Cool, so everything’s sorted right? Brexit is getting done, everything’s going back to normal and I never have to talk about trade again.
Oh yeah, no sorry. That’s all a lie. We are about to enter the most perilous system-level recalibration of an advanced economy in trading history.
What.
Yeah, all that nightmare of the last four years was the easy part. Now we have to figure out our future trading relationship with the EU.
I saw Boris Johnson on the telly the other day.
Really? That never happens anymore.
No, it was crazy. He just popped up. It was like a Big Foot sighting. Anyway, he seemed to suggest it was all really easy. We’d get it done in a year and then be free to do whatever we want.
Yeah, that’s the official narrative. But the reality is very different.
Are you suggesting that the government is making a sustained attempt to deceive the public in order to hide the fact that they have an impossible set of negotiating goals and no competence to deliver them?
Yes, I know. It’s hard to believe.
I know what happens now. You start talking about fisheries and regulatory alignment and customs procedures and then I gradually lose the will to live and have to order extremely expensive whisky.
That’s right, that’s how this works. So here’s the thing. The government wants to get the Brexit deal negotiated, ratified and implemented in eleven months, before December 31st. They were entitled to an extension but have decided not to take it. That means the deal is going to have to be proper bare-bones – a completely stripped-down set of negotiating goals.
Like what?
Tariffs, basically. Nothing else. Just eliminate the tariffs.
What are tariffs again?
They’re taxes on goods crossing borders. The thing is, most tariffs are already very low. Decades of worldwide tariff-reduction rounds have hammered them down in pretty much every area but agriculture. So it’s a very modest bar to set. It also means that services – which are kind of key to our economy – are completely forgotten about. And it does nothing about the real problem areas of trade – alignment, customs checks and rules of origin.
Yeah, that’s it. That’s where I switch off. I swear these words are like hypnotic suggestions to close down brain function.
Bear with me, they’re all pretty simple when you break them down. And the implications of them can smash local economies, which then has a massive political impact. Will people blame Brexit? The government? Or the EU? Remainers? Immigrants? The knock-on effect of these decisions will define our politics for years to come. Which is troubling, because it’s not clear the government has any idea what it’s doing.
How so?
Take the distinction between goods and services. Sounds simple right? Goods are things and services are, well, services – legal, financial, hairdressing, whatever. But actually that’s a crude distinction that doesn’t reflect the reality of how businesses work. Car companies, for instance, sell cars. But many of them also often offer the financing for the car, which allows the person buying it to pay in monthly installments. So in that capacity they’re actually functioning as a mini-bank. And banking is…
A service.
Exactly. The same is true for loads of companies, like IBM. They sell things. But they also sell services. So even at this very basic level, going for a goods-only deal already has a massive knock-on effect on businesses. If they want to keep on selling the services in Europe, they have to internally restructure to get into the right regulatory regime. Sometimes that’ll be big news – they’ll close an office or factory. Sometimes it’ll be a case of moving staff around or bulking up whatever office they have on the continent to get recognition there, and it’ll slip under the radar. But the long-term danger is that all the high-knowledge, proper value-added activity goes to Europe.
Grim.
Yep. And things get uglier when you look at regulations.
Yeah I heard about this. What are they exactly?
Regulations are one of the key aspects of international trade. Countries have different regulatory regimes. So when they trade, people have to show that they are satisfying the requirements of the country the good ends up in. That entails a lot of time and paperwork. Until now, Britain has been part of Europe’s regulations regime. Now it wants to completely detach itself. But we’re so deeply ingrained in continental trading networks that we can’t afford either time or paperwork.
How come?
Basically because of our reliance on a manufacturing system called Just-In-Time. Manufacturing depends on this to keep costs down. It means that you avoid holding a lot of stock. Instead, you get the parts you need, literally, just in time. And we are absolutely locked into this. So for instance BMW makes the engines for its Mini model at Hams Hall just outside Birmingham. But the engine blocks come from France to the UK, where they’re drilled and processed, then go to Cologne in Germany for more engineering, then back to the UK for final assembly. GKN in Birmingham also makes the drive line for many cars – this is what transmits power from the engine to the wheels. But it uses components from Spain, Italy, France, Germany and the UK. Millions of components come across the Channel every day to arrive just as they’re needed.
