This blog is part two of the transcript from a University of Bath Institute for Policy Research (IPR) Public Lecture, given by Philip Rycroft on 21 January 2020. Read part one, watch the lecture online, or listen to the podcast.
Philip Rycroft is former Permanent Secretary at the Department for Exiting the European Union.
The immediate focus once we leave [the EU] will be on the negotiations on our future relationship with the EU. It will be the government’s fervent wish, I have no doubt, that these negotiations should become as boring and technical as possible, as quickly as possible. No drama, thank you, just let’s get this done away from prying eyes, and with a complaisant Parliament to hand, the government may, at least for a time, get its wish.
There can be no complaints there. The direction of travel was clearly set out when Prime Minister Johnson renegotiated the Political Declaration. This was as sure a pointer to the future he envisages as any and was hardly masked through the election campaign.
As Michel Barnier made clear a way back in the early days of the withdrawal negotiations, the UK had a binary choice on its future relationship with the EU; either a close relationship inside the Single Market, something akin to the European Economic Area (EEA), and possibly the Customs Union as well; or a free trade agreement, perhaps based on the current best in class, the EU’s agreement with Canada, Comprehensive Economic and Trade Agreement (CETA).
Mrs May struggled long and hard to defy that remorseless logic. Pinioned by her early insistence that free movement would end, totally averse to any continuing jurisdiction of the Court of Justice of the European Union (CJEU), she sought a way out in the Chequers deal, now almost ancient history, that doomed attempt to square the circle through some process of regulatory alignment that would limit the economic impact of Brexit while leaving the UK de facto outside the Single Market and the Customs Union. The department I led at the time lost its secretary of state and assorted junior ministers as a consequence as they saw in this a denial of the true path of Brexit.
The current Prime Minister was of course the other secretary of state who resigned in the aftermath of Chequers. His position has been consistent since; embrace the logic of the Barnier choice and seek a free trade agreement with the EU, seeing the limitations of such a deal not as a cost but as a liberation.
There was a lot of chatter in the immediate election aftermath about whether this position would shift, with the Prime Minister pursuing a softer Brexit, as a result of all those Northern and Midland seats, with the associated manufacturing industries, coming into the Conservative fold. But that is to repeat the category error that Barnier so firmly nailed back in 2017. Bluntly, the only way that the impact of Brexit on UK business can be mitigated is by following the first of the Barnier paths, into something close to the EEA, and there is no way that this Prime Minister will go anywhere close to that.
Why the concerns about the impact of a free trade agreement? It is really quite simple. Leaving the Single Market and the Customs Union means that the UK will create anew a trade border with the EU. That border, a literal one for the movement of goods, a virtual one for the movement of services, will be what creates new cost for businesses seeking to trade across that border. The negotiations might determine whether it is a thin border or a thick border, but a border is a border. Even with a zero tariff and zero quota deal, goods crossing that border will require customs declarations, security declarations, regulatory checks and rules of origin checks. Under a free trade agreement with the EU, British businesses will face new checks and new costs and will become less competitive in their main market as a result.
There is a choice as to how thick that border is. If the EU and the UK regulatory regimes remain broadly aligned and the respective authorities have confidence in the goods passing across the border, the thoroughness of the checks can be minimised. But if the UK seeks to diverge from the regulatory frameworks of the EU, the EU authorities are likely to impose a heavier burden of proof that the goods coming onto the EU market meet EU standards.
Take one example. The Prime Minister has spoken about liberalising the UK regime on genetically modified crops. This is a perfectly justifiable policy position; the caution of EU regulation is not supported by the science or the experience of other countries. But if the UK does take a more liberal approach, and the EU does not, any exporter of food products to the EU will have to demonstrate conclusively to the EU authorities that the product does not contain GM content.
The quality of access that the UK is able to negotiate will depend too on how far the UK is prepared to go in signing up to binding commitments on the so-called level playing field issues. These are the ancillary rules to the Single Market, on labour market standards, environmental regulation and competition and state aid policy, deemed vital by most member states as a means of ensuring fair competitive conditions for trade. It has been clear since the referendum that one of the top concerns in EU capitals was that Brexit would allow the UK to weaken its regulatory standards in a way that would make it unfairly competitive in its main market. The UK has a choice to become a Singapore-on-Thames, as the low regulation option is dubbed, rather unfairly from the perspective of Singapore, but there will be a price to pay in terms of the quality of access for goods to the EU market.
For services, there is no conceivable deal on the table that will give British service providers as good access to the EU market as they have now. At worst, they face a reversion to so-called home state rules, having to meet different regulatory conditions imposed by each member state in order to do business in that member state. At best, some of the edges will be knocked off home state rules by agreement on things such as labour mobility, mutual recognition of professional qualifications, rights of establishment and data flows. But even on the best outcome, doing business in the EU for British firms will become harder.
The Prime Minister has of course set the ambition to conclude a free trade agreement by the end of 2020, ruling out any extension of the transition period. Is a deal doable on that timetable?
