May’s Speech – Predictable Overreactions

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So, the morning following the speech setting out Britain’s “position” on leaving the EU by Prime Minister Theresa May, the reactions are predictably diverse and some bordering on the hyperbolic.

We are left (in the words of Donald Rumsfeld) with Known knowns, known unknowns and unknown unknowns. Let’s start with the Known Knowns

We will walk away if we have to:

This was the easiest line to predict. Cameron went to Brussels knowing that whatever happened, however little he was given, he would react in exactly the same way. He was always going to put a frock coat on it and show it off like first prize.

Brussels is a place well used to such behaviour, and used him for its bidding, thinking that having the weight of the Prime Minister behind it would turn a dressed up frog into a prince. They didn’t bargain for the British people, who have a tendency to be rather more independent of mind.

May hasn’t made the same mistake – from the outset she is making clear that Britain can and will walk away, and that it is for the EU to weigh up the consequences of that for themselves as well as for us. It’s a standard negotiating position.

We will be outside the Single Market:

Bearing in mind the terms of the campaign, this is no surprise. Remain always pushed the idea that to leave the EU would be to give up single market membership, and Leave always took that as an advantage. Only a few of us in the middle argued a third way (EEA/EFTA). As we had no discernible impact on the outcome, it is entirely predictable that our campaign arguments have little influence in the tactics of negotiation.

But is this the disaster that some are predicting? Not from what I can make out. There will be some issues of course, but this is not a some desire expressed to go ‘Straight to WTO Rules’ by tearing up the 1972 agreement and not holding any negotiation at all. There is still plenty of scope for MRA, Trade agreements and the suchlike, without being members of the single market. For the politics of this, both sides must be seen to gain something, or equally to lose something. That doesn’t make it a zero sum game, politics is not business.

We will leave the Jurisdiction of the ECJ:

This again, is a bit of a no brainer. Even under EFTA/EEA, this would have been at least partly true. The influence of the ECJ would have still been there but its ability to impress its will at least one stage removed to the EFTA court. The amount of EU law would have been drastically reduced. It was never the perfect solution, and was never intended to be a permanent fix.

We will be able to control migration from the EU:

Again, this was an inevitable red line, I cannot for the life of me see why this is causing any consternation. But what it doesn’t suggest is that anyone currently enjoying the right of residence via EU citizenship will face any new hurdles to remain here.

We will seek Customs agreement with the EU:

This is a very sensible move. Along with the idea of Mutual Recognition and services conformity, Customs procedures will be one of the more complicated of the big administrative issues up for discussion. The nature of that agreement is of course, still an unknown at this point.

We will seek a UK/EU FTA:

This is quite ambitious, FTAs can often take a long time to negotiate and get hung up on the smallest of issues. But in a negotiation you start at the boldest point, so this is not anything we should not have expected to hear.

We will seek an Implementation period for that FTA:

So despite the reaction of many to the idea of a ‘Cliff edge’ – the government’s intention is still to avoid one. The open question is now how they will do that.

Known Unknowns:

How will the EU react to our negotiating stance?

Predictions this morning are that the EU partners are saying largely – ‘you’ll get nothing’. But of course, that’s exactly what you would say for public consumption in their position. Behind closed doors, discussion will be much more sensible, this is how negotiations work.

I think we must wait and see what shape the discussions take, and refrain from the panic commentary of “We’re Doomed, doomed I tell ye” that has featured in some places  overnight. Governments like to get re-elected. Clinton was right when he said “It’s the economy, stupid”. May is not going to throw herself under a bus, and there will be compromises along the way.

At the same time we know that the EU has its own internal problems, without now taking a trade hit, or suffering any difficulties in accessing market money for EU based businesses. The objective for both sides will be to first do no harm to themselves.

For one’s self respect and anger management, avoiding the press at this time (on both sides of the English channel) is certainly advisable!

What has been the response to discussions behind closed doors?

The idea that discussions have not been happening is fanciful nonsense. Firstly, these informal discussions go on all the time between officials in corridors, opening up lines of contact that are un-minuted and unofficial. The world doesn’t just exist in the formal sphere. Feelers will be out, on both sides. What we see in public is just the show, not the substance.

We don’t know what the intelligence services are saying either, but we do know that the PM will be receiving intelligence reports that have a bearing on the positions of others in the negotiation, (just as they will have on us). Remember that we are dealing with 27 sets of interests, not just one position. The EU talks like a single entity, but it is much more complex than that.