Is this primarily a car thing?
No, it goes across the board, in Britain’s most successful manufacturing sectors. Take aviation. Nearly 80% of aerospace components manufactured in the UK are exported. And the important part there is in the word ‘components’. That’s what we do. We don’t make the whole plane. As a country, we specialise in wings, landing gear, engines and avionic systems – the electrical equipment in the cockpit. All of that is regulated by the European Aviation Safety Authority (Easa). Everything you see on a plane in Europe, numbering over 5,000 different parts, has been vouched for by them, down to the little trolley serving you drinks when you ask for your fourth rum and Coke and the air steward starts to look at you suspiciously. Oh, and his training is overseen by them too, as is the pilot’s, and that of the engineers.
It’s the godfather of aviation regulation.
That’s right. The industry is clear: it needs to hold Easa tight. And not just Easa. It also wants a close relationship with Reach – Europe’s chemical safety regulation system – because they use those chemicals in the manufacturing process. There is zero reason to deviate from this regulatory framework. There are literally no upsides. The UK is not going to start setting international standards for aviation on its own. The trend in the global industry is towards alignment, because everyone wants the same things – a safe product, with fuel efficiency, which is clean and quiet and cheap to run, and which can be traded in a complex supply chain with a minimum of friction.
Can you stay in Easa from outside the EU though?
Sure. It’s an EU body, but it has various agreements with non-EU countries. Or you can just align and basically mimic whatever it does. And why not? The industry will make products to those specifications anyway, simply to trade them easily.
So surely that’s what we’d do. It sounds insane to do anything else.
Yes it would be insane, wouldn’t it? But apparently that’s what’s going to happen.
You’re not serious.
Who knows. Theresa May’s administration had pretty much decided to stay in the system. The political declaration for the future relationship she signed with the EU said the UK would “explore the possibility of cooperation” with Easa and then added: “In this context, the United Kingdom will consider aligning with Union rules in relevant areas.” But then things got a bit weird. Johnson updated the political declaration when he got his deal and he made some small but quite striking changes.
Like?
Well the line on ‘exploring possibilities’ stayed, but the following sentence, on alignment, was deleted. That raised a lot of alarm. And then the chancellor, Sajid Javid, told the Financial Times this weekend that “there will not be alignment, we will not be a ruletaker”. So right now, if we’re to take the government’s word for it, no – we’re going to pull away, for no reason at all, and at enormous cost. Or they could be lying to sound tough and Brexity. Or they could think it’s a negotiating gambit with the EU. Who knows?
OK. So you’ve now been talking about regulations for what feels like several days. Is that it?
No I’m afraid not. The government also wants out of the customs union. That means it’s also a customs problem. Manufacturers will have to fill out two sets of forms – one for regulations, one for customs. In the case of agriculture, they’ll also have to satisfy health checks – these are called sanitary and phytosanitary measures. And that takes place on or near the border.
Please tell me this section is over. Hell, please tell me it’s all over and the final days are upon us. Anything to escape this relentless carnival of doom.
The worst bit is yet to come, I’m afraid. It’s called rules of origin and it is horrible. It’s a kind of bureaucracy that kicks in when you have a trade agreement.
How does that make sense? Surely trade agreements are supposed to reduce bureaucracy.
Yep, but they need an insurance policy. So imagine the UK and EU do a trade agreement eliminating tariffs. And then the UK does a separate agreement with the US eliminating tariffs.
Sounds ideal.
Quite. But the EU and US don’t have a trade deal eliminating tariffs. So now there is an incentive for the US to ship goods to the UK for entry into the EU as a way of sidestepping the taxes on their exports to Europe, but without having to make any of the concessions a trade deal would involve. Rules of origin checks are how you get around that problem.
How do they work?
The purpose of the rules is to find out where something was made. But the way of doing that changes depending on what kind of good it is. There’s different rules in different sectors. Sometimes they measure a country’s economic contribution to the product, such as its capital or the labour or intellectual input. There’s also different grades of change in the product. You often have to show that the product has transformed from one customs category to another in a substantial way.
Did something terrible happen to you when you were a child?
Hey I didn’t make the rules. But they do make sense. And this, arguably more than regulations or customs, is going to be one of the defining issues impacting on Britain in the years to come. Actually, it’s already happening.
