"Brexit: Trading in choppy waters" by Lorand Bartels

“Brexit: Trading in choppy waters” by Lorand Bartels

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There’s no better trade deal for the UK than being in the EU but the Chequers ‘sticky tape’ may just help the UK Brexit if it still wants to.

Dr Lorand Bartels, Reader in International Law at the University of Cambridge who teaches WTO & EU law, tells the Cambridge Public Policy SRI (Strategic Research Initiative) what he thinks the UK’s prospects are of getting proper trade deals with other countries post-Brexit.

In this 35 minute audio podcast Bartels examines in depth the options the UK has for its trading relationships post-Brexit in the short time left to negotiate a deal and what the barriers to a deal might be, including the Northern Irish backstop.

Bartels believes that the economic benefits of the UK negotiating country by country trade deals are far from clear; they may even yield no economic benefit at all. Moreover, the EU can “carve up” the so-called four freedoms in a free trade agreement if it wanted to, as it has done this before with other third countries.

An agreement which just covers goods is at odds with the much talked about indivisibility of the EU’s four freedoms – the movement of capital, labour, persons and services – but although ‘indivisibility’ sounds good and necessary, “it is not actually true at all”, when it comes to EU external relations.

“They [the EU]can carve up these four freedoms and they frequently do. Barnier has said that if the UK has a fully free market in goods but not in services in particular, or free movement of persons, it will be able to undercut the EU in those two areas. This means the UK will be able to have cheaper labour potentially depending on UK domestic policy and cheaper access to services and in particular financial services. In other words a manufacturing business in the UK will have access to cheaper capital than an EU equivalent business will be able to have access to and that would put the UK business at an advantage in what would otherwise be a free market of goods. Barnier has been fairly up front about this recently. “

On the issue of the NI border: “There are already checks in the Irish sea, because the island of Ireland is a common zone as far as health and safety measures and quarantine measures are concerned and is treated differently from Great Britain. There are already checks in the Irish sea and it is a question of enhancing those checks. “

He admits it would be unclear who does those checks but asks if it would be better for there to be a lighter border on land or at sea. “That question can’t be fudged.”

Those Queues At Dover
Relying solely on WTO rules would mean more and more checks were needed:

“The more you hand over your rules to the EU the more you have to open yourself to EU people, that means opening yourself to EU trucks without checks at the border, opening yourself to EU services and of course vice versa. At the moment we have the most integrated arrangement possible as a member state of the EU and there is full free movement and no checks of any sort apart from passport checks as we are not in a common visa zone. The further you get to a disintegrated system which is the World Trade Organisation (option) the more you are going to have those checks. They’ll be checking for more and more things and the queues will be longer and so on. Anything in between there will still be border checks and there will still be queues at Dover and so on.

“It is a question of trade- offs of being able to make your own rules, which comes at a cost in terms of ease of access to the other side and vice-versa, or agreeing common rules with the other side. What’s good is that you have easier access but less control over the rule making. Those are technical issues but there are political ones too. The EU doesn’t like the UK having its cake and eating it because it could be costly to the EU – there is an economic reason for not allowing the UK to get all the good bits of the EU and not take the expensive bits or be able to undercut the EU – that’s an economic problem that the EU has to grapple with but the second is a purely political issue.

“The EU likes the EU and wants it to hang together and doesn’t like the idea that the UK can walk out with the good bits and not the bad bits and that would fail to discourage others thinking of the same thing. We know that two years after the Brexit vote that the appetite for other EU states to leave the EU has disappeared. Why? Because they can see what a disruptive event it is for the UK.

“It may well be from the UK’s point of view that the people want to leave the EU and that is a sovereign choice people can make. It can’t be made without also accepting that there are going to be ongoing disruptions, not just temporary disruptions.“

WTO Rules
Bartels says the UK has been bound by WTO rules since the GATT agreement was signed in 1947, and now also as part of the EU. However, the EU as a WTO member has exercised the UK’s rights in the WTO since the UK became an EU member state in 1973; it has taken responsibility within the WTO for performing the UK’s obligations:

“The obligations and rights within the WTO have always been the UK’s. That doesn’t change. The UK is now going to repatriate its responsibility and its ability to exercise those rights in the WTO. From a legal point of view nothing changes from the point of view of the UK. The WTO does not give as much as membership of the EU does in economic terms and in terms of ease of access to others’ markets and an absence of checks at the border as there currently is in the EU, which was Margaret Thatcher’s ask. The WTO does do a lot but it doesn’t get you anywhere near the degree of integration that one sees within the EU as an EU member state.”

