/Brexit: Warmed Over Chicken

Brexit: Warmed Over Chicken

On the one hand, we Americans are hardly ones to talk about empty posturing, usually accompanied with moral indignation and finger-wagging. On the other hand, it isn’t just that the Government’s approach to Brexit has been heavy on theatrics and thin on substance. It’s also that we seem to be back to Groundhog Day mode, of seeing the same tired tropes yet another time.

The latest iteration of this far-too-familiar play is Boris Johnson acting as if he can threaten the EU with a no deal at the end of the transition period. Specifically, Johnson has made a big show of poking the EU in the eye by setting forth his tough guy negotiating demands over this past weekend. Admittedly, the Prime Minister isn’t setting out his position formally until Monday, but there’s no mystery as to what it will be: a rejection of accepting EU rules yet saying it wants a Canada-style free trade agreement. From the BBC:

Britain will “not be aligning with EU rules” in any post-Brexit trade deal, the foreign secretary has said….

But Irish PM Leo Varadkar said the UK needed to commit to a level playing field to get a free trade deal…

Reports in recent days have suggested EU chiefs want the UK to continue to follow EU rules on standards and state subsidies – while accepting the jurisdiction of the European Court of Justice in any trade disputes.

The PM is expected to say that he will accept no alignment and no jurisdiction of the European courts when talks start in March.

And wags believe the reason for the rollout was to create the impression that the UK was driving the agenda by virtue of preceding Michel Barnier’s remarks this week.

The Financial Times’ version was entertaining:

Boris Johnson is on course for a significant clash with the EU in trade talks on the future relationship with the bloc, with both sides setting out opposing stances on whether a deal will include alignment on rules.

The British prime minister will set out his approach to the negotiations on Monday in a speech outlining his vision for the UK after Brexit. He will state that Britain will maintain high standards “without the compulsion of a treaty”.

But Michel Barnier, the EU’s chief Brexit negotiator, will say the opposite when he unveils the bloc’s proposal for its future relationship with the UK. He is expected to insist that Britain’s future market access be directly linked to its willingness to align with EU rules.

Aside from the fact that trade does not operate on a “trust me” basis, Johnson himself doesn’t have a great reputation in that category and is proving to be true to form. Assuming his speech Monday lives up to the previews, Johnson will repudiate parts of the Political Declaration, the statement of intent about the so-called future relationship with the EU, that his Government just agreed to. Specifically:

In that spirit, this declaration establishes the parameters of an ambitious, broad, deep and flexible partnership across trade and economic cooperation with a comprehensive and balanced Free Trade Agreement at its core, law enforcement and criminal justice, foreign policy, security and defence and wider areas of cooperation…..

This balance must ensure the autonomy of the Union’s decisionmaking and be consistent with the Union’s principles, in particular with respect to the integrity of the Single Market and the Customs Union and the indivisibility of the four freedoms…

This partnership will be comprehensive, encompassing a Free Trade Agreement, as well as wider sectoral cooperation where it is in the mutual interest of both Parties.It will be underpinned by provisions ensuringa level playing field for open and fair competition… To that end, the Parties should uphold the common high standards applicable in the Union and the United Kingdom at the end of the transition period in the areas of state aid, competition, social and employment standards, environment, climate change, and relevant tax matters.

Alert readers may point out that the Political Declaration was not legally binding. True, but that is also the case for letters of intent in business negotiations. It’s one thing for parties to work through deal points that have a lot of wriggle room in them and where the two sides need to haggle about what they mean in practice. It’s quite another thing for one side to renege on a point in a letter of intent without offering a corresponding concession (unless it was abandoning an issue that worked to its advantage). At a bare minimum, it’s a demonstration of bad faith and will taint the talks.

The expected EU draft would reiterate the Political Declaration. Again from the pink paper:

Brussels’ draft mandate for the negotiations will call for a “level-playing field” that would require the UK to stay in line with EU environmental and labour market rules as they stand at the end of Britain’s post-Brexit transition period, according to three people briefed on the contents of the mandate.

Johnson is expected to insist on a Canada-style deal with no/minimal alignment requirements, but Irish PM Leo Varadkar has already pre-debunked that on the Andrew Maar show:

“Canada isn’t the UK; you’re geographically part of the European continent, we share seas and airspace and our economies are very integrated.”And one thing we feel very strongly in the EU is that if we are going to have tariff-free, quota-free trade with the UK, which is essentially what we have with Canada on almost everything, then that needs to come with a level playing field.”We, for example would have very strong views on fair competition and state aid.”