We also don’t know the response of Norway, Switzerland, Lichtenstein or Iceland. Have we made overtures about rejoining EFTA, and have they been accepted or rebuffed? Again, these are positions we know could be, or might have already been explored, but we don’t know the progress of them.

Implementation period:

What does May intend by this? We know that the entire EU Aquis will be incorporated in to UK law, David Davis has told us this already. Does this mean that the implementation period will comprise of a set time, still under the rules and principles laid down in the EEA agreement? It’s not impossible, and if there was a sunset clause here then it would be more palatable politically in the UK.

Some criticism has been made also that we cannot have an implementation period to a destination that we cannot know, because it will be impossible to agree an FTA in two years. I have some sympathy with that view, but it is not impossible to set out the broad scope of objectives within the two years, leaving the implementation period to thrash out the details. Of course this still creates a deadline, but it doesn’t have to be like article 50 by necessity – in that it relies only on our partners for extension.  We already have some templates, such as CETA, which can be built on. This might not be entirely ideal for some, but it does mean that we are not starting entirely from scratch. It should also be noted that we start from a point of regulatory harmony, something that no other FTA negotiation with the EU has experienced.

As for the implementation period, it would need to be subject to (if it were EEA based) some form of arbitration. And this is where the EFTA nations question arises again – would they agree for the UK to join EFTA, or to adopt the EFTA court as a temporary arbiter of this period? Of course, if May has already had some feedback from EFTA, then she would be in a position beyond that which we know. It should be remembered that EFTA membership is not reliant on EEA membership – Switzerland is outside the EEA. We might retain EFTA membership permanently, even after leaving the single market.

Unknown Unknowns:

Many scoffed at Donald Rumsfeld over this term, but it was an important recognition that there are simply possibilities which we may not have even anticipated arising. As commentators from the outside, we are not in a privileged position for information, so we must accept that with some humility.

While we can of course, read and interpret the statements of ministers, the law as it is written, the treaties to which we bind ourselves and of course the historical precedents, we are still outside the process. Our position is one of being fallible, even if our research is entirely accurate. For most of us, our understanding and interpretation of EU and international law was constantly moving even during the campaign, it would be supremely arrogant to believe that we have somehow reached total understanding now.

DON’T PANIC!

The Hitch Hikers’ Guide to the Galaxy has these important words printed in bold letters on the cover. It’s probably the best advice ever issued in the Galaxy. (Along with the bit about Vogon poetry, that was very important advice).

Panic is futile. It won’t change anything, and you’ll probably give yourself an ulcer.

Article 50 hasn’t even been triggered yet, there is a long way to go. If we start panicking now over every statement that is made it’s going to be a very long two years. Also, it won’t help to heal wounds that have opened up in UK political discourse to rush to hyperbole and exaggeration as if wild articles in the Guardian or Twitter warriors really have an influence on those who will undertake the negotiations. LBC’s James O’Brien will tell you every day, for three hours a day if you can last that long, that its all for the consumption of the Daily Mail – Dacre is the real driver of the government. If you listen to him, you’re likely to have a nervous breakdown by 2019. Spare yourselves, I  implore you! Spare the NHS, it’s stretched enough as it is!

What we really know is actually…not very much. And we won’t know that much until we see the negotiations unfold. May is playing poker with her cards face down, that much is sensible at least. But two years is a long time in politics, and there are many events to come, as any historian will attest.

 

Brexit: Political Considerations

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On the now defunct Brexit Door blog, I spent the best part of a year developing the arguments for an EEA/EFTA based Brexit solution – what was basically to all intents the first stage of the Flexcit plan by Dr Richard North. There were several reasons for this. Firstly, it was the only game in town for anyone who wanted to see any real research led argument. Secondly, its motivations were the ones I shared, in that it was not motivated by either xenophobia or any intent to pull up the drawbridge between ourselves and the continent.It was based on mainly classical Liberal trading arguments as opposed to protectionism.

Strongest of all the considerations, was that I thought that this would be the single plan to leave the EU that would be able to gain enough support in the campaign to allow those with fears over the impacts of exit some security, while also gaining us the opportunity to create a fully independent Britain over a period of time. We could win, and take a majority of the ‘middle ‘ with us.

In the final weeks of the campaign, we were all much heartened by polling commissioned by the Adam Smith Institute and published in the Telegraph which backed this theory very strongly. However, there is a fly in the ointment.

Brexit in the Courts.