Trade agreements take time to negotiate – ranging from 18 months to 20 years. However, precedent might not be a good guide this time: “That doesn’t really matter because that is not the sort of negotiation we will be having with the EU or with the other countries with which the EU currently has a free trade agreement which we would then need to replicate.”

He points out how novel this type of negotiation is: “We have an agreement to subtract from a very full degree of economic integration. That means we are dealing with a lot of technical issues and that will take time to organise but there is no modern precedent for doing this and no precedent for doing this sort of complicated disintegration. We are flying in the dark and I don’t think the analogy with normal free trade agreements makes any sense.”

Normal FTAs take time to negotiate because you are countering normal protectionist pressures and you are trying to convince businesses that the deal will ultimately be good for them, while recognising that it won’t be good for all of them as free trade comes at a cost: “It is a way of enhancing your competition in your domestic market and it is going to be bad for some producers in your domestic market. The normal FTA market dynamic is about countering protectionism. This doesn’t exist in the current situation, there is no protectionism to counteract.

“There is the flip side which is opportunism; in other words you will have, as we have seen, banks and the finance industry in the EU looking with some excitement at the possibility of business moving in the direction of Frankfurt and Paris and so on. The same with the legal sector and various other sectors but that’s opportunism, that is extra business, that is not about protectionism, the dynamic of which is completely different. With protectionism, you say, if we have this FTA, people are going to lose their jobs. They are going to find better jobs in export industries and so on. In the current situation what you are arguing about is whether there is more business, more profits maybe, even some more jobs. It’s much easier to face that down than to face down the fear of an industry where people are going to lose jobs, and that is a normal dynamic and that is why those agreements take much longer, and they are no precedent for this agreement.”

Those Better FTAs
Bartels is sceptical that the UK could negotiate better trade deals with the rest of the World than those it has as an EU member: “India wants to send its workers and service suppliers to the UK. There’s been an India-EU FTA negotiation for more than a decade now. It’s stalled because the UK was not prepared to open up its market to that degree of immigration, temporary or permanent from India. I can’t see that changing particularly in the current climate, but if it does you can have an agreement with India.

“If you give China what China wants, you can have an agreement with China, and if you give Australia what it wants, which are visas, more than market access for beef, you can have a deal with Australia. Now if you have all these wonderfully integrated deals, ‘yes’, you can start to clock up the benefits. The thing about these normal FTAs, even integrated ones, is that they normally only add very little to GDP and nothing if you compare it to the level of integration that you can have with your nearest neighbour.

“Economists talk about the iron rule of distance, the gravity principle, and the further away the less valuable a trading relationship has to be for you, you simply cannot make up distance. The most integrated agreement with Australia is not going to substitute for a more integrated agreement with the EU.“

Bartels also points out it is difficult to make economic forecasts based on free trade and that most are wrong because there are too many moving parts: “With NAFTA it is still quite up in the air as to what the effects of NAFTA were and it is 20 years on.

“The Australian productivity committee report last year on the Australia-US FTA, which has been around for 14 years, said that under this agreement trade actually contracted even if it wasn’t as much as if there hadn’t been an FTA, but you can see that FTAs are no panacea.”

On the importance of the EU relationships in trade: “It is not really about customs duties, which are mainly what FTAs deal with, it is not even about opening up government procurement markets which FTAs do: the real value of trade within the EU framework is about recognition of standards of other products from other countries and of service suppliers from other countries. A lawyer can go to Berlin and with very little interruption can practise law there. Products can be sold to Latvia as they can be sold in Oxford, all of that is very, very, valuable. No FTA other than within the EU space, and within the EEA as well, some of it is Turkey, some of it Switzerland, no other trade agreement in the world goes anywhere near as far as one sees in the EU space on those regulatory issues. That is where the real value is, and that is what would have to be replicated. I don’t think it can’t be replicated between the EU and the UK because it can be replicated, anything can be done, but there is no precedent for doing this in the way that the UK is asking for at the moment, and that is why the current discussions are so fraught. “

Migration Conundrum
Historians might eventually think Theresa May had done a good job, but in the shorter term the way the UK has negotiated Brexit has not been good.

“The UK has not done a very good job. The last year and a half has not been very productively spent in terms of negotiations with the EU because we have only even recently come to an agreement on what a future relationship with the EU might even look like (Chequers) and that is more an agreed disagreement than an agreed agreement. Nobody really seems to like it apart from the government. There has been very little movement on the NI issue, we haven’t even talked about Gibraltar and nor have we said anything about the only issue that most people agree the referendum was actually about, immigration.

