The Brexit Grand National

Brexit: the UK is going to leave the EU.  But how?  When exactly? Charles Grant at the Centre for European Reform has looked into the future to see the negotiating track that lies ahead for the UK as it departs the European Union. It is a really interesting piece of work.  You can read it here and I’d highly recommend it. I found it as a link in Martin Wolf’s column this week in the Financial Times (the FT is now essential reading for Brexit watchers). Having read Grant’s article, Wolf thinks that a hard Brexit is the most likely option.

The key point in Grant’s analysis is that the UK has to sort out its relations with the EU, WTO and bilaterally sequentially. That stands to reason but its implications for the Brexit negotiation process and British trade are profound.

Taking the first part, look at the negotiation process in reverse because the ostensible economic goal of Brexit is to free the UK to do trade deals around the world. The UK cannot finalise any bilateral trade agreements unless it has an established position as a stand-alone member of the WTO, as opposed to being a bloc member via the EU. Moreover, it has to divide the world into those countries that have an existing FTA with the EU (53 countries and counting) and those who do not.

The UK cannot establish its standing within the WTO until it has first established its trading relationship with the EU whether that is via the European Free Trade Agreement (EFTA) or the European Economic Area (EEA) or a bespoke UK-EU free trade agreement.

And the UK cannot do that until it has agreed the terms of its withdrawal from the EU. (To get a sense of the possible complexities, the Swiss are a member of the EFTA but not the EEA, having opted instead to negotiate some 120 free trade agreements with the EU. Yet because of the Swiss referendum restricting immigration, their relationship with the EU has to be revised).

Getting back to the starting line, the UK cannot legally do any deals with third parties as long as it is a member of the EU. The sequential process of negotiation facing the UK is not however some mere legalistic imposition. Any country that Britain wants to do a trade deal with will need to know where Britain stands vis-à-vis the EU and WTO otherwise it cannot assess what’s on the table and what are the implications for its trade with other partners.

Brexit then is the Grand National of negotiations with each multilateral forum containing a new set of fences to jump. The tricky bit is that the UK doesn’t know the height of the fences. That will be decided by the members of each fora. Any single member can decide the height that the UK has to clear to get to the next stage. Or can red flag the process at any stage by disrupting the consensus. That applies to the EFTA (4 members) and the EEA (30) as well as the EU (27 other members) and WTO (163).

The UK has only two years to run the course once the Article 50 gun is fired. Taking into account the need to get approval of the EU Council and Parliament, you can shave a month or so that. European elections will interrupt the process as mandates are refreshed and perhaps electoral instructions generated that have a direct bearing on the negotiations.

If there is no agreed extension, then the UK will find itself out of the EU, on its own, riding across unknown country with weights in its saddle courtesy of the WTO default single status membership.

As Wolf argues for various compelling reasons, the balance of probability is a hard Brexit. I know what a hard Brexit is when I don’t think about it but I don’t know what it means when I do. I suspect is more complex that its name suggests, with at least some transition if only to avoid excessive damage to the British economy.  Indeed both Wolf and Grant point to the critical importance of the transition agreement which is needed whether the British Government’s goal is a hard or soft exit from the EU.

And I think that, faced with the longevity and complexity of a soft Brexit negotiation, the impact and unknowns of a hard Brexit, and the post-Article 50 two year timeline, the transition agreement is the where the focus of attention should and will be.

Yet like the terms of a hard Brexit, the nature of such a transitional agreement needs scrutiny. Even now analyses of either are scanty. Given the importance of the British market to its trading partners, there is certainly an incentive to do deals and reach understandings for a transition period. The EU raises much of its capital needs in London, for example. More relabeling and less substantive demands on the UK’s part will facilitate a transition agreement.

Yet there will be a limit to this facilitation. Trade talks are followed with intense scrutiny business and unions who have a very keen interest in the prospective outcomes. Each member state will be subject to their own domestic political pressures, not all of which will necessarily support an interim arrangement. The appetite for transitional arrangements will be constrained the more the UK is looking to shed regulations to improve its competitive advantage. Trade difficulties for the UK will mean opportunities for its competitors within the EU.

No one should underestimate the UK. They have a formidable system, the reflexes of a big power, a large economy, international reach, a veto on the UN Security Council, skilled and canny officials, and a deep reservoir of experience. They have been a source of great firepower within the EU on free trade issues, on justice and home affairs, on security, international relations and overseas development assistance. That list could go on.

Within the EU, we in Ireland have relied on British support and sheer capacity on issues where our perspectives converged. We’ll miss them in Brussels, no doubt about it. Yet formidable though they are, they have set themselves an unenviable task of great, even confounding complexity in leaving the comfort of the EU Jockey Club, mounting up and heading off on the Brexit Grand National.

Eamonn