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February 25, 2020

Why no-deal is a real possibility

As we progress towards the start of EU/UK trade talks, we are becoming more pessimistic. We know, of course, that the two sides are playing to their home audiences. We also know that the EU has a long history of agreeing impossible deals. 

With all those caveats in minds, what makes us pessimistic is the lack of a common purpose in these trade talks. The reason why trade negotiations often succeed in adverse circumstances is their positive-sum nature: in the end both sides can claim victory. The same goes for EU treaties for so long as everybody values European integration in principle.

The reason we think this time is different is that both sides have framed the talks as a zero-sum game. The UK affirmed yesterday that its goal is regulatory independence from January 1st. The EU’s explicitly goal is a maximum degree of regulatory alignment. It hardened its level-playing-field demands, which it now wants firmly anchored in EU law. For both sides, these negotiations are not primarily about trade. 

As the larger partner, the EU is naturally in a stronger position. The UK has only got a single trump card. It can walk away from the talks. For so long as the UK is not bluffing about this, it can achieve its negotiating goal unilaterally. The EU cannot.

In a zero-sum game, it is much more difficult to find the narrow path at the end of which both sides can claim to have achieved a good result. If the EU prevails, with dynamic alignment on state aid and EU-law anchored level-playing field agreements, then the UK will have given in. The same goes the other way. This suggests to us that it might be easier for both sides to let the negotiations fail, and then make another attempt after defaulting into a WTO-based relationship next year. That would maximise frictional cost in the short term, but would have the advantage that the trade talks might follow the more traditional pattern of a positive-sum game. Both sides would at that point gain by liberalising trade flows.

Having said this, we cannot rule out a U-turn by Boris Johnson. He may be bluffing. But something would have to change in UK politics for that to happen. Remember the EU has misjudged the entire Brexit process from the start: the referendum itself; the failure by Remainers to organise a second referendum; Theresa May’s resignation; Johnson’s large majority in the December election; and then his refusal to extend the trade talks. Brexit is the defining issue of modern-day British politics. Its main characteristic has been lack of compromise. That mindset would have to change in the next eight to nine months. We see no obvious reason why that should happen. Johnson has a large majority. The Remainers are demoralised. The opposition in the UK parliament is weak. And Sir Keir Starmer, the likely next Labour leader, will probably not want to focus too much on Brexit either. 

The UK’s negotiating objectives will be signed off by a cabinet committee today. The EU will also publish its negotiating guidelines today, after yesterday’s general affairs council. 

Mehreen Khan of the FT saw the changes to Michel Barnier’s original draft. It sets EU standards as the reference point in the level-playing field discussion in respect of employment laws, the environment, climate change, and tax policies. And it would give the EU the right to oppose autonomous interim measures, again with the EU standards as reference.

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