February 18, 2020
What to make of David Frost?
We don't easily bet against negotiating success at EU level. The EU is genuinely good at managing to reach agreements that looked doomed at one point. The trade talks with the UK are in a different category, though. The two sides disagree on what they are actually negotiating. David Frost, the UK's chief negotiator, reminded us last night that the principal goal of the whole Brexit process is to achieve regulatory independence. It is the EU's declared goal to prevent exactly that. This is what makes the Brexit trade talks so unique. They are not about trade primarily. The underlying reason why even difficult trade talks often succeed is that trade is a win-win game. But the fight for regulatory autonomy is not. If classic trade talks break down, both sides pay a price. They lose a benefit they would have had. But in this case the talks could break down, and both sides could think they succeeded, at least initially.
It is worth quoting the key passage in Frost's remarks:
"To think that we might accept EU supervision on so-called level playing field issues simply fails to see the point of what we are doing. It isn’t a simple negotiating position which might move under pressure — it is the point of the whole project."
The level playing field he is referring to is the principle which has been agreed in the political declaration attached to the withdrawal agreement. The EU regards the level playing field as naturally being anchored in EU law. That's unacceptable to the UK.
We are intrigued by the fact that the trade talks are informed primarily by regulation rather than by the maintenance of trade flows. One possible explanation is ignorance. The German media, for example, have been and continue to be complacent about Brexit. For three years, they were in denial that Brexit would happen. They focused their reporting efforts on the second referendum campaign. The tenet of the current batch of reports is that the UK's negotiating position is irresponsible, against the interests of the EU, and therefore unrealistic.
We are not sure what will happen to the cohesion of the EU's position when people suddenly realise that the UK might leave on WTO terms. The UK is the single largest source of Germany's export surpluses.
The UK's position has clarity and political support, which is why we are taking it seriously. The EU is, of course, the stronger partner in the relationship but, if the talks break down and there is no deal, the EU will have no means under WTO rules to stop the import of UK goods. For so long as the UK is not bluffing, the UK is logically in a stronger negotiating position because it can unilaterally achieve its primary goal of regulatory independence, while the EU cannot achieve its opposing goal without the UK's consent. The EU can, of course, withhold a trade agreement. But, given the EU's trade surplus, such a decision would produce a net financial flow from the EU to the UK in terms of collected tariffs. We saw an estimate from the UK parliament of the order of some £6bn a year. Have EU negotiators even considered this asymmetry?
Our hope that an agreement is still possible rests on the observation that the UK does not really intend to undercut EU standards on existing products. The UK wants to exploit future opportunities. Most of the GDP generated between now and the end of the century will be based on technologies that have yet to be commercially exploited or even invented. The regulations for diesel cars are not the issue here. Data protections laws and state-aid regimes will matter, but we don't believe the UK will undermine EU labour laws. For so long as the UK gets the freedom to regulate in the areas that matter to them, it could in turn agree to level-playing-field rules for existing goods. But only for so long as there is no dynamic alignment. We recall Theresa May's former negotiator, Raoul Ruparel, who said that the UK's goal was to seek divergence in areas that are not regulated at the moment.