EU negotiators have probably noticed that the UK didn’t have any problems agreeing to accept US rules. We have pointed out that the US dictates terms in its bilateral trade deals, so this should come as no surprise. From FT reader Iron Knee:

Yet the Brexiteers rushed to submit to US regulations


Agreement on Mutual Recognition

The United Kingdom shall, as specified in the Sectoral Annexes, accept or recognize results of specific procedures, used in assessing conformity to specified legislative, regulatory and administrative provisions of the United Kingdom, produced by designated conformity bodies and/or authorities in the United States

There was a lot of rah-rahing on Twitter over a Financial Times story that Nissan had a contingency plan for a hard Brexit of largely abandon EU operations and invest more in the UK with an eye to stealing share from other automakers there. However, this isn’t inconsistent with our predictions. We had stated that non-tariff trade barrier would wreak havoc with automotive supply chains, which operate on “just in time” principles. Thus UK part-making for EU end customers would get shifted out of the UK or displaced by other countries. Automakers would still supply the UK market…via some reconfiguring UK operations to be more self-sufficient. Others might instead only ship in completed vehicles. The Financial Times “doubling down” headline also exaggerates the magnitude of the possible production increase:

But the Japanese carmaker has invested more than £4bn in the [Sunderland] site, the largest in the UK with 6,000 workers, and is determined to keep the facility operational even at the expense of abandoning its exports-based model….

The site is equipped to make up to 600,000 cars a year, but last year output fell by a fifth to 350,000, with 80 per cent of the vehicles exported. Under the scenario of selling only to the UK and growing sales, the plant could reach 400,000….

The idea of abandoning the business in mainland Europe underscores how far Nissan’s fortunes have declined in the region, where sales fell 17 per cent to 567,000 vehicles last year and most operations are lossmaking due to a sharp decline in diesel demand.

In case you missed the math, 350,000/.8 = 437,500. So its “focus on the UK” plan would not get production back to the level of a year prior. There might some short-term additional employment due to the need to reconfigure the plant, but the ongoing labor requirements would presumably simply be in line with the recent past.

The BBC said Johnson also intends to threaten the EU with customs checks at UK point of entry. As Richard North pointed out, the EU is not impressed:

If the strategy is to pressurise the EU into giving the UK a better trade deal though, it is unlikely to be treated as a credible threat. In the short to medium term, the UK is in no position to set up inspection systems which could handle the volume of goods coming in from EU Member States….

Needless to say, a “senior EU source” has rejected the idea of reacting to Johnson’s plan to impose import controls. “We saw similar threats from Theresa May” he says, “but frankly we never believed them. And if the UK is actually ready for border checks – which are indeed coming – then so much the better for both sides”.

Even the normally sober Economist concludes that Johnson is aiming for “the hardest possible Brexit.” He does have a fallback:

Some dry humor from the Financial Times:

This new stance has prompted bafflement in Brussels, given that Canberra is still in the process of negotiating a wide-ranging trade deal with the EU.

Oh, and the press has largely skipped over the fact that the EU and UK are not on the same page as far as the “shape of the table,” as in negotiating process is concerned. From Politico:

EU countries have now mapped out their priorities for Brussels’ position in the upcoming talks with the U.K. on future relations. A summary compiled by the Council secretariat, and seen by POLITICO, shows that countries want, among other things, a “single negotiating channel” with “no separate negotiations” between London and individual EU countries. They also demand that the EU pursue a “comprehensive approach with the possibility of trade offs between chapters.”

The structure of that agreement looks like a house with the roof being governance/general principles, sitting atop two pillars covering economic components and security.

Needless to say, this does not look pretty. As I said to our Brexit mavens by e-mail yesterday:

Johnson is playing a game of chicken. He’s already lashed himself to the mast of 11 months.

Sir Ivan Rogers basically warned that the early months would amount to shape of the table talks and he thought negotiations could break down then. I would not see that as lasting but with time so tight any delay increases the risk of bad outcomes. And Sir Ivan warned that there had never been a trade deal between countries trying to get further apart. He’s stressed that point so often that I think he is saying at least that the human dynamics of that make getting to a deal more difficult.

Again, if the time weren’t so rigid, the odds would look completely different.

And the EU would almost certainly give an extension if the UK asked….but at a price….and would Johnson ever ask? The most I can see him being able to finesse might be say a 2 -3 month “technical” extension, which won’t buy meaningful negotiating runway given the complexity of deals like this.

Now we’ve seen these games of chicken resolve without a crash before, but Johnson is making it difficult as hell, and the UK is further hampered by a Foreign Office which is short staffed and has effectively no experience negotiating trade deals.

David’s response:

The fundamental problem is that the most brilliant team of negotiators in the world can’t do anything unless they have a clear negotiating mandate. (This was the case in 1972 and 1991 by the way). There comes a point in negotiations where you have to decide whether to stick, twist or bust, and you can only do that if you have a clear idea of the overall political objectives of your masters. There’s nothing worse (it’s happened to me) than to be sent out to die in a ditch on some issue only to find out half way through that your principals have had a rethink and changed their position. It doesn’t do your credibility any good, but it also makes it practically impossible to negotiate, because nobody believes you afterwards when you say “no.”

Not only do I not think Johnson has no real negotiating objectives, I also believe that he’s uninterested in even fairly high-level detail, and sees the negotiations as one more jolly game that he wants to win. My fear is that he’s out to deliberately sabotage progress in order to create drama and tension, only to fly to the rescue at the very last minute. This is more than dangerous. “Insane” is perhaps the word for it.

Some other takes. Will Hutton in the Guardian contends that Johnson has become a prisoner of the allegiances he made to become Prime Minister (and Hutton is very complimentary of the moves Johnson has made so far ex Brexit). I’m not sure I agree, since before his ascent, Johnson was famed for shamelessly reversing himself and getting away with it. But Johnson sure looks like someone who is choosing to throw away the steering wheel. From the Guardian:

However, Johnson has one fatal weakness – the Faustian bargain he struck to deliver a hard Brexit to win the prime ministership. Any economic bounce this year will be short-lived: the Bank of England’s forecast of 1.1% growth for the next three years could even be optimistic, as both inward direct investment and UK business investment dry up when access to the EU single market and customs union ceases. The Canada-style trade deal Johnson advocates is as close to self-immolation as economics provides. Britain already has a vast trade deficit in goods that will widen alarmingly as competitive overseas exporters take advantage of zero tariffs, while services – where Britain has great competitive strengths – will be crippled by being denied their former EU markets. It is insane and risks an unstoppable run on the pound, as a former cabinet minister privately agreed. Renewed austerity and recession will follow.

Johnson and his Brexit cabinet, backed by our Europhobic rightwing press, will blame dastardly Europeans for the crisis – and the anti-foreigner mood will grow ugly. But even if the worst is avoided, Britain is plainly not going to grow at “new dawn” rates of up to 2.8%, as our curiously naive chancellor wants. Rather, the years ahead are going to be a drip of disappointments, as the reality of a hard Brexit bites. And on this Johnson cannot be breezily opportunistic and convert to a soft Brexit, tempted though he may be. He will be imprisoned by his know-nothing right – the European Research Group in full battle cry.

Richard North argues, “What this looks like, therefore, is Johnson setting up his alibi for the failure of the talks, getting his blame game cranked into gear before the EU can react.”

And Richard Murphy contends Johnson knows what he is doing, which it to put in place Singapore on the Thames:

Nothing I have yet seen so starkly states what Brexit is all about.

For Johnson the first objective of Brexit is to place greater controls on labour. The intention is to ensure that by controlling free movement labour itself can be controlled, and so too can its price be kept at rates the government would desire. And that is low, of course.

And his second objective is to create freeports. He will claim that these are all about creating regulation free hubs for enterprise. This is completely untrue. There is no evidence that regulation free ports have ever generated work, wealth, much employment, or free market enterprise, come to that. This is unsurprising. That is not what freeports are about, at all. Freeports are instead about permitting the free movement of capital beyond the control of the state and without the imposition of any taxes.

Quite bizarrely, given that freeports are effectively declared to be outside the country that creates them, one of the major objectives Johnson has for Brexit is to carve whole chunks of the UK out of the control he claims to have just taken back, and to pass it over to the free loaders who frequent freeports.

To understand how freeports really work I suggest watching this video. I know it’s not in English, but it’s good, and explains how the Geneva freeport works to handle diamonds, gold, armaments, fine art and rare wines, all beyond the control of authorities and all beyond the reach of tax:

The aim of freeports is to undermine the state.

It achieves this by suspending the law.

Freeports permit illicit activity.

They permit wealth to be accumulated in secret.

That wealth is beyond the reach of tax.

Research suggests that much of that wealth is also shielded by anonymous offshore shell companies that disguise the ownership of an asset even if it can be located.

The object is to ensure wealth can accumulate without constraint.

This is the paradox that Johnson revealed in his video. He wants to control and constrain people. He will use that power to oppress, not just those who want to come to the UK but also, of course, those who wish to leave the UK as well. The market in labour will be  constrained. People will suffer as a result.

At the same time the market in illicit wealth will be liberated to traffic at will. The cost will be to us all, in lost tax revenue, increased inequality and the undermining of the rule of law. Additional jobs will be few and far between.

And let’s not for a moment pretend that any freeport activity supports markets: creating ring fences always creates unlevel playing fields that will always, by definition and in practice, undermine effective markets. So there is nothing in this policy that is about wealth creation: it is all about wealth expropriation and extraction.

This is what Brexit was for. And Johnson admitted it last night. One day people will realise.

If Murphy is correct, that would explain Johnson’s recent conversion to fixity of purpose, at least with Brexit. We’ll have more clues in due course whether the hard core Brexit faction is mad like a fox or simply a different variant of the madness we’ve seen all along.

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