Why Boris Johnson is considering a no-deal Brexit for a bruised economy

In an economy devastated by the impact of the coronavirus pandemic, Britain can boast at least one new boom industry — customs.

By some industry estimates, which ministers do not dispute, as many as 50,000 people could find new work as customs agents, facilitating trade between Britain and the EU under new Brexit arrangements. This army of form-fillers could soon start to rival the actual British Army in size.

The party of Margaret Thatcher is now overseeing the unwinding of one of her biggest projects: the creation of a vast EU single market, where goods and services flowed unimpeded across national borders in Europe.

Lorry parks and inspection points are being created to facilitate customs controls between Britain and the EU. More than £350m is being spent to help companies in Britain overcome red tape spawned by Boris Johnson’s Brexit deal to enable them to trade with Northern Ireland, another part of the United Kingdom.

This is all happening to prepare for what the prime minister says is his preferred option of a tariff-free trade deal with the EU, when the Brexit transition period expires on December 31.

But even that limited trade agreement is not a certainty. As a crucial eighth round of EU trade talks take place in London this week, Mr Johnson is considering whether to inflict even more friction on trade between the UK and its biggest market by severing ties with the 27-member bloc at the end of the year with no trade deal at all.

UK chief negotiator David Frost with the EU’s Michel Barnier, whose talks this week have been overshadowed by revelations that Boris Johnson is planning to legislate to start overriding parts of the Brexit withdrawal treaty © Yves Herman/Reuters

David Frost, Britain’s chief negotiator, said ahead of talks with Michel Barnier, his EU counterpart, that unless Brussels respected the UK as “a sovereign state” — giving it freedom to chart its own economic destiny — then reluctantly Britain’s new existence outside the EU would start without a trade deal in place. “If they can’t do that in the very limited time we have left, then we will be trading on terms like those the EU has with Australia. We are ramping up our preparations for the end of the year.”

An “Australia-style” deal is the euphemism preferred by the Johnson government to describe a relationship with the EU that does not include a free trade deal. Unlike a “Canada-style deal”, which abolishes tariffs but spawns a mountain of additional paperwork and customs checks at the new trade border, a no-deal Brexit would involve tariffs and quotas on British goods as well, making exports more expensive.

Mr Johnson is reluctant to say how much this would cost the economy. When asked why there have been no recent impact assessments of the government’s trade options, Number 10 says: “The economic impacts of our trade deal with the EU has been much debated in the last four years and there are many economic studies on this issue.”

The most recent official estimates in 2018 reckoned the UK would miss out on 4.9 per cent of future income over 15 years if it left the bloc with a basic trade deal. Under a no-deal scenario, that would rise to 7.7 per cent over the same period, compared with staying within the bloc. Sam Lowe, a trade expert at the Centre for European Reform and an adviser to the UK government, says a no-deal exit would also complicate other aspects of Britain’s dealings with the EU, tarnishing relations for years to come.

But Mr Johnson insists this would nevertheless be a “good outcome”, arguing that it would allow Britain to adopt its own policies free from meddling by the EU, which insists the UK must stay close to its rules that limit the amount of aid states can give to their domestic industry.

The big calculation for the prime minister in the coming days and weeks is whether “no deal” is worth the political and economic price — especially at a time when the economy is facing its biggest crisis since the second world war and Scottish independence is back on the agenda.

A 'pivot to sovereignty' would allow Dominic Cummings the freedom to pursue his vision of an activist state promoting new technologies
A ‘pivot to sovereignty’ would allow Dominic Cummings the freedom to pursue his vision of an activist state promoting new technologies © Chris J. Ratcliffe/Bloomberg

One EU diplomat says: “Walking away from the table and going for a no deal will hit the UK economy and UK jobs much harder than the EU economy and EU jobs. One wonders whether this is really a negotiation or pure masochism.”

Fishing and subsidies

On the face of it, a deal on a free trade agreement should be within the grasp of Lord Frost and Mr Barnier when they sit down for what are likely to be tense talks this week. Dominic Raab, foreign secretary, claimed last weekend that there were only two “outstanding bones of contention”: one relates to the distribution of fishing quotas, the other to a state subsidy control regime.

The mood has been soured by the revelation in the Financial Times this week that while Lord Frost and Mr Barnier are talking about future relations, Mr Johnson is planning to legislate to start overriding parts of the Brexit withdrawal treaty he negotiated with the EU last October — the so-called Northern Ireland protocol.

