Brexit: free trade agreements not only show in town

Aug 30, 2020

Originally posted on Business Post on 30 August 2020.

Phil Hogan has been widely quoted in recent days though not all references have been to Golfgate.    Michel Barnier’s gloomy observations on the lack of progress in the 7th round of Brexit negotiations included a reference to the former Commissioner’s view that a modern trade policy must contribute to upholding standards in the interest of citizens, consumers and sustainable development. 

Ever since the Brexit referendum over four years ago, there has been a school of thought that the best form of Brexit was Brexit in name only.  Both European and British trading and political interests would best be served by a future agreement that resulted in very few changes to the existing UK-EU trading arrangements under the EU Treaties.  This seemed to become a staple of the Theresa May government.  It appears to be less of a staple of the Johnson government.

One of the big sticking points in the negotiations is the apparent intransigence on the British side over the EU's insistence on a level playing field.  If the UK wants favourable terms and conditions in the future with EU industry, it cannot offer more favourable terms and conditions to its own domestic industry.  In short, the level playing field is largely about whether or not EU state aid rules should apply post Brexit in Britain.

State aid prevents a national government favouring a company, a business sector or even a region of the country, over another company, sector or region.  The pervasive nature and rigidity of State aid rules can be perhaps best understood by examining what is permitted when they are absent.  Many of the EU state aid rules have been temporarily suspended due to Covid-19.  Therefore, our government can, for example, provide additional supports and grants to industry in Kildare to help compensate for that county still being under lockdown.  This kind of county by county selectivity would be unlikely under normal state aid rules.

The argument goes that if the British government is to derive any immediate economic or, perhaps even more importantly, political benefit from following through on the Brexit referendum, it must be able to deliver selective aid, support and preferential treatments to its own regions and industries without reference to any Brussels regime. 

There is a correlation between the most economically disadvantaged areas of Great Britain and the Labour “Red Wall” – those mainly English constituencies where, until the last British general election, the Tories could not secure a foothold.  Whatever about the economic merits, Barnier’s level playing field conditions may just not be politically acceptable to a British government which aspires to holding on to such constituencies.

While comprehensive free-trade agreements can be beneficial, they are not the only show in town.  Establishing a free-trade agreement between the UK and the US has been a well-publicised priority for the British government.  Nevertheless, without a free-trade agreement, the US exported some €58 billion worth of goods to the UK and imported some €53.5 billion worth from the UK in 2019.  In the same year (and the British figures were a huge component of the EU total) EU imports of goods from the US were €232 billion and total exports were €384 billion.  EU/US trade talks are stalled at present.  Trade still happens without free-trade agreements.

The British are doing what they can to make international trade easier post Brexit.  Customs requirements for exported British goods cannot be eased unilaterally, but many British importers will be able to defer the customs duty they have to pay for the first 6 months of 2021. A £650 million investment for Northern Ireland was announced earlier this month, a major part of which is to go towards dealing with import processes for Northern Ireland businesses.  Furthermore, the British system of charging tariffs on goods has been simplified with some tariffs reduced, harmonised or eliminated. However, because Northern Ireland will remain a de facto region for both EU and UK customs rules, the customs procedures for Northern Ireland will be especially tricky in the event of no free-trade agreement being concluded.

The disruption to business will certainly be huge but the prospects for the British economy pushing ahead without an EU deal may not be quite as dismal as is sometimes portrayed.  Yet there remains a snag.  Much of the analysis of post Brexit economic scenarios has focused on movement of goods, with cross border trade in services other than financial services being a secondary consideration.  The real risk for the British economy may be neither of these.  It may be a shortage of labour as restrictions on the movement of workers from the EU start to kick in. 

As one Silicon Valley executive put it to me, no-one who's ever had to deal with labour shortages and visa restrictions could believe that cutting out access to a huge pool of workers and talent by leaving the EU is a good idea.  She may be right, but that impact will take some time to become apparent.

The British may well share Hogan’s idea of trade policy as contributing to upholding standards in the interest of citizens, consumers and sustainable development.  How they bring it about is another thing if Brexit really means Brexit.

Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland