What happened to Brexit?

James Penn
 on 
May 26, 2020
-
Investment

With the airwaves and the papers full of Coronavirus material, it is surely time to visit some other subject.

So why not reheat last year’s overbaked subject, Brexit, instead?

In truth, while still down on the news agenda this subject is once again hotting up.

To recap, the UK’s Withdrawal Agreement passed through Parliament in January with barely a whimper. The UK was then in the ‘transition period’, which would permit discussion about the future trading relationship between the UK and the EU.

Originally this was supposed to last a year and nine months, following an anticipated exit in March 2019. But given the bill only passed this January this has been significantly curtailed to eleven months.

A month ago, most commentators took the view that the damage from COVID-19 was so severe that the government would just extend the transition period into next year to avoid ‘a second cliff edge’, or withdrawal with no deal in place and therefore future trading on WTO terms.

However, that view seems to have changed over the past four weeks.

Both sides seem to be so far apart that no hope of an acceptable agreement seems possible. Whether this is due to the difficulties of negotiating in virtual meetings, or an underlying impassable gulf in the two sides’ ambitions, is difficult to say.

But with the UK government last week publishing its proposed tariffs (or exemptions on tariffs) in a post-EU world, it seems the UK is now planning aggressively for a no deal scenario. Tariffs will be retained on autos and agricultural goods to protect UK producers, but otherwise largely abolished.

From a UK perspective, the stumbling block is the ‘level playing field’ that the EU is insisting on, under which the EU would continue to have oversight, and effective control, over UK customs and other regulations. The government’s view is that this is completely unacceptable fora sovereign nation.

Under membership of the EU, of course, sovereignty is forfeited. For the UK to then remain subservient to EU control and the judgements of the European Court of Human Rights would surely make no sense at all. Why bother leaving to ‘take back control’, if you don’t get any more control than you had previously.

The EU also wants access to UK fishing waters on the same terms as before. Meanwhile, the UK wants access to the EU for services companies, particularly financial services.

A bare free trade agreement covering just goods and exempting fishing and services seemed like the most likely scenario a while ago. But the EU’s insistence on level playing field control looks to have scuppered this.

Earlier in the year, with Boris firmly in control, an overspill of the ‘transition period’ into next year would have seemed plausible.

But COVID-19 has arguably made the situation so bad that leaving on WTO terms won’t make things appreciably worse. We are already in the worst recession since the 1930s. Movements between the UK and the EU have already come to a standstill while trade between countries is significantly reduced.

The UK’s hand is discernibly stronger because of the Coronavirus. No wonder Michel Barnier has been accused of losing his rag recently.

In a sign of opinions hardening, a lot of column inches have been spilt on the matter in the past few days.

A piece in this week’s Spectator magazine puts the case that there has never been a better opportunity to leave on WTO terms. If the UK doesn’t go now, the EU will doubtless keep stringing it along until a future Labour government revokes Brexit. The delay to leaving last October was not Boris’s fault, but any future delays will be pinned on him. The magazine also makes the case that the Labour Party probably won’t protest too much, even though Keir Starmer is a firm remainer, given it will wish to reclaim the Red Wall at the next election.

In the Telegraph, Roger Bootle put a similar case for leaving on WTO terms. If the UK remains in the ‘transition period’, it will have to sign up to the next (higher) EU budget. Lack of clarity on the UK’s future trading position with Europe will prevent it from signing up to any free trade agreements with other countries. He also suggests that remaining tied closely into Europe will probably mean the UK has to participate in any future bailout of Italy.

On the other side, the remain-leaning Financial Times had a leader in last Thursday’s paper, saying it would be irresponsible to leave on WTO terms with the economy so weak, while in Friday’s FT, the columnist Martin Wolf said that a no deal exit would be ‘disgraceful’.

So it’s all to play for over the next few weeks.

My guess is that the UK walks away in June, but that a limited free trade agreement covering goods is agreed by the end of the year.

As usual, though, with the EU – only at the last hour.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

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