Business Europe hosted a panel of LSE experts for a joint seminar with business representatives in Brussels on 25 June 2018 to discuss the current state of Brexit negotiations. Professors Kevin Featherstone and Tony Travers talked about the political situation in the UK, and Professor Paola Conconi and Jan Kleinheisterkamp went on to discuss potential new UK-EU trade relationships. Elsa Leromain (CEP, LSE) reports on the proceedings

Conconi, Paola

Featherstone, Kevin

Kleinheisterkamp, Jan

Travers, Tony

LSE Research Online

Continental	Breakfast	11:	fragile	politics	and	tradingrelationshipsBusiness	Europe	hosted	a	panel	of	LSE	experts	for	a	joint	seminar	with	businessrepresentatives	in	Brussels	on	25	June	2018	to	discuss	the	current	state	ofBrexit	negotiations.	Professors	Kevin	Featherstone	and	Tony	Travers	talkedabout	the	political	situation	in	the	UK,	and	Professor	Paola	Conconi	and	JanKleinheisterkamp	went	on	to	discuss	potential	new	UK-EU	trade	relationships.Elsa	Leromain	(CEP,	LSE)	reports	on	the	proceedings.Two	years	have	passed	since	the	referendum,	but	a	lot	of	questions	remainunanswered.	While	the	status	quo	outcome	“Remain”	was	a	fairly	easy	positionto	define,	deciphering	what	“Leave”	meant	has	proved	challenging.	There	are	aninfinite	number	of	possibilities,	and	the	pro-Leave	coalition	did	not	have	acoherent	view	on	what	route	to	take,	as	it	brought	together	a	wide	spectrumranging	from	liberal	globalists	to	national	protectionists.The	government	has	stressed	that	post-Brexit	they	want	Britain	to	be	able	to	make	independent	policy	with	a	highdegree	of	autonomy,	and	specifically	no	jurisdiction	for	the	European	Court	of	Justice.	This	statement	is	subject	tointerpretation	and	is	general	enough	to	encompass	a	lot	of	different	options.	But	time	is	running	out:	both	Brusselsand	businesses	are	putting	pressure	on	the	British	government	to	clarify	its	positions	and	take	decisions.	Are	we	at	adeadlock	in	the	negotiations?	Will	the	UK	government	settle	on	a	definite	path?	Where	are	we	heading?	To	tacklethese	important	questions	it	is	crucial	to	understand	the	state	of	the	political	environment	in	the	UK.A	fragile	political	environmentTo	handle	Brexit	the	government	had	to	rethink	its	organisation,	create	new	entities	and	increasing	the	scale	ofexisting	ones.	The	Department	for	International	Trade	was	set	up	in	July	2016	to	assist	the	government	inestablishing	UK	trade	policy,	and	negotiating	bilateral	partnerships	with	non-European	trade	partners.	It	currentlyemploys	an	additional	800	officials.	The	number	of	civil	service	staff	also	increased	significantly	in	other	departments.HM	Revenue	and	Customs	has	employed	between	3000	and	5000	additional	staff	since	the	referendum,	presumablyto	handle	customs	procedures.	The	nerve	centre	of	the	action	of	the	government	on	the	exit	was	concentrated	in	theBrexit	Cabinet	committee,	previously	run	by	David	Davis	–	and	now	by	Jeremy	Hunt.	The	Cabinet	Office,	however,soon	recognised	that	only	a	tiny	number	of	people	would	have	to	take	decisions	on	behalf	of	the	UK	government	andtook	the	lead	in	the	negotiations,	leaving	less	room	for	the	Brexit	Cabinet	committee.The	Prime	Minister	has	had	to	balance	the	Leave	and	Remain	camps	ever	since	the	referendum.	That	balance	isalso	present	in	the	Cabinet,	especially	since	the	last	general	election,	as	Theresa	May	has	had	to	sustain	a	coalitionwithout	a	parliamentary	majority.	It	was	therefore	unsurprising	that	making	decisions	in	the	Cabinet	turned	out	to	bedifficult.	Sufficient	ambiguity	has	to	be	maintained	to	keep	Leave	and	Remain	ministers	and	backbenchers	on	side.The	broad	outline	of	the	UK	government’s	objectives	in	the	following	February	2017	White	Paper	is	quite	illustrativeof	the	tone	adopted:“The	Government	will	prioritise	securing	the	freest	and	most	frictionless	trade	possible	in	goods	andservices	between	the	UK	and	the	EU.	We	will	not	be	seeking	membership	of	the	Single	Market,	but	willpursue	instead	a	new	strategic	partnership	with	the	EU,	including	an	ambitious	and	comprehensive	FreeTrade	Agreement	and	a	new	customs	agreement”.Crucially,	this	lacks	detail,	leaving	it	open	to	interpretation.	It	seems	that	no	position	can	keep	the	coalitiontogether	long	enough	to	get	legislative	empowerment	for	any	decision	that	is	made.	