This will be tough. It means concluding the main part of the negotiations within a very tight window. Negotiations can’t really begin until the EU negotiating mandate is confirmed, which won’t happen much before the end of February. And the deal will need to be pinned down by the late autumn in order to allow time for ratification to be concluded before the end of the year. That is a crushingly tight timetable.
Perhaps the most that can be achieved in that time is a thin free trade agreement on industrial goods alone. Even including agri-food could be problematic if the UK is insisting on regulatory divergence. A thin FTA would at least provide certainty on the future trading relationship on goods, but will only be achievable if the UK is prepared to meet EU conditions on level-playing field issues, probably as a minimum a commitment to no regression clauses, in other words to maintain standards at least as high as they currently are.
And the other issue that will need to be sorted to get that deal done is fish. For a small sector of the economy – only 0.12% of value add in the UK – fisheries attracts a disproportionate amount of political attention, both here and in coastal EU states. The argument will be about access to UK waters for boats from France, Netherlands, Denmark, Spain and elsewhere, and about access to the EU market for UK fish exports.
Passions run high on fisheries. Many UK fishermen supported Brexit as a means to reserve very much more of the catch in UK waters for themselves. Others, particularly shell fishermen, risk losing their livelihoods if they lose access to EU markets to sell their produce. For their part, French and Dutch and Spanish and Danish fishermen will argue that their access to UK waters long pre-dated UK membership of the EU; these are historic rights. Expect to hear a lot about fish before the end of the year.
If the government is not prepared to accept the conditions set out by the EU, the risk of failure even to achieve a thin FTA by the end of the year will be very real. This will not be the same as the no deal scenario that we faced at various points before the Withdrawal Agreement was finally concluded. That deal would remain in place, with the commitments on money, on citizens and on Northern Ireland. But there would be no trade deal. The UK would trade with the EU on World Trade Organisation (WTO) terms from the beginning of 2021, so taking us over a different sort of cliff edge, but a cliff edge nonetheless.
There will be some, I have no doubt, who will argue that the difference between the sort of thin FTA that might be on the table and trade on WTO terms will not be so very great. There will be some truth in that. Expect those voices to get more voluble as the year progresses and the EU negotiating conditions are better understood. The advocates of a so-called clean break will not go away.
But our relationship with the EU is not just about trade in goods. As the Political Declaration that accompanied the Withdrawal Agreement sets out, there are a multiplicity of other policy domains where it is overwhelmingly in the interests of both the UK and the EU to have a functioning and defined relationship.
I have already touched on services. Other things that will need to be sorted include energy and transport, intellectual property, public procurement, management of digital markets, science cooperation and student exchange. Beyond that, there is the security relationship, hugely important for citizens in both the UK and the EU, both foreign policy and security cooperation and internal security.
All these are complicated issues in their own right. Some progress this year is possible, even likely, for example on foreign policy and security cooperation, which is mainly handled in inter-governmental space anyway, making some sort of arrangement with the UK simpler. But there is zero possibility that negotiations on all these things will be concluded by the end of this year.
What happens if agreement on these issues cannot be agreed by the end of the year? If trade negotiations have broken down, there is a high risk that we will effectively be in no deal territory on many or all of these other domains as well, compounding the shock as we leave the transition period.
So, the stakes are high. With a trade deal, it is likely that there will be the momentum to sustain arrangements in other policy areas that are still to be negotiated through some sort of mini transitions. We may even get to the point where both sides agree that some sort of overall wrapper is required for the relationship, something akin to an Association Agreement, not least to provide for the institutional infrastructure, including dispute settlement procedures, that is required to handle a complex international relationship. Concluding all this will take time. From an EU perspective, it will also be an agreement in mixed competence territory, engaging interests that formally lie within member state responsibility as well as issues of EU competence. That means that it will need to be ratified by member state parliaments, even some regional assemblies. That’s not going to happen by next Christmas, or for many Christmases to come.
Failure to agree will see the UK tumbling off various cliff edges at the end of the year as we exit the transition period. That will not be the end of the story; for both the UK and the EU the relationship is too important not to seek to structure it in a formal way. So at minimum there will be negotiations about negotiations. We will have reason to bang on about Europe for a long time to come.
Whatever happens, the relationship will not be as close as it is now and there will be a consequent impact on the UK, and the EU, economy. On the back of the sort of free trade agreement that the government is pursuing, most, though not all, estimates by different groups of economists, including the government’s own, suggest that the UK economy will grow more slowly than it would have done had we chosen to stay in the EU. The impact of that might be to reduce growth by around 5% over the next 15 years or so. Note; this is not absolutely poorer; we will still grow and get richer as a country, but we won’t grow as fast. Indeed, some economist estimate that UK economic growth is already 3% less than it might have been, compared with the experience of other G7 countries over the last three years.
Why the economic impact? Again, the answer is simple. As all the most ardent Brexiteers would accept, free trade brings benefits. The UK is leaving the biggest and most successful free trade area in the world. That puts friction into the trading relationship; that friction carries costs and those costs mean the economy grows more slowly.