In the last few months we have seen several court actions, and at the same time we have gained an extended understanding of the manner in which the EU treaty works in practice through engagement with those who are or have been involved in the legal process on the EU side (such as Andrew Duff). This means for me, that the shape of the negotiation is somewhat different to that which we had initially believed before the vote.

Much of this stems from the Jolyon Maugham case, which is currently being brought through the Irish courts. He is seeking to show that the article 50 notification is revocable unilaterally by the leaving state, so long as that revocation is in good faith ( and not just a delaying tactic). Of course, this changes the dynamic. Were that case to succeed then there is likely to be a point at which the choice to remain in the EU will appear again, before we have left it.This is a significant factor, because before the referendum we took the opinion from many sources that the choice at the end of the negotiation process would be between any deal we had reached against leaving without one. This was a key component of Flexcit, to avoid that pressure based on the two year guillotine on article 50.

Maugham’s case is, from what I have read and from answers I have received from various sources, correct. Article 50 is revocable, unilaterally, as the Lisbon treaty was written to be read not just alone, but in conjunction with the Vienna Convention on the Law of Treaties (the accepted international authority on treaty law). It is Vienna which provides the framework for notification, and the rules surrounding this notification.

Of course, if this is correct, then Gina Miller’s case should by the same token, fall at the supreme court, because there is no implied repeal of the 1972 act in the simple placing of the notification to leave. Parliament will still have to be consulted on the treaty that will replace our EU membership (and there would have to be some agreements, even if not the depth and scale of an FTA, that would have to go through the process of Parliamentary approval under the 2010 Constitutional Reform and Governance act). At that point, the choice to Remain would still on the table, legally speaking.

Political Impacts of Continuity Remain

It is impossible to argue that the coverage of the court cases and the resignation of Sir Ivan Rogers has not had a political impact. The results of the cases are not yet in, but when they are, and if they return the results I am led to believe that they will, this will almost certainly create a political shift again. Opinions at this point, especially amongst Leavers, seem to be hardening.

Partly this is a change in perception – simply the fact that they won a vote that most expected to lose (including myself if I’m completely honest). This has emboldened views that we must go for the swift and sharp option. But also it is a function of the continuity remain campaign.

Rather than press for a solution that the middle could coalesce around, many Remainers have looked for strategies to derail Brexit. In this, Tim Farron is a prominent voice – their hope is that they can force a second referendum on the deal, while emboldened by Maugham’s case that to reject the negotiated deal now means that we remain, rather than leave to some ‘Hard Brexit’ WTO status. Project fear can be replayed again, and the incentive for the EU to ‘play nice’ would appear reduced.

At the same time, those who are now coming around to the idea of an EEA/EFTA route out, are seeking it as a much more long term arrangement than most leavers would be willing to be subject to. Ian Dunt for example, has proposed to hold out an olive branch to Leavers in the form of co-operation around the EEA/EFTA route. But in his article he tries to convince Remainers that this is the best way to shadow the progress of the EU in legal harmonisation, the aim being that we should have the shortest gap to bridge to rejoin it at a later date.

This makes it very difficult for Leavers who proposed the Flexcit route – because in that plan was the intention to lift power through enhancement of Global governance (via WTO TBT agreement), to the next higher level – UNECE. Clearly, those newly in favour of EEA/EFTA are not looking to that aim at all.

The Civil Service, Parliament and Norway

One consideration that is coming to the fore is that none of the personalities involved in the campaign have really changed. Parliament is still there, as is the Lords. The MPs elected in 2015 were presumed by their own statements to be about 500/150 for remain.

The Civil Service, always supposed to be a neutral tool of the state and therefore the people, is arguably nothing of the sort. Peter Oborne has written extensively and authoritatively on this subject. It has never been a secret that the distinction between the EU and the British Civil Service was a very blurred line, and that the Civil Service (at its highest levels) were not in favour of a referendum. Oborne also writes about the politicisation of the Civil Service, something that has led to suspicion about how the system works, and makes it very difficult for the man on the street to feel confident in it.

And what of our major Parties? The Conservative Party, which should always have naturally been against Supranational government, has always been its biggest cheerleader. Labour after 1987 joined in. If both parties are showing a desire to support the will of the people in effecting Brexit, it is almost certainly regarded by many as no more than a position of convenience. These parties have not been somehow forever changed by the result of the referendum. Arguably with some justification, people fear that eventually they might both return to their old positions, and simply never really get beyond the initial first stage of Brexit – a kind of half out position where we play along tacitly with the ECJ and other institutions.