How so?
The EU and South Africa, for instance, have a deal on rules of origin allowing components from the other side to count towards the ‘local content’ tally. But when the UK leaves, its components will automatically be excluded from the total. So last July BMW redirected engine production from the UK to Germany for South African production. That could be the start of a trend.
How big a problem is this?
Very big. British car production leans heavily on parts and processes in the EU and Turkey. If those are excluded from the calculations, they wouldn’t satisfy the rules of origin requirements. And even working it out is a nightmare – a horrible tangled web of multiple supply chains, with their own separate supply chains for component parts, and then multiple layers of subcontractors and goods going back and forth. And it’s not just goods like cars and planes either. The same goes for food. Chickens reared in the UK often go off to the Netherlands for slaughter then come back and are turned into ready meals. So how much work went into the chicken to make it British? And what happens when it’s put on a frozen supermarket pizza?
Civilised people don’t put chicken on pizza.
That’s where you’re wrong. Chicken is a perfectly respectable pizza topping. But even if the chicken is British, what about the dough, the tomato sauce and all the other stuff? It’s a nightmare. Just working this stuff out will put a massive new burden on British producers, who never had to do any of it before. And that assumes they can even pass the test and get the product to a level where it has enough domestic components to satisfy the rules.
Is there any way out of this?
In terms of the faff of it, no. But there is a way to make the test easier to pass. We need the rules of origin to have something called a cumulation provision.That means some inputs from outside the UK count towards domestic content. There are two main ways to do that: bilateral or diagonal. Bilateral would mean stuff done in the EU and UK would count. Diagonal includes the UK and EU and extends it to other countries who have trade deals with both of us. That would fix the South Africa problem BMW had. But even there they have different levels. We would want something called ‘full cumulation’, meaning that no matter how small the work done in different countries, it counts.
So it’s a no-brainer, right? You go for full cumulation diagonal rules of origin. Oh and look at that. You have made the most unspeakable words come out of my mouth.
Yep, you totally would. But that’s in the EU’s gift. It gives them significant leverage over us. And honestly, listening to the weirdly bullying rhetoric coming from the UK government, it’s not clear Downing Street realises that.
Election went to their head.
There’s a lot that’s gone to their head.
OK so I think I get this. It’s ultimately pretty simple right? The Brits want the Brexit talks done in one year so they’ve reduced their negotiating goal to tariff elimination and that is going to hurt us.
Not all of us equally. Small firms will be hit harder than large firms and poorer areas will be hit harder than richer areas.
But of course, because the reality of the world is inversely proportional to any sense of moral justice.
Pretty much. Small firms selling less than £250,000 of merchandise to the EU, of which there are tens of thousands, will be forced into filling out all sorts of forms they’ve never had any contact with before. That’ll be a much bigger burden on them than it will the big firms selling over that amount, or who already trade with the rest of the world. And the cost of adopting the new system might outweigh the benefit of exporting the goods in the first place.
Why does this mostly affect poorer areas?
Well there’s a cruel irony to the effects of a hard Brexit: It won’t really hurt Remain-voting areas but it’s likely to seriously damage Brexit-supporting areas.
This is insane.
Yes, it is. The kinds of industries which could get really pummelled – automobile, aerospace and that – are mainly based in the Midlands and the North. Remain-voting London, on the other hand, is less exposed to European markets. It’s economy is already hyper-globalised, arguably more so than any other city in the world. Decision-makers in the capital are often on the phone to Namibia, Honduras or Belize. But the decision-makers in Hull are more likely to be on the phone to Denmark and Germany.
Gotcha.
There’s another problem too.
Oh cool, another one, yeah why not.
Tariffs aren’t the only ask. Britain has also got a negotiating goal on fishing.
Fishing? Really? Surely that’s a tiny dot in the economy. And given that they’ve given up services you wouldn’t expect them to get too het up about it.
True. But it matters to the communities who do it and it has a political importance that far exceeds its economic impact. Britain also has a watertight legal case for its demand. Basically, sovereign coastal states have a 200 mile limit out to sea in which they can fish, under the UN Law of the Sea Convention.
Cool name for an international convention.
Isn’t it. The whole thing is very Aquaman.
I always preferred Namor.
