June 08, 2020
Brexit talks at an impasse
The current Brexit negotiations are at an impasse, unsurprisingly. Both sides started with the usual dance, and serious talks will not start until those who set the negotiating mandates give new instructions. Boris Johnson will soon face a choice among three options: extend; not extend and try for a deal by October; not extend, stop negotiating and prepare for no-deal. It is hard to say what will happen. At the moment, the picture is very dark. There are many obstacles despite some hints of willingness to compromise on both sides. One of the latest roadblocks, as reported by the Guardian, had been opposition from fisheries ministers to a potential compromise currently under discussion. We still don't think this will fail because of fish, but we are still in a phase where the small intersection of the interests of the EU27 member states does not itself intersect the interests of the UK. The political brinkmanship needed to find a compromise is enormous. And the EU is currently busy with two mega-projects: managing the end of the lockdown, and the EU budget negotiations. Accidents are possible, and maybe even intended.
On Friday, the latest round of negotiations ended with no result. The EU and the UK have wasted four months. We don't think Johnson will extend. So, if there is a deal, it will have to be done by October. We think this is possible, but this can only involve a small trade deal initially, assuming a readiness by both sides to drop some of their red lines. The problem is that both sides have persuaded themselves that they can live without a deal. They both will have to rein in their extremists.
The UK is now proposing a very small deal with some tariffs on agricultural products. That's a new variant. But it, too, is complicated. We think the overall idea of a small deal is right. The best way forward in our view is a framework deal, time-limited or with a review clause, based on zero tariffs, zero quotas, and hard level-playing field commitments but with no obligation by the UK to follow future EU rules. This way, it will become apparent very soon that the UK is not going to undermine competition through state aid, an issue we consider a red herring.
We heard reports that Michel Barnier is willing to compromise on state aid rules, which is encouraging. The UK wants the right to sponsor new industries without the EU frustrating it. This is not about car subsidies. The EU has a bigger state-aid problem with Germany than it will ever have with the UK.
Wolfgang Münchau takes a closer look at the most-favoured-nation tariffs the UK has recently proposed, and which will enter into force next year. The key is that MFN tariffs by the UK will fall from an 7.2% currently to 5.7% on average. This is miles away from universal free trade. The 10% car tariffs, for example, will stay. But the elimination of tariffs on many product groups, like dishwashers and freezers, means that the trade negotiations will have to deal with complex rules-of-origin problems. If the EU applies a tariff on a product but the UK does not, third-country exporters might try to route their products through the UK into the EU. This is why a zero-tariff, zero-quota trade deal is easier when the tariff schedules are broadly aligned. But they are not. As the economy struggles after the lockdown, EU industry will ask for protection.
And finally, Andrew Rawnsley tells us in his Observer column that Rishi Sunak, the UK's finance minister and once an enthusiastic Brexiteer, has become more careful about no-deal. He quotes some Tories who believe Johnson is bluffing. He desperately wants a deal, but wants to take the EU to the brink. We are not sure this is true, but we think this would be a bad idea. The EU is quite good at sussing this out. If you play hard, you really need to be willing to walk out.