Norway, our proposed EFTA partner, also suffers from a similar malaise. Its politicians are largely out of step with its electorate when it comes to matters regarding the EU. They would join tomorrow, if they thought they could get it past the people. The referendum has not changed this, and the comments of the Norwegian PM this week about Britain’s lack of negotiating ability have simply not helped matters (even if they had a ring of truth to them). It has made our EFTA partner appear hostile to many leavers, even if that was not the intention.

All of the above, makes it more difficult for Leavers to coalesce around a deal which leaves us close to the EU, such as the EEA. Simply, the trust in our own political system is not there.

Conclusions

The hardening lines I see in the public discourse over Brexit, the conversations with friends and the reports in the media draw me to the belief that the EEA solution is less and less likely to be our route our of the EU, whatever its merits.

Those who have rallied to its cause since the referendum have been largely those who wrote it off as ‘Pay with no say’ or ‘Fax Democracy’. Their volte face inspires little confidence in confirmed Leavers, and their fellow travellers are often holders of some quite extreme positions on Brexit which further salts their ground. While they openly support the idea of ‘rejoining’ at a later date, they surely stand little hope of wider support. Of course, that doesn’t mean that Rejoining is a realistic prospect, even via a prolonged EEA transition. As Dr Richard North points out, it’s a big political leap to reverse the decision after we are actually out. EFTA membership makes it no more easy to rejoin the EU, for it is a political decision, regardless of the logistics. But the floating of this idea hardly promotes a common cause.

The government, while still being that of a Tory party, must already be looking to their next election. The argument for immigration control is playing large in areas where the Tories need to gain ground, but not so much in the areas where they are fairly safe. Labour’s pledge to keep current Freedom of Movement rules hands them an historic opportunity to break Labour in the North. Article 112 emergency brake mechanisms are simply not being discussed in the public arena, because the same people are in charge who effectively rubbished this option in the Referendum campaign, on both sides of the house. Only Cameron and Osborne have been removed. But Fox, Johnson and Davis have been moved in – and we know their position on EEA from the campaign. Only Davis has appeared to soften slightly, in terms of payments to the EU – though any reader of Flexcit will be able to tell you was always going to be part of the settlement and ongoing co-operation. There’s no such thing as a free lunch.

All this leads me to believe that other options will have to be explored first. An FTA will certainly not be part of the Article 50 process in the way that transition to EEA could be – that is a separate issue under the EU Treaty. The EU has made noises to the effect that these issues will not be taken in parallel. So I think it is becoming clearer what the government’s position will be – and it will not be that which I campaigned for.

However, there is still a wide scope for agreement with the EU and continuing constructive co-operation. Brexit, on any terms we negotiate, will still be better than Remaining in an EU which is contrary to our nature, culture and long term interests. There is no ‘WTO’ option as was painted by some in the campaign – the dichotomy between ‘Hard’ and ‘Soft’ Brexit is a false one. There are in fact many shades of grey. Both sides must be seen to get something they want in the upcoming negotiations for the consumption of the public. But that doesn’t mean either side has to lose for the other to gain, and I am still confident that the outcome will be Liberal, good for Britain, and potentially good for the EU.

 

Fox on Free Trade – addressing the imbalance

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On 29th September, Liam Fox made a speech in Manchester Town Hall setting out his (and the government’s we assume) attitude to free trade. And very laudable it all was too, referring back to Adam Smith and to liberal economic belief that free trade is the great driver of wealth and progress in the world.

But it wasn’t all wine and roses, and therein lies the rub for the Government, in extricating ourselves from the EU with the least possible economic risk (there is never a point where risk is zero -in any action there is always a risk factor).

It is a sad fact, however, that the proliferation of protectionist measures has often been by the very countries who should be the most ardent supporters of free trade.

The most recent WTO reports show an acceleration of protectionist trends since the 2008 recession – with the G20 being amongst the biggest culprits.

The USA for example, tends to look to inwards on trade before it looks outwards – and in fact did great detriment to the Lomé IV agreement which gave preferential treatment to the former colonies of the European powers on agriculture, allowing them one sided market access to Europe. It was the USA that petitioned the WTO to bring the Lomé agreement to an end, making all trade deals reciprocal under Most Favoured Nation Rules.

The EU though is equally protectionist in its own ways. The Common Agricultural Policy was designed purely to rig the market on agriculture in favour of home producers, by artificially pumping revenue into the sector, while maintaining high tariff walls to outside competitors.

