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EU Exit brexit

The significance of the omission of Gibraltar from Theresa May’s Article 50 letter is being exaggerated.  If Spain wants to crash the Brexit negotiations over the matter, it can either veto any eventual deal, if it has the power to do so, or lobby for support if any agreement is subject to qualified majority vote.  What the Prime Minister puts or doesn’t put in a letter is thus of no real importance.  In any event, Britain and Spain are not, repeat not, on the verge of war.  The matter at stake is not who rules Gibraltar – despite Ministers’ attempts to suggest so – but its tax rates.

But the argy-bargy is none the less a reminder that the Brexit talks may break down.  What then?  Policy Exchange is early out of the traps seeking answers.  On this site today, Dean Godson provides a thought-provoking list of questions.  Other think-tanks have done a lot of work on some of the issues.  Over at Legatum, Shanker Singham has provided a guide to how the World Trade Organisation works, which will come in useful if we end up trading with the EU under its rules.  On this site, William Norton has written about his Civitas paper, which details how the effect of tariffs might be mitigated, and suggests that taking the WTO route has potential pluses as well as minuses.

What are the latter?  If the talks break down completely, and Britain falls back on its WTO membership, one might have a rough stab, at this early stage, at identifying four main problems.

First, no agreement means that the current legal basis for our many of our security arrangements would, at a stroke, no longer exist and have no replacement.  For example, we would be out of the European Arrest Warrant, the European Investment Order, the Schengen Information System, and the Prum Agreement which covers fingerprints, DNA details and vehicle records.  Where are we legally if a terrorist bombs the tube again, flees to Greece (say), and we have no sure means of extraditing him?  On what basis can we hand over material from our own vehicle or fingerprint records if, for example, France asks for some in pursuit of a terror investigation of its own?  There may be answers to these questions and to more but, in this age of ambulance-chasing human rights lawyers, it isn’t clear what they are, let alone that they are watertight.

Second, the implications of having no agreement at all stretch wider.  As Godson asks, what would happen to banking and financial services, in particular to passporting rights?  We may be able to rely on regulatory equivalence but, as he says, we may not be, particularly if the European Commission has anything to do with it.  What would the implications for our energy security and supply be, if common energy market rules suddenly no longer applied?  If we leave the EU Common Aviation Area without negotiating access, will it still be legal for British airlines to fly to European destinations?  Again, there may be answers to all these questions, but it is worth asking whether they would apply, and to what degree, if negotiations had broken down acrimoniously.

Third, there are the effects of tariffs – since we would, in the absence of a deal, fall back on those  available to nations that trade under the WTO’s Most Favoured Nation status rules.  In many cases, these are not very high, and the general trend in tariffs is downwards, anyway.  But our car and farming industries would be hit.  Business for Britain, in its report Change or Go, suggested that money from tariffs that we slap on goods from the EU27 might be used to compensate exporters for the costs that the EU27 has slapped on to ours.  However, this assumes that we would want to impose them in the first place.  Harm done by tariffs might be offset by the help provided by a falling currency, but what if it rises?  There would also be blowback from the effect of tariffs on Ireland’s farmers.

Fourth, there are the consequences of non-tariff barriers.  At present, trade flows smoothly between the EU27 and Britain, just as it does between the EU27 and, say, the United States – which is (obviously) not a member of the EU at all.  But the WTO/MFN arrangements that America and other non-EU countries enjoy with the EU27 have been in place for some time: incoming goods are not held up by quibbles about whether they meet EU standards or not, and nor – returning for a moment to tariffs – by laborious checks to find out whether components from different counties are caught by rules of origin.  Without a specific agreement, there is no guarantee that MFN status alone would guarantee the smooth flow of goods.

So much for the main minuses of what we might call plain MFN/WTO – that’s to say, reverting to MFN rules without any EU deal at all.  What are the pluses, if any?

Norton offers one in his Civitas paper. Any deal with the EU will ensure that we are bound close to its tax and regulatory model.  It is precisely because the Commission and the EU27 are worried that we might take a different route in the event of no deal that Philip Hammond warned that we would in his Die Welt interview in January. “You can be sure we will do whatever we have to do,” he said. “The British people are not going to lie down and say, too bad, we’ve been wounded. We will change our model, and we will come back, and we will be competitively engaged.”  Theresa May made the same point in her big speech setting out the Government’s position.

As Norton pointed out, Britain would, freed from EU-type rules on state aid, have greater freedoms on research and development, regional aid and energy policy.  For example, we would be able, if we wished, to abolish the carbon price floor mechanism altogether, saving £1.2 billion in costs, including £392 million for domestic users of electricity.  There is a case for arguing that the logic of leaving the EU favours precisely the kind of Open Brexit model that the Chancellor was floating – and therefore the MFN/WTO route.

ConservativeHome’s preference is for a deal.  The list of unknowns raised by Policy Exchange in the event of no deal is sufficiently daunting to make this almost inevitable.  The think-tank has got itself ahead of the game and of others by raising them in such a rounded way.  But Godson’s list also provokes the thought that some have tended to think of the coming negotiation the wrong way round.  A lot of ink and pixels have been spilt over tariffs.  But agreement on these looks like being the last stage of a negotiation, not the first – or should be.

This site’s staff are not trained negotiators, to put it mildly.  And the Government will have its own plans.  But it surely makes sense to build any deal from the essentials outwards.  These are: certainty on security arrangements; a wider sureness on legal arrangements of which these are part, and a continuation of “frictionless” trade in goods and services (in so far as there is already such trade for the latter), with no long delays at ports and airports over whether the goods in question meet the required standard or are caught by rules of origin.

The absence of tariffs comes last, not first.  They are the end-point of a successful negotiation, not its starting-point.  They are the icing on the cake.  A smooth flow of goods; legal certainty, continuity, stability – this, as ever, will be what most voters and businesses are looking for, whether they backed Leave or Remain last summer.  In helping to make all this clear, Policy Exchange has done us all a service.

121 comments for: The Brexit negotiation – and why the importance of tariff-free trade has been over-hyped

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