“How is this country going to handle discussions of immigration which are going to be at the core of any agreement with the EU when we are now only six months before the exit date? From a negotiation point of view, it has been slow and given that these two years were supposed to be about negotiations, then the EU side has said to us: why did you even submit your Article 50 notice without having made all these internal decisions first? We can safely say that this period has been a little bit wasted and that is why we have a transitional period.

“The transition period, call it implementation or whatever, I think it is fairly obvious that these 19 months (after we Brexit) are going to be used for what the two years was supposed to be used for. A historian would have to say this period has not been well spent by the UK, but if we spool forward a little bit further I think we might look at it slightly differently. The question is then: could it have been any other way? And I think history will look at it a little more kindly.

“I think we are dealing with a revolutionary moment, constitutionally a revolutionary moment. We don’t know if the current parties will survive in their current form. We know there is a gulf of opinion between London and a few other centres in the UK and the rest of the country. We know that when we talk of the Union, there are very different views on what the UK should look like. There are so many points of fracture that historians might say in 50 years’ time, ‘yes’ that wasn’t very well handled from a technical point of view, but the country was at war with itself, it was an ugly divorce and there was a lot of internal psychologising that needed to be done, and that just takes time and is a fairly bloody process and maybe the UK did as well as it could have. Maybe Theresa May come out of this at the end looking like a relatively strong leader given the cards that she had been played.”

The UK still has to answer a strategic question about the relationship it wants with its continental neighbours and that another referendum would solve nothing: “Does it want to stand outside a rule-making union with its neighbours? The answer was fairly close to 50-50, maybe now it would be slightly on the other side, but probably not very much, and we need to take that split seriously. The real problem is, we just don’t have a good answer to what the country wants. If we knew that 90 per cent of the country wanted to be shot of the EU it would be very easy, we would just drop out, we would have an FTA and no real rule-making delegation. If 90 per cent of the population wanted a union with the EU we would be an EU member state.

“The real problem is we can’t answer the strategic question and therefore it is impossible to answer the technical questions and it just becomes gamesmanship on the day as the different factions push for their desired outcomes, and that is what we will continue to see with Chequers or without Chequers now. It’s not appropriate for me to say what we should do.”

Bartels says it would be difficult for a second referendum to come up with a question that would solve the problem. “The danger is we end up with the status quo and the status quo in this case is that we crash out not, that we stay in. So I would be wary of a referendum – either you split the vote or you end up with a very slightly different result that goes in the opposite direction, and I am not sure that will do anything to make the people who lost a second referendum feel that their vote in the first referendum had been respected. If the Remainers are upset now, how much more upset are the Leavers going to be when a second referendum overturns what was supposed to be a once in a generation opportunity for them to have their say? “

Concluding Remarks
“Chequers is held together by sticky tape. Even the Chequers proponents don’t see this as being a fully workable plan. I don’t think the government says that everything in Chequers hangs together. It is a starting point, the EU in its more benign moments says, yes, this is a useful starting point for negotiation. I think that the reason that is said is because it recognises that there needs to be a trade-off between economic integration, which is better for business, and sovereignty which can be better for your political health, if that is the sort of thing that you like, and then there is the open question of how much technology can solve this. We don’t really have answers to any of these questions.

“The reason Chequers is seen as positive by its proponents and sometimes by the EU is that at least it acknowledges that trade-offs need to be made, and that is the importance of Chequers. It is the beginning of a discussion and that discussion is really only going to begin in earnest after Brexit day because there can’t be a legally binding agreement based on Chequers until 29th March 2019. Chequers is an acknowledgement that trade-offs need to be made, that there are negotiations that need to be had. I think the shame is that it has taken so long for something like Chequers to emerge. If Chequers had emerged on day one, on the day the Article 50 notice had been given, we would probably be in a better place now, but that was not just because of laziness, it was because it was so hard to get the government position together, and maybe that is just the way it had to be.

“From a tactical point of view you should never go into a negotiation not knowing what you want. But there are other imperatives too. Who knows, without triggering Article 50 maybe we would never have come to the position we are in at the moment it could have just been pushed on forever. Hypothetical counterfactuals are very hard to work with, I just don’t know, I tend to think you can’t always counter guess history and a lot of it is just the way it had to be.”

About Lorand Bartels
Dr Lorand Bartels is Reader in International Law at the University of Cambridge.

source: Social Europe

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