So when Liam Fox then goes on to maintain that out trade with the EU will be

‘at least as free as it is now’.

he shows a great deal of optimism – especially as he is in favour of a short ‘Hard’ Brexit with no Single Market attachments.

In this he is talking about tariff barriers – and that he believes that we will not face tariff barriers to the EU if we leave because the trade imbalance we have with the EU will ensure that we get a free trade deal with the Single Market.

An unbalanced relationship

Where we have an issue is with the politics of Brexit, rather than the principle framework for relationships. None of the above is impossible, but the relationship is still some what imbalanced by the WTO, and how it regards trade blocks as against independent trading nations  – and most pertinently, the exemption from Most Favoured Nation Status.

MFN is a rule that is designed to open markets in a manner that is continually driving down the cost of import tariffs. If a trading nation charges a certain tariff on a particular sector, then it must charge the same tariff to all WTO members. Now that’s fairly simple – because it means that the playing field is always level.

Except it doesn’t.

The biggest players wrote the rules to protect themselves. The USA (NAFTA), the EU, EFTA – they all enjoy an exemption from the MFN status. Trade blocs are internally exempt from the MFN rule, so that they can remove tariff barriers internally while keeping a tariff barrier to the outside world. That part is easy enough to understand in that there would be no point of ‘Free Trade’ blocs if that were not possible.

But it also advantages trade blocks in another way. When a bloc does a free trade deal with another state, it is protected in that deal from MFN – it does not have to reduce its tariffs to all WTO members to match that.

But for the UK, this presents a small problem, and it is that which creates asymmetry between the EU and UK post Brexit if no specific deal is in place.

Let’s take the car industry. EU common tariff is 10% on finished cars, twice that on commercial vehicles and pickups. So when we come to look at our free trading outlook to the world we we surely wish to move to a much lower general tariff – around the average of say 3%. But the EU is a WTO member, so therefore we must charge it the same as we charge every other member – 3%, while it may still charge us 10% – the common external tariff. This might also be an issue in agriculture, another significant sector.

Free trade agreements

So to continue on this line of ‘They export to us more than we to them’ is shown to be total folly. We cannot liberalise without that asymmetry cutting in, something that none of the main campaigns mentioned, and Liam Fox seems not have mentioned either since the result. Journalists seem not to ask him about it – am I missing the point somewhere?

The problem with free trade agreements is that they can take a long time to negotiate. Article 50 is still only 2 years. Now of course it would be relatively straightforward in administrative terms, to negotiate a free trade agreement with the EU in manufactured goods. All the regulatory convergence is in place, we would just agree to continue on that path. As product regulation is lifting to a global level, this wouldn’t be a problem to us. But politically, I still think we face an uphill task in that the EU has a single agenda – completing the political union.

Signing a full free trade deal with the UK might be economically in the EU’s best interest, but the pain of not signing one is spread around the 27 fairly unequally. And what does that do to the project? Would the EU be willing to set a precedent in offering us an FTA, or extending Art 50 to ensure one was reached? It is not always the case that all participants act in their own economic best interests, or what we perceive those interests to be. They can be trumped by other more political issues. Therefore getting agreement could still be difficult.  Uncertainty is bad for business, disentangling  that which has been in place for 40 years, is not an overnight task.

This was why I supported the initial stage of joining EFTA and then utilising the EEA agreement as an interim arrangement while we looked to create a free trade agreement with the EU that jettisoned the last of the political baggage of the single market. It creates time, away from art 50. (Art 50 was designed to look like a fair exit, but act as a disincentive – it’s one of the great political con tricks of our age. Despite this, because it’s in the treaty we must use it).

It is one possible solution of many that are now appearing from researchers, after the Brexit vote. But it was this, the Flexcit, model that I campaigned on during the referendum. The principle I believe, remains sound – in that Brexit won’t be an event, but a process. Whether Flexcit becomes the basis for that process or not remains to be seen – new ideas will challenge it, and one might devise a better or more workable solution. Even Flexcit itself is not stationary and undergoes constant development and revision. But whatever happens, the simple message of ‘It will hurt them more than it hurts us’ should be thrown out with the campaign slogans, and we should start to deal with the detail of the world of trade as it is, not as we would like it to be.

 

Postscript:

Mr Brexit runs with a very similar theme today on the ‘Brexit Blog’. Well worth a read.