 

  • They are especially difficult to achieve in the agricultural, steel and fishing sectors (each for different reasons). They can be more easily reached when only goods are involved, although always with lots of “horse-trading”.
      
  • When it comes to culturally-based (e.g. film or broadcasting) or (self- and government-regulated services (e.g. law or medicine), or services (the fastest growing sector of the economy), the barriers to agreement are higher, and in many cases, impossible to surmount.  Here sovereignty issues are especially vigorously pursued and can trump economic ones.

  • A trade agreement is not simply about the relationships between specific countries (or even between a country and one of the multinational groupings).  Although there is geo-political maneuvering involved in every case, sitting immediately behind (usually literally) any country’s delegates at the table of any trade talks are representatives (lobbyists in other words) of the major trade and sector organizations, and/or  corporations likely to be affected.  This is as true for smaller countries as it is for big ones.

  • Thus for example:  Trump can readily say that USA would quickly sign an agreement with UK in the case of Brexit.  As soon as some consequential product or service is involved, Trump and the UK representatives have to contend with the major interest groups/corporations immediately involved on each side of the table. 

The importance of standards in all this

  • Much is made of “non-tariff barriers (standards) to trade” but it is easy to miss their huge  significance.  There are three elements to standards.
     
  • First, products and services and their component parts must be made according to particular specifications.  Such specifications concern not only the products or services themselves, but can include safety, packaging, efficacy and safety, environmental and working conditions  (EU standards certainly do). Sometime is it enough for there to be product harmonization.  That is, the differing standards in each country do not create a hurdle to free movement.

  • Second, someone must certify that these products and services actually meet the standards before they can be used in trade. 

  • Third, every time a good (or person providing a regulated service) crosses a border, the border or other officials must deem that the product or service meets the standards of the receiving country or that it is a harmonized product.

  • For the record, in the international standards development bodies, it can easily take ten years to develop a single voluntary standard or harmonizatiion,. Even then there are relatively few of these.  Mandatory standards are subject to trade-offs within each political jurisdiction.

  • Many of the trade agreements (EU, WTO included) currently in place have developed standards and/or product harmonization, certification processes, and a mechanism for border control (and in some cases a process for disputes) within their areas.  This is why standards or harmonization is so valuable from an economic perspective.
     
  • Were there successful negotiations with the US,  UK would have to take account of the often lower US standards (say, for chemicals or medicines), thus lowering its own standards.  Doing so would render these same products ineligible for entry into the EU.

The WTO problem:

  • The hard Brexit view is that, instead of the EU, the UK can rely upon the WTO and thus escape regulation and external control.   The WTO is anything but a control-free zone, as Canada certainly has experienced.

  • WTO arrangements are based on reciprocal concessions.  The WTO has its own standards and harmonization processes (called something else in WTO lingo).  It has many regulations of its own for goods and service, including about “predatory pricing” and about and subsidies. It has a binding dispute resolution mechanism.

  • WTO membership includes small countries (and also China) each with its own interests.  Any of these countries can use any opportunity to benefit its own trade relationships and/or instigate a dispute. 

  • Moreover both the EU and the EU member countries are members of the WTO, so withdrawal from the former creates problems in the latter.

  • None of this accords well with the first principle of hard Brexit, i.e. control.

 

Are there Alternatives?

  • It is true that various non-EU countries have unique agreements with the EU that allow for access to the single market or customs union with some restrictions, arrangements that do not require free movement of people.  These countries also have no decision-making powers within the EU and must make financial contributions as if they were members.

Summing up:

  • The EU was created (actually it evolved over time) largely to prevent the catastrophes of two world wars that grew out of the degeneration or dissolving normal relations among European countries.  With hard Brexit, the UK can put side that goal. 

  • Notwithstanding its corporate-friendly inclination (in general and in its specific policies, laws and regulations), the EU sustains a program of redistribution, albeit often with real, often unpleasant and counter-productive consequences for the receiving countries.  It does, however, provide a safety net for its member countries.  UK can opt out of this goal too.

  • The EU countries are decidedly mixed in their reaction to the refugee crisis, but at the formal level (through the EU courts and the Charter of Fundamental Rights) attention is paid to the humanitarian crisis.   It is also the stated the intention to withdraw from the European Court of Human Rights, although this is not part of the EU.  Hard Brexit means opting out of this goal too.  

  • Herein lies the reason why hard Brexit is the product of the vision of the hard-right.  None of the above goals accords with values that hard Brexiteers espouse. The rhetoric and ideology sustaining hard-right values overshadows all of the complexities, difficulties and barriers. 

  • It could be that the realities of the up-coming negotiation, or the EU response, or some newfound importance of the opposition to hard Brexit, or a split between hard and soft Brexiteers among Conservatives, or a new UK political grouping – any of these could open the door. Either a softer Brexit would become politically viable or somehow the whole idea of Brexit would be rejected.

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