As we look forward to the Article 50 negotiations, Steve Harrison presents a positive case in relation to the UKs trading relationship with the EU going forward through the lens of a procurement negotiation strategy.
The principle negotiating objectives in the two-year period prescribed by article 50 are twofold. First is to settle who is liable for ongoing liabilities, like pensions of EU staff, unfunded commitments and future programmes agreed when there were 28 of us. There is a need for formal agreement on the terms of ongoing co-operation that both parties wish to continue going forward such as security, law enforcement, education and open skies. Secondly, it is about agreeing the framework for our future trading relationship with the EU. There has been great speculation about the models that we might adopt. Helpfully the government has now ruled out the obvious non-starters and while a spectrum of possibilities still exist, viewed through an experienced negotiators eye, there are only two that can be agreed quickly.
Why is speed important? Given that until an alternative is reached we will continue to pay £250m a week to the EU, it is not hard to see who benefits most from any delay. We have already heard conditioning statements from the EU that they want to prioritise settlement ahead of our future trading relationship. Our response to this negotiating tactic can be found in the wording of Article 50 which states: “the Union shall negotiate and conclude an agreement with [the leaving] State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union”. It is manifestly impossible to “take account of the framework for [our] future relationship with the Union” unless we first agree at least in outline what that framework will be. It is also virtually impossible to imagine a framework which does not include our mutual trading relationship. As far as I am aware not even the most fervent Europhile has found a persuasive interpretation that does not require a need for agreement on the framework before the negotiations can be undertaken, let alone concluded. So, we should begin by insisting that the negotiations respect the need to reach agreement on at least the outline of the framework for our future trading relationship before we can get down to who owns the house and who pays the mortgage.
Moving back to our options, by ruling out free movement of labour we have precluded ourselves from joining the European Economic Area (EEA) and we have ruled out remaining within the Common External Tariff since that would prevent us from entering free trade agreements (FTA’s) with other countries. There are therefore only two realistic options – either we continue to trade without tariffs and other new barriers under a UK-EU FTA or will we trade based on Most Favoured Nation tariffs and non-discrimination under World Trade Organisation rules (MFN).
The UK is Europe’s largest export market. In 2014 the UK ran a £59 billion trade deficit on aggregate with the other 27 member states. Germany alone constitutes £27 billion of that total, the UK only ran a surplus with 7 of the other 27 states during 2014. These commercial considerations should lead to pressure for a UK-EU FTA.
Remainers point out that the average time it takes to conclude a trade deal is 7 years, often citing Canada. This time is spent by hard working EU personnel and their counterparts negotiating the removal of tariffs and alignment of standards. We should ask ourselves how long therefore, it should take to write an FTA if, as in the case of the UK, all of our tariffs and standards are already aligned?
As mentioned previously, the EU have a massive trade surplus with the UK. If the EU’s prime consideration is the economic well-being of EU citizens, they will not want to impose tariffs on that trade. However, economic well-being may not be the primary consideration of the EU commission in this negotiation. The EU may prioritise the need to discourage others from following the UK’s example. Faced with a choice between an FTA and trade on a MFN basis they may well opt for the latter. That will cause the EU far more pain than it will cause the UK but they may reason that it is worthwhile. Moreover, whereas it requires at least a qualified majority of EU states to agree an FTA, a minority of states or the European Parliament can veto such a deal. Ratification of the EU-Canada FTA is currently being held up by Romania & Bulgaria, who are using it as leverage in an unrelated visa dispute they each have with Canada. You can imagine an EU strategy that seeks to achieve the deterrent effect to others of leaving by working slowly towards an FTA that never materialises while all the time collecting the UK’s EU membership contributions.
We can expect the European industry to apply pressure for an FTA and as politicians seek the funds to secure re-election, we may see an increased appetite to engage. Ultimately however, this negotiator believes that the EU will be initially unwilling and ultimately unable to agree an FTA and so we must be ready for the second option which is to take MFN.
The Prime Minister has said that no deal is better than a bad deal and so we need to analyse MFN as the best alternative to a negotiated agreement. Under MFN terms UK industry would need to pay £6.5 billion in tariffs on goods to access the EU internal market. This is approximately 50% of the UK’s net contribution to the EU, so the government could compensate any exporters for whom the 15% improvement they have experienced due to exchange rate movements over the last year is insufficient. In addition, the Treasury would collect £12.3 billion in tariffs on imports from the EU to fund improvements in the NHS, address our deficit and improve our attractiveness as an inward investment destination by reducing taxation.
Upward pressure on the cost of food and other products due to the pound falling compared to the USD has been widely reported since the vote to leave. Once again, speed here is the key as FTA’s with other countries will enable consumers to benefit from the removal of the huge EU tariffs on agricultural products and textiles. The dire consequences for the cost of living predicted by economists is in large part due to the inclusion of a gravity effect in their modelling that put simply suggests that we will continue to buy from markets that are familiar to us as goods and services are not identical. I see a great opportunity for the procurement function changing buying habits in order to pay less for many goods and services. A fantastic benefit of this process will also be that we will be helping producers from emerging economies such as those in Africa out of poverty, rather than (in the case of agricultural products) subsidising rich European farmers.
One should not make too glowing a case for MFN, as it will bring bureaucracy and pain as redistribution is much easier to say than to do. However, what I hope this piece demonstrates is that there is an optimistic case for Brexit that we must now seize.