Everyone sensible does. He has those little wings on his ankles which let him fly. That is so preposterous and wonderful at the same time. Imagine what it looks like to see him fly with the little wing thingies on his ankles.
You were talking about fisheries policy.
Ah yes. So the British position is simple. We are now going to be a sovereign coastal state. We want our 200 mile limit. We’ll decide what goes on there. The EU position is very different. It wants everything to stay the same as it is right now.
And what is the status quo for fishing exactly?
Basically anything outside of 12 miles from a member state is a common area. The stocks of individual fish species are then divided up between countries in set quotas to prevent overfishing. So Britain might have a 15% share of a particular stock, for instance. Those quotas are set. They do not change. But each year scientists provide advice on the total allowable catch. If it was 100,000 tonnes, Britain would get 15,000 tonnes that year. And that’s how they divide up the stock.
So they want that to stick.
Yeah. But Britain, on the other hand, will probably want something like what Norway has. Each year, in the autumn, Norway gets together with the Europeans and sorts out some annual fish arrangements. It’s fraught and tense, but it has a lot of power in the talks. They haggle over how much of a quota it gets on certain stocks. And unlike in the EU, that quota can change. Sometimes, if no agreement can be reached, Norway just says you can’t fish in their waters at all. Britain would love to operate just like that.
Why can’t it? You said the law is on the UK side.
It is, but the leverage isn’t.
Recurring theme.
Quite. We can take control of our waters and block anyone fishing within 200 miles of them if we want, but there’s a problem: we don’t eat our own fish. Eighty per cent of what we catch goes to the EU. The fish we actually eat – good old British fish and chips – mostly comes from Norway and Iceland.
OK, but so what?
So the European threat is simple. If we don’t do what they want they’ll put tariffs on fish. That would absolutely hammer our fishing industry. The tariffs are high in this area and it would apply on almost everything it sells.
OK so what about some sort of compromise? Maybe the UK could stay in the EU system but they agree to rejig the quotas a bit to placate us.
Tempting, but the trouble is that would involve opening up the whole quota debate across the EU again. It would be like opening Pandora’s Fish Box. They won’t do that.
So we’re faced with two sides with really quite distant goals in a highly emotional area of trade.
Yep. Which is why it’s instructive to look at how they plan to talk about this. Britain wants to talk about fish separately to everything else. But the Europeans aren’t having any of that. They want to bring the issue into the general trade discussion. And that’ll be the attitude throughout – the British trying to silo off individual topics so they can’t be used as leverage against each other and the Europeans making it more comprehensive.
What is it the Europeans actually want?
I thought you’d never ask. It’s quite simple. They don’t want Britain to undercut them. And that’s not just about price – it’s about regulations, subsidies and taxes.
What do you mean?
Well take Ireland. It basically functions as a kind of tax haven. This distorts the market and leads a bunch of major international companies to set up base there, where they pay hardly any tax. Countries like France hate that. Now, they might not be able to fully control tax policy, but they will want to make damn sure the same thing doesn’t happen with Britain.
This is the Singapore of Europe thing, right?
Right. Britain will be experiencing two things simultaneously after the end of the transition period. First, a degree of damage to its trading status, the exact extent of which depends on how the trade talks go. And second, some freedom it did not have before. So where does that lead you? Well you’re still a big country which can encourage companies to set up with you because of your infrastructure, language, culture and all that. So why not slash corporate taxes to the bone, lower regulations and subsidise business? Make yourself as low standard and attractive as possible. The Europeans want firm commitments to stop this happening.
How do you know?
When the new European Commission president Ursula von der Leyen came to London recently her priorities were clear: “Zero tariffs, zero quotas, zero dumping.” That’s an interesting set of priorities. Used in this context, ‘zero dumping’ sounds like code for UK firms undercutting European ones.
Like how?
Well environmental regulations for one. The EU is about to bring in a massive new green initiative, including carbon tax and carbon VAT tax. It doesn’t want that undermined by Britain basically exporting lots of dirty carbon to the EU. Same with what’s called ‘social dumping’ – unfair labour practices like easy firing laws. And the same with subsidies – throwing cash at an industry so it can outperform its competitors overseas. This is disciplined at the WTO, but China does very well operating in the grey area of the rules. Britain could try and do the same.
This is really their main priority?