When	Davis	and	Boris	Johnsonresigned	after	the	‘Chequers	agreement’,	the	divisions	were	clear.LSE Brexit: Continental Breakfast 11: fragile politics and trading relationships Page 1 of 4		Date originally posted: 2018-09-04Permalink: http://blogs.lse.ac.uk/brexit/2018/09/04/continental-breakfast-11-fragile-politics-and-trading-relationships/Blog homepage: http://blogs.lse.ac.uk/brexit/The	second	order	negotiations	will	be	challenging	in	themselves.	In	the	preliminary	stage	of	the	negotiations	with	theEU,	the	UK	government	expected	to	be	able	to	divide	and	rule,	but	faced	a	high	degree	of	unity	among	the	EU.	Theywere	surprised	by	the	EU’s	lack	of	flexibility	when	it	came	to	defining	the	rules	of	a	new	partnership	and	their	will	tostick	to	existing	rules	and	models	and	criticised	their	‘lack	of	imagination’.	They	also	did	not	expect	the	EUCommission	to	signal	that	the	UK	would	be	excluded	from	a	number	of	individual	sectors	where	there	is	an	obviousmutual	interest	for	the	UK	to	continue	(Galileo,	Europol	etc).Evaluating	the	optionsSeveral	options	for	a	future	UK-EU	relationship	exist,	each	with	different	rights	and	obligations.	The	UK	governmenthas	emphasised	the	wish	for	an	independent	trade	policy,	a	high	degree	of	regulatory	autonomy,	no	financialcontribution	to	the	EU	,	no	free	movement	of	persons,	and	no	jurisdiction	of	the	European	Court	of	Justice	(ECJ).The	role	of	the	ECJ	has	important	consequences	and	binds	together	all	the	other	requirements	of	the	government.The	degree	of	access	to	the	EU	market	will	depend	on	the	compatibility	of	future	UK	market	regulations	with	EUregulations,	and	the	ECJ	is	currently	the	single	guarantor	for	interpretation	and	compliance	to	these	rules.	TheChequers	agreement	envisages	a	‘joint	institutional	framework’	in	which	the	UK	would	pay	‘due	regard’	to	EU	caselaw	but	not	be	bound	by	it.	This	rules	out	staying	in	the	single	market,	the	‘Norway’	or	‘Swiss’	options.	Adopting	anagreement	such	as	the	one	Norway	has	with	the	EU	would	provide	high	level	of	market	access	but	it	would	imply	freemovement	of	people	and	the	UK	adoption	of	all	the	regulatory	measures	agreed	in	the	EU,	while	not	having	any	sayin	the	decisions.Although	the	UK	could	have	been	tempted	by	the	Swiss	model,	which	relies	on	a	number	of	sectorial	agreements,the	EU	clearly	stated	that	it	was	not	a	choice	on	the	table	outside	the	jurisdiction	of	the	ECJ.	The	UK	instead	wants	a‘common	rulebook’	with	the	EU,	which	would	enable	it	to	sell	goods	into	the	EU.	Parliament	could	diverge	from	this	inthe	future,	but	that	would	put	Britain’s	ability	to	trade	freely	with	the	EU	in	jeopardy.A	free	trade	agreement	with	the	European	Union	would	allow	the	UK	to	pursue	an	independent	trade	policy.	The	UKwould	be	able	to	set	its	own	external	tariffs	and	sign	bilateral	treaties	with	its	non-EU	trade	partners.	Free	tradeagreements	differ	greatly	in	their	depth,	scope,	and	effects	on	trade.	It	seems	that	the	UK	wishes	to	achieve	a	deeptrade	agreement	close	to	the	trade	agreement	between	the	European	Union	and	Canada	(CETA),	sometimes	referedto	as	‘Canada	plus’.	If	the	UK	government	opts	for	a	trade	agreement	with	the	EU,	then	the	CETA	is	the	best	existingmodel	and	one	of	the	most	comprehensive	agreements	on	regulatory	alignment.	To	ensure	coordination	on	sensitiveissues	such	as	technical	barriers	to	trade,	sanitary	and	phytosanitary	measures,	trade	in	services,	trade	and	labour,there	is	a	‘regulatory	cooperation	forum’	(cf.	Chapter	21	in	CETA	for	more	details).	Ultimately	this	helps	companies	toknow	that	whatever	practice	is	acceptable	in	one	jurisdiction	is	also	acceptable	in	the	other.In	contrast	to	a	customs	union,	rules	of	origin	have	to	be	defined	in	any	free	trade	agreement.	These	are	a	set	of	therules	that	prescribe	which	goods	get	the	preferential	tariff	treatment.	It	often	takes	the	form	of	a	percentage	thresholdon	the	domestic	content	of	a	product.	For	instance,	when	exporting	a	car	from	the	UK	to	the	EU,	a	car	manufactureroperating	in	the	UK	would	have	to	prove	that	a	sufficient	share	of	the	value	of	the	car	has	been	produced	in	the	UKto	qualify	for	preferential	treatment.LSE Brexit: Continental Breakfast 11: fragile politics and trading relationships Page 2 of 4		Date originally posted: 2018-09-04Permalink: http://blogs.lse.ac.uk/brexit/2018/09/04/continental-breakfast-11-fragile-politics-and-trading-relationships/Blog homepage: http://blogs.lse.ac.uk/brexit/A	Nissan	car	on	the	production	line	in	Sunderland.	