Mr Johnson has tried to calm nerves, reassuring French president Emmanuel Macron that the changes he has in mind are “limited”, but Mr Barnier will insist that the starting point for a future deal is full respect of the international treaty negotiated by the British premier and ratified by parliament less than a year ago.

On the substance, the issue of fisheries is seen by officials on both sides as totemic but solvable. Mr Barnier reiterated on Monday that Brussels has moved from previous “maximalist” positions on fishing waters and was looking to secure a compromise. “I think a deal is possible,” he said. “It is a question of goodwill.”

Lorries near Dover take part in a trial to tackle potential post-Brexit traffic queues. Lorry parks and inspection points are being created to facilitate customs controls between Britain and the EU
Lorries near Dover take part in a trial to tackle potential post-Brexit traffic queues. Lorry parks and inspection points are being created to facilitate customs controls between Britain and the EU © Glyn Kirk/AFP/Getty

EU officials say the current UK proposals would effectively double the British catch, an outcome Brussels argues would devastate EU coastal communities. Brussels intends that this week’s discussions on fish will focus on governance arrangements for any future deal, given the current difficulties in making headway on actual catching rights.

The real sticking point is the question of state aid: notably the insistence by Mr Johnson and his powerful chief adviser Dominic Cummings that Britain must be free to hand out state support to companies to help regenerate the economy after the Covid-19 crisis, to transform “left behind” regions and to put state “oomph” behind the British tech sector.

The irony of this demand is not lost on veteran diplomats. Kim Darroch, Britain’s former ambassador in Brussels and Washington, recalls how Treasury officials working for the Thatcher government in the 1980s designed the EU state aid rules precisely to foster fair competition and to stop other European countries engaging in a subsidy race.

“We were the biggest enthusiasts in the whole EU for a tough state aid regime,” he says. “People who were involved in devising that regime will have their jaws hanging open — or will be spinning in their graves — that this Conservative government’s big idea is to intervene to create a UK equivalent of Silicon Valley.”

Downing Street insists it does not want Britain to become a “high subsidy regime”. Negotiations are under way with Brussels about how such undertakings might be given legal force with an independent regulator.

But it is the precise opposite of what many in Brussels feared would happen after Brexit. Debate initially focused on whether Britain would become an offshore “Singapore-style” economy, competing with the EU through low taxes and light regulation. But Mr Johnson, who needs higher taxes in a post-pandemic world to pay for spending programmes in former Labour-supporting northern seats, has already reversed previous plans to cut British corporation tax and rates look set to go higher.

Farmers protest in London against what they see as substandard imports.Michael Gove warned last year that British beef and sheep meat exports could be hit by tariffs of at least 40 per cent
Farmers protest in London against what they see as substandard imports. Michael Gove warned last year that British beef and sheep meat exports could be hit by tariffs of at least 40 per cent © Tolga Akmen/AFP/Getty

As for lighter regulation, the public has little appetite for such an agenda — indeed, the prime minister is promising higher standards. Mr Johnson’s hopes of negotiating a trade deal with the US have already run into trouble as the British public and farmers resist the idea of imported hormone-treated beef or chlorine-soaked chicken.

‘Pivot to sovereignty’

The problems encountered in trying to strike ambitious new trade deals with the US — or indeed with any other major economy — have delivered another blow to the post-Brexit dreams of the Eurosceptics. Efforts to secure a trade deal with Japan have revealed that Tokyo will not grant Britain a better deal than it currently enjoys through its membership of the EU. Liz Truss, trade secretary, has tried to win special treatment for makers of British cheese — notably Stilton — to put a Union Jack stamp on what would essentially be a cut-and-paste of the existing EU-Japan deal.

Mr Johnson’s free-trading rhetoric of February 2020 already seems somewhat archaic. “Free trade is God’s diplomacy,” he said in a speech at the Royal Naval College in Greenwich, quoting Richard Cobden, a 19th-century campaigner for free trade. The prime minister bemoaned the fact that free trade was being “choked” by new obstacles. Pointing a finger at Brussels, Washington and China, he said: “Tariffs are being waved around like cudgels.”

Government insiders say that Mr Johnson now accepts this problem and is quietly shifting his post-Brexit rhetoric away from free trade to notions of sovereignty: a sort of “Britain first”, go-it-alone approach which appeals to the populist and interventionist leanings of Mr Cummings and has echoes of the agenda sponsored by US president Donald Trump.