UK businesses selling into the EU face a loss of competitiveness, but so do EU businesses selling into the UK. That’s not good for either side. Given the EU surplus on trade in goods with the UK which runs to some £290 billion, some have assumed that the EU will be desperate to cut a generous deal with the UK. These are often the same people who have berated the EU for being more of a political than an economic and trade project. There’s a strange myopia there. Just as a majority of people in the UK were prepared to pay a well-advertised economic price for a return of UK sovereignty, so many in the EU will be prepared to pay an economic price to protect the integrity of the EU political project, in particular the coherence of the reinforcing rights and obligations of the single market.
So businesses on both sides of the Channel will be impacted. There will be an adjustment of supply chains and some import substitution. Some costs for consumers will go up. But given that the UK does 45% of our trade with the EU and the EU only 9% of its trade with the UK, the impact will be felt proportionately more in the UK.
The hope and intention is that the loss of EU trading opportunities will be compensated for by the vigorous pursuit of trade deals with other countries round the world, notably the US. And, of course, free trade generally being a good thing in economic terms, these deals will deliver economic benefits to the UK. But these deals will have to do a lot of heavy lifting to completely negate the adverse economic impact of a poorer trading relationship with the EU. Distance still counts in trade; it will be a lot harder to build as good a trading relationship with Australia as we currently have with the Netherlands. Only the most optimistic of economists (if that’s not an oxymoron) believe that a gung-ho deal with the US and others will let the UK economy surge; and the price of such a deal would be the wholesale acceptance of US demands on things like agri-food standards and pharmaceutical purchases by the NHS, issues which to put it mildly are not uncontroversial.
So the economic legacy of Brexit will be profound and long-lasting. Because the macro effect will be slower growth, this will not be immediately evident to many of us; we won’t miss what we’ve never had. But that will be cold comfort for the many thousands of businesses, and their employees, who will feel the impact of a poorer trading relationship with the EU directly. Some businesses and some sectors, particularly those embedded in low margin, highly integrated European supply chains, will be hard hit. It will take time for the economy as a whole to adjust to these new conditions.
The government has tools in its kitbag that it can deploy to mitigate the economic impact of Brexit, chief among them actions that improve the business environment in the UK. The incoming government has promised vigorous action to do just that; borrowing around £20 billion a year to invest in much needed infrastructure, particularly in the Midlands and the North, increasing dramatically the amount of public funding available for research and development, so important as a driver of productivity and hence economic growth.
These things are not Brexit dependent; any government over the last few years could have done precisely the same. But there will be some opportunities available to this government that do flow directly from Brexit and the taking back of control. There is the chance to remake chunks of our regulatory state.
The most immediate and prominent example is the need to re-base the UK’s immigration system as free movement for citizens of the EU comes to an end. The promise is for an Australian-style points-based system which will bring EU citizens into the same system that applies to potential immigrants from other developed countries and beyond. There is no doubt that the UK has a continued need for workers from overseas, not just in high-skilled jobs but also to staff our health service, our care system and our hospitality sector. I am less certain that we have had a sufficient debate about the balance of that need for workers and concerns about the consequent levels of immigration. In short, does taking back control of our borders reconcile people to continued high levels of immigration? Or does the underlying concern about the perceived pressures of immigration persist?
In some sectors, there will be no choice other than to create a new policy context. Leaving the EU means leaving the Common Agricultural Policy (CAP) and the Common Fisheries Policy (CFP). New law is required to give the government powers to manage these interests once we are out of the EU, hence the bills in the Queen’s speech. There is undoubtedly opportunity here. It would be difficult to create a more economically and environmentally perverse policy than the CAP. But our farmers will face this new future in the tender care of Her Majesty’s Treasury; there will, I hope, be a vigorous debate about how public goods are delivered through any continued subventions to the industry. Likewise on fishing; exit from the CFP is a chance to improve the management of fish stocks in UK waters. It should not give licence to weaken controls over exploitation of a precious common resource.
On regulation more generally, the government will have the chance to make the law in a way which better suits British business and other interests. Businesses have already been warned to expect divergence, though on what is not clear, nor to what end.
There are examples of where EU regulation does not work well for British interests. There is a prospect too that Brexit will allow the UK to be a more agile regulator of new industries and new technologies, from smart cars through to biotech, AI and big data.
But the UK will also have to accept the reality that the EU is now one of the major drivers of standards in world markets. Should the UK choose to diverge in domains like auto, chemicals, agri-food or pharmaceuticals, UK businesses will still need to produce to European standards for the EU and other markets. The cost of demonstrating compliance will be higher and the cost higher still if businesses are forced to produce to different standards for the UK market.
Nor is it clear yet whether the government will include labour market and environmental standards in its drive to diverge from the EU. Does it have the Working Time Directive or the Agency Workers Directive in its sights? What about the Habitats Directive or the Wild Birds Directive? If so, what will this mean for standards within the UK?
Therein lies the rub. Quite apart from the interaction with the negotiation on our future relationship with the EU, these regulatory choices are important for the sort of society we want to be. As we take back the freedom to make our own regulatory choices, from immigration to agriculture to workers’ rights, so we import the political controversy that attends them. Those debates have been muted in the noise of the Brexit battle, but they are debates we surely need to have if we are to build a post-Brexit regulatory state that works for the country and commands a common acceptance.