Pretty much. Britain isn’t their biggest concern globally – the US and China are – but it is a big meaty economy, which can heavily undercut them, right on their doorstep. Lowering environmental or labour or subsidy standards would allow this, and might tempt firms over from the rest of the world to invest in the UK rather than the EU – or, hell, even get firms in the EU to move. Taken together, this is called the ‘level playing field’ debate. And it is central to the European negotiating aim.
So this is where one of the main battles will be?
Yep. And it has a knock-on effect on the timetable. Johnson is desperate to get this all done in eleven months. But the level playing field issue has a procedural impact which could make that impossible.
How so?
It’s because of how the EU works. It’s split up into different competencies. Some things member states have pretty much to themselves, like criminal justice. Some things are mixed competencies, like the environment. And some things are exclusive competencies of the EU, like trade. If the talks with the UK were completely focused on trade, the European Commission could insist that it has exclusive competence. That would be great news for the UK. It would mean that only the Council, where national leaders meet, and the parliament, where MEPs vote, needed to sign off on the deal. But if the deal expands to include things like the environment – and the level playing field issue does exactly that – then it becomes a mixed agreement. And that means you need each and every member state to ratify it according to their domestic political arrangements.
Christ alive. So every national parliament would need to OK it?
Yeah and not just them. In some cases, their constitutional arrangements mean even regional parliaments, like the one in Wallonia in Belgium, would also need to ratify. When Canada did a trade deal with the EU, Wallonia actually refused and for a brief moment it looked like the whole thing would fall down.
Damn.
And actually it goes further than that. A non-mixed agreement would be decided by a qualified vote in the Council. That’s important, because it means you don’t have to keep them all on board – just most of them. But if it has to be decided by every individual state, you need something for everyone in there, and nothing too terrible for anyone either. The whole thing becomes a lot more complicated and harder to negotiate.
Can the UK prevent this?
It’s unlikely. Nearly everyone believes this is a mixed agreement. Member states want to maintain EU unity, but they all have different interests with the UK. They’ll want to be able to have an impact on negotiations.
So that it then? There’s no way Johnson can get his deal ratified in time?
Yes and no. There is still a get-out clause. The UK and EU can take the trade aspects and provisionally apply them in areas where the EU has exclusive competence. Then the deal goes out for ratification to national parliaments, for however long that takes. And then when they’ve agreed, it’s all put back together and gets properly ratified. There’s a bit of wriggle room, basically.
OK.
The trouble is what happens if a member state says no. That happens. The Netherlands rejected the EU’s association agreement with Ukraine after a referendum. Greece decided it wanted protection for Ouzo in the South African talks. And if that happens, you have to reopen the agreement and work it all through again to try and find a compromise. Basically, you are sucked into the domestic and regional politics of 27 other member states. And there’s no predicting which way that will go.
God.
Yeah. And then there’s the thing we haven’t mentioned, which is an absolute monster of administrative confusion and grim political consequences.
I can’t believe this isn’t over yet and you are still talking. Have I died and gone to the Bad Place?
We’re all in the Bad Place. You must surely know that now.
Yeah, good point. OK, hit me.
Northern Ireland.
Christ, I’d forgotten about that.
So has the British government. This week, the Stormont Assembly voted unanimously – all parties and not a single vote against – to withhold consent from Johnson’s Brexit deal. But even without their consent, it is going to be imposed on them. And it is an absolute godawful mess.
Why?
The deal Johnson did with the EU on Northern Ireland says that it stays in the UK customs territory but follows EU customs rules. It’s not clear that he understood the implications of this. It means that a British trader selling into Northern Ireland would need to prove the goods are going to stay there, or pay the EU tariff.
Doesn’t sound so bad.
But think about how weird it is. All around the world, goods arriving at a customs border are asked questions about the past – what is it, where was it made, how was it made? But now they are going to be asked questions about their future – where will it end up? And that is fundamentally unknowable. How do you prove it stayed in Northern Ireland? Let’s say it’s by a receipt on sale. How do you prove that the person you sold it to isn’t then selling it into the EU? And this isn’t just for final goods. It’s also for goods for processing. So you need to know about the supply chain of the people you sell to as well.
I see the problem.