This “pivot to sovereignty” would allow Mr Cummings the freedom to pursue his vision of an activist state promoting new technologies. “He certainly sees state aid as an important part of the toolkit,” says one friend of Mr Cummings. Others in Downing Street say the iconoclastic adviser is telling Mr Johnson that state aid and the principle of sovereignty are so important that a no-deal Brexit is a price worth paying to secure them.

UK prime minister Boris Johnson’s hopes of negotiating a trade deal with the US have already run into trouble
UK prime minister Boris Johnson’s hopes of negotiating a trade deal with the US have already run into trouble © Simon Dawson/Reuters

But Nick Macpherson, former chief official at the UK Treasury, recalling failed state rescues in the 1970s of “national champions”, tweeted: “Believe me, this is not an issue to go to the wall on.”

Since the coronavirus crisis ravaged the UK economy, with gross domestic product plunging 22 per cent in the first half of 2020, some Conservatives have pushed for a “clean break” no-deal Brexit partly because its effects would be small compared with the crisis the economy has just suffered. They could wrestle back complete control of economic events from the EU with the effects dwarfed by Covid-19.

Thomas Sampson, an associate professor at the London School of Economics, says this calculation was profoundly mistaken because most of the coronavirus economic losses would be recovered, while those from Brexit are permanent. “Covid-19 is likely to cause more job losses than Brexit and greater swings in output, but the economy in 2035 may bear more scars from Brexit than from Covid-19,” he says.

Most macroeconomic models suggest the greatest advantage of EU membership is reducing regulatory burdens “behind the border”. Even under a Canada-style free trade agreement — with customs controls but no tariffs — those new regulatory burdens would fall on British companies.

The difference with no deal is in the additional cost of tariffs, which are important for sectors such as agriculture, processed foods and carmaking, but not large in most other sectors. British-made cars would see tariffs of 10 per cent imposed by the EU, while Michael Gove — now the minister in charge of no-deal planning — warned last year that British beef and sheep meat exports would be hit by tariffs of at least 40 per cent.

Mr Lowe argues that a no-deal outcome would probably also have negative knock-on effects. It might make it harder for Britain to secure side deals in areas such as financial services and data, or to agree bilateral “easements” agreements with third countries to reduce bureaucracy at the border.

Brussels intends that this week’s discussions on fish will focus on governance arrangements, given the difficulties in making headway on catching rights
Brussels intends that this week’s discussions on fish will focus on governance arrangements, given the difficulties in making headway on catching rights © Dan Kitwood/Getty

A deal, he says, “creates a framework for future co-operation. It’s worth quite a lot and could lead to further integration under a different government in future”. Although Mr Johnson calls a no-deal outcome an “Australia-style deal”, Canberra has spent the past two years trying to negotiate a free trade agreement with the EU. Ultimately trade experts believe Britain would be back in Brussels, trying to do the same.

‘We’re ready for a clean break’

Opinion is divided in the Johnson government about whether the prime minister is willing to make the compromises on issues such as fish and state aid needed to get a deal, or whether his tough talk about no deal will be backed by tough action. One Whitehall official says: “A lot of this is theatrics. We’re not yet at the final endgame when a deal is going to be done.”

Some believe that Mr Johnson has not yet made up his own mind whether to follow the advice of Mr Cummings and go for a hard Brexit, or whether to make the concessions to get a free trade agreement. A former Tory cabinet minister believes the EU is right to take the threats seriously: “The EU is finally waking up to the fact we are an independent nation and the game is changed,” he says. “We are ready and willing to have a clean break.”

Failure to secure an amicable trade deal with the EU could also raise further questions about the prime minister’s competence and increase support for independence in Scotland, which voted overwhelmingly against Brexit. But Mr Johnson this week said he wanted a deal in place by mid-October or he would walk away from the talks.

“If we can’t agree by then, then I do not see that there will be a free trade agreement between us, and we should both accept that and move on,” he said.

Some EU officials are not sure Mr Johnson has thought it through. “There’s a reason why Australia is currently negotiating a trade deal with the EU,” says one. Mr Barnier, speaking ahead of his latest visit to London, said simply: “Sometimes in the UK I hear people talking about the opportunity of a no deal. Good luck. Good luck.”

Additional reporting by Chris Giles and Sebastian Payne

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