A positive view of Brexit II–They may have the discipline, but we have the money

A positive view of Brexit II – They may have the discipline, but we have the money

Steve Harrison Blog, Brexit

I started 2017 with a blog suggesting that getting a Free Trade Agreement (FTA) with the EU was unlikely, because they will initially be unwilling and ultimately unable to agree a deal at a price that is reasonable to the UK. Six months on we take stock of how things have panned out so far. Not the politics, but rather the Brexit negotiation itself and the key aspects of preparing for the end game.

Once you strip away the media hysteria and spin, I believe that the government has adopted a discernible strategy for negotiating with an uncooperative EU.  The reasons behind the EU’s uncooperative behaviour are understandable. Firstly, the project of ever closer integration will be weakened if countries are seen to benefit by leaving. Secondly as the second biggest net contributor, they want to keep as much of our money as possible for as long as possible. As a result, a successful outcome for the EU will be for the UK to pay a heavy price for failure. This is the issue that makes these negotiations the most difficult in the peacetime history of our country. It’s not the Free Trade Agreement (FTA) negotiation itself, as this will benefit from being the first time in history that such talks start with both sides at zero tariffs and with regulatory equivalence. Therefore, the status quo bias should favour a zero for zero deal relatively quickly, although nothing moves quickly, it seems, with trade talks.

The EU has laid out their timetable, their objectives, and appointed themselves the sole arbiters of when the UK has done enough to progress to trade talks. The government has done well to control their response to this unneighbourly approach. At such times in a negotiation it is wise to ”go to the balcony”, that is to take stock and see things for what they are rather than what your opponents would like you to believe they are. Typical, but counter-productive responses could have been to hit back with a similarly unreasonable starting position and waste time in talks about talks or alternatively to break off discussions before they begin. Instead, the government has taken the pragmatic view that it will make a generous settlement to the EU and citizens of the 27 in return for a FTA and cooperation in the process of leaving. In doing so they have sought to describe a “golden bridge” to the future.

Having prepared the ground for the preferred solution, the tungsten tipped ordinance needs also to be readied. Principal amongst this is the UK’s best alternative to a negotiated agreement (BATNA). “No deal is better than a bad deal” is a clear indication that WTO rules remain on the table. This has furnished the governments opponents at home and abroad with a pretext for lurid headlines about planes being grounded and lorry parks in Kent being necessary. However, understanding the point at which you walk away is necessary I believe that the UK BATNA should also include settling the final bill through binding independent arbitration. The EU commission is willing for European business to take a lot of pain to achieve its objectives, however, the money is something it will be less willing to jeopardise. To extend the divorce analogy this suggested approach is where it goes from amicable to transactional and there are no dependents and the joint assets as well as liabilities must be included in the evaluation. The money is also the key to their discipline, undermine that and unity will quickly be replaced by something else. Why should we believe that an independent arbiter would find the figure to be lower? Well, imagine the case that a net beneficiary country decided to leave, would the EU be arguing that they need to be paid 10 times their annual net benefit as a settlement?

The next most important thing to do is to stop negotiating with ourselves. Freedom of expression is a wonderful aspect of our nation, as is the democratic process. However, at times like these it can feel like we are trying to conduct a rational negotiation process in a tumble dryer. We’ve got to stop tormenting ourselves about the correctness of the decision to leave and make the best of our negotiating hand. It is understandable that the 13% of the UK economy linked to EU exports will want the UK tax payer to continue subsidising their trading costs for as long as possible. The EU is hoping that the exporter and remain lobbies along with the unstable nature of UK politics will cause the UK to fold and they may be right, since self-inflicted harm is the biggest risk in these negotiations. I believe that a positive case could be made for the future post Brexit and with a commitment to reinvest a significant amount our net contribution (£11 billion annually by 2019) and any tariffs collected (est. £9bn), in infrastructure, tax breaks for investment, R&D and a reduction in business taxes, which would offset the costs to these businesses and also benefit the other 87% of the UK economy not linked to exports to the EU but paying anyway.

Similarly, it’s understandable that remainers want to paint WTO as a cliff edge, this is an obvious “nudge” because we know people are naturally more comfortable with what they know and this is a narrative that makes staying in the single market logical. When you look at the data, it is interesting to note that in the 25 years since the single market act UK businesses have been more successful trading with the rest of the world under WTO rules than with the EU under the single market. This is measurable by the fact that the share of our exports with the EU have dropped from over 60% to 44% during that period. It’s also worth noting that at least 4% of “EU exports” are in fact shipments to Rotterdam from where they are exported outside of the EU. Let’s also look at other examples of the chaos predicted of no deal. Those making emotive claims about grounded airplanes should look at a map of Europe and ask themselves who’s airspace a huge proportion of air traffic between continental Europe and America passes through. So, the UK continuing in the open skies agreement will happen (though there is a part of me that would enjoy watching German and Dutch transatlantic flights being placed in the hands of French air traffic control!). Regarding the need for lorry parks in Kent, I would point out that as a services lead economy the majority of our exports leave the country digitally. The EU on the other hand does export most of their goods in trucks. Since the UK also currently acts as a land bridge for 80% of Irish exports to the EU and enterprising British ports may step in to replace Rotterdam if its efficiency is impaired. So, provided we ensure that our friends understand that we will be symmetrical in our approach to customs checks, it’s hard to imagine the French, Dutch and Irish holding the line for too long.

The final thing is time. We are told “the clock is ticking” by Mr. Barnier. The government has proposed a transition period, which gives businesses extra time to prepare. This is a good move as it creates a pretext for additional payments that are fair, and some extra time for new systems to bed in and to complete the FTA. If, however an FTA does not materialise, then neither should the transition period. The October summit was interesting in that the EU said no to trade talks, but advised that we only need to double our offer and the no could be a maybe. Mr Junker and Mr Tusk have “love bombed” us with proclamations that a fair deal for the UK is their intention. This is a trap that must be sidestepped. A good test of a negotiating position is if when expressed as an “if you will … then I will …” sentence that makes sense. The EU offer is “if you will pay us €40bn then we will consider what else we need from you before starting talks on trade” which doesn’t sound like a very good deal at all.

They say money talks, so now is the time for the UK to speak clearly. Not to be less reasonable or generous, however to demonstrate a degree of steeliness of resolve that our neighbours  may have forgotten that Britain as a nation possess. We should set a deadline of December 2017 for serious talks to start. A check point in say May 2018 where the UK will determine whether “sufficient progress” has been made for talks to continue and failure to meet both would trigger the UK leaving in March 2019 on WTO, with no transition and with fees to be decided by judges from another continent.

Now, our position would read “if you agree an FTA and an implementation period, then we will pay you €20bn”. This sounds like a good deal for the UK and the other 27.

The paradox of negotiation is that you must make the other side believe that you truly are prepared to operate your BATNA to achieve your primary goal. So, our message needs to be clear. We want a zero for zero FTA along with an amicable departure. However, we do not need an FTA, therefore if the EU doesn’t want to meet the terms or timescale then we will go to WTO and independent arbitration on the settlement.

In all cases we will continue to be a good neighbour and cooperate on defence and security and schemes such as Erasmus and open skies, but leave everything that requires us to operate under ECJ authority.