We don’t even really have much data to prepare us for this because we don’t track British trade to Northern Ireland, for the simple reason that it was always treated as domestic. The kind of information you’d usually have to prepare for a free trade agreement simply doesn’t exist.
This is horrible.
It gets much worse. How is Northern Ireland supposed to prepare for this? If the British government succeeds in securing zero tariffs across the board, then life gets marginally easier, although you’d still need to deal with regulatory checks. But if it doesn’t, we won’t know what the outstanding tariffs will be until close to the deadline. And the Northern Irish system needs to be up and running at the end of transition on December 31st, with all the infrastructure and monitoring that entails. Put simply: It can’t be done.
What’s Johnson’s plan?
He doesn’t have one, or at least he hasn’t revealed it. Probably the former. He still insist trade will be frictionless, even though this simply cannot be true by virtue of the deal he himself signed. The government also insists that “largely electronic” processes – the high-tech-solutions band back together again for a reunion tour – will solve everything. And then, even if everything works out in the best possible way and all the highest aspirations of the high-tech solutions come to pass, there is still a ghastly problem we have to face.
Alright, I’m strapped in. What is it?
Rules of origin.
No, come on. Not again man. Don’t do this to me. We’ve done that.
Yeah, but it applies here too. The Northern Ireland arrangement is permanent. It stays in place even if the UK and EU have a trade agreement. And that means it has to function as if it’s in the EU customs union. And that means…
Rules of origin between Britain and Northern Ireland.
Exactly. Those laborious, nightmarish requirements, carved right into UK territory.
Do they have to do these checks at the border?
No. You can do it away from the border. But the impact on businesses will be huge. Exporters from Britain, who are used to sending things to Northern Ireland as if it were the same country, will suddenly face the full bureaucratic horror show of rules of origin. They will need to decide if they want to go to all the work of figuring out where all their inputs come from, and where their suppliers source their inputs, and where their supplier’s suppliers source their inputs. Or whether it is cheaper to simply stop exporting to Northern Ireland. Which many of them are very likely to do.
What’s the political consequence of this?
It shows that Johnson’s promise of frictionless trade between Britain and Northern Ireland is an outright lie. In fact, his deal creates a permanent border within the UK. It will never go away. It is set in stone. And the worst part, the really immoral part, is that this is happening without the consent of the people it is being imposed on. How that plays out, against the background of Irish politics and the prospect of sudden infrastructure and monitoring arrangements, and impossible timetables, is anyone’s guess. But one thing is clear: No responsible person would have done this.
OK. Please tell me this is over now.
Yes. But also, it’s only just beginning.
Just on the off chance that I fell asleep through any of that, can you give me a quick executive summary.
Sure. Johnson has set himself an arbitrary one-year deadline for a trade talk with the EU. The consequence of this is that the deal is bare bones, excluding services or – probably, if they’re not lying – alignment on goods. Unless he changes course, this will be highly damaging to UK industry, especially those parts based in the Midlands and the North. He also wants control of fisheries. The EU want fisheries to stay as they were and a set of level playing field provisions to stop the UK undercutting them in future. They will try to secure these outcomes by keeping all the issues in play at the same time, so they can leverage them against each other. Whatever happens, the UK must deal with rules of origin requirements, which are extremely painful and will have potentially ruinous results between Britain and Northern Ireland.
Can you make it shorter than that?
The government either does not know what it is doing or is not prepared to reveal what it is doing. We are heading towards a truly disastrous set of outcomes unless that changes.
Thank you. And also please never talk to me again.
This article is based on conversations with…
David Bailey, professor of Business Economics at the Birmingham Business School
Meredith Crowley, international trade economist at the University of Cambridge
Piet Eeckhout, EU law professor and dean at the UCL Faculty of Laws
Andrew Kuyk, policy lead at the UK Seafood Industry Alliance
Philip McCann, professor of Urban and Regional Economics at Sheffield University Management School
Thomas Sampson, assistant professor in the Department of Economics at the LSE
Uta Staiger, executive director of the UCL European Institute
…and others in London and Brussels who chose not to be named.
Ian Dunt is editor of Politics.co.uk. His new book, How To Be A Liberal, is out in spring 2020.
The opinions in Politics.co.uk’s Comment and Analysis section are those of the author and are no reflection of the views of the website or its owners.