Photo:	Colin	via	a	CC-BY-SA	2.0	licenceCurrently,	UK	companies	do	not	have	to	worry	about	complying	with	rules	of	origin.	Small	producers	don’t	rely	onsupply	chains	so	much,	but	to	the	extent	they	do,	they	will	be	likely	to	decide	not	even	to	try	to	comply	with	the	rulesgiven	the	administrative	costs	it	entails,	and	instead	to	bear	the	cost	of	the	tariff.	Big	firms,	which	do	have	a	lot	ofsuppliers	outside	and	inside	the	EU,	would	be	greatly	affected	by	such	rules.	Most	Japanese	car	manufacturingcompanies	currently	use	the	UK	as	their	base	to	serve	the	European	market.	Almost	80%	of	cars	manufactured	byNissan	at	its	plant	in	Sunderland	are	currently	sold	to	consumers	in	the	rest	of	Europe.	Given	they	use	a	lot	ofimported	intermediate	inputs,	their	cars	are	unlikely	to	comply	with	the	established	rules	of	origin.	If	this	is	the	case,they	may	have	to	stop	importing	key	parts	and	components	from	abroad,	or	face	a	tariff	when	exporting	their	car	tothe	single	market.A	recent	paper	by	Paola	Conconi	et	al.	shows	that	rules	of	origin	matter.	The	existence	of	such	rules	led	to	a	sizeablereduction	in	Mexican	imports	of	intermediate	goods	from	third	countries	relative	to	NAFTA	partners	when	theagreement	was	put	in	place.	In	the	absence	of	rules	of	origin,	trade	between	these	countries	would	have	been	45percent	higher.	This	is	especially	important	for	goods	for	which	there	was	a	big	gap	between	the	preferential	tariffrate	within	the	agreement,	and	the	basic	WTO	‘most-favoured	nation’	rate	(MFN).	The	implication	of	this,	is	that	if	theUK’s	relationship	with	the	EU	is	changed	from	a	customs	union	to	a	free	trade	area,	then	it	might	have	the	perverseeffect	of	reducing	UK	trade	with	non-EU	countries,	since	at	present,	once	non-EU	goods	or	materials	have	enteredthe	UK,	they	do	not	incur	any	additional	cost	when	they	are	re-exported	to	the	EU.	Once	the	UK	is	outside	thecustoms	union,	firms	that	export	to	the	EU	will	need	to	keep	their	non-European	inputs	below	the	threshold.The	devil	seems	to	be	in	the	details:	what	threshold	of	minimum	domestic	content	is	agreed	on	cars	may,	forexample,	determine	whether	companies	like	Nissan	remain	in	the	UK	or	move	to	France	or	Germany.	Thegovernment	should	make	sure	that	the	rules	of	origin	it	negotiates	with	the	EU	as	part	of	the	new	trade	deal	are	asflexible	as	possible	to	minimise	the	distortion	of	global	supply	chains	and	the	risk	of	relocation	of	multinationals.Finally,	the	‘cliff-edge’	scenario	cannot	be	excluded	given	time	is	running	out.	If	no	agreeement	is	reached,	the	UKand	the	EU	would	trade	under	the	most-favoured	nation	terms	available	to	all	World	Trade	Organisation	members.Goods	traded	would	be	subject	to	MFN	tariffs	and	both	border	and	behind-the-border	non-tariff	barriers	wouldincrease.	This	outcome	would	result	in	the	largest	increase	in	trade	barriers	between	the	UK	and	the	EU.	Accordingto	the	UK	government,	in	the	case	of	a	no-deal	scenario,	the	UK	will	need	5,000	new	customs	officials	with	acomparable	increase	in	demand	for	customs	authorities	of	the	EU27	Member	States.	The	impact	on	businesses	isalso	expected	to	be	very	significant	in	terms	of	time	and	resources.	A	report	by	the	Institute	for	Governmentestimates	that	180,000	British	companies	will	need	to	make	customs	declarations	for	the	first	time	after	a	‘cliff-edge’Brexit.	The	additional	administration	required	to	cope	with	this	task	is	expected	to	cost	UK	traders	around	£4	billion	ayear.LSE Brexit: Continental Breakfast 11: fragile politics and trading relationships Page 3 of 4		Date originally posted: 2018-09-04Permalink: http://blogs.lse.ac.uk/brexit/2018/09/04/continental-breakfast-11-fragile-politics-and-trading-relationships/Blog homepage: http://blogs.lse.ac.uk/brexit/The	certainty	is	that	by	March	29	2019,	the	UK	will	exit	the	EU,	but	the	amount	of	change	that	will	occur	in	themedium	run	will	depend	on	the	outcome	of	the	negotiations.	Then,	the	UK	may	enter	a	transition	period	in	which	thefree	movement	as	well	as	the	rules	of	the	customs	union	and	the	single	market	will	be	maintained.	The	UK	willpotentially	be	able	to	start	negotiating	new	trade	deals	with	non-EU	countries.	In	January	2021,	it	will	in	principle	bethe	end	of	the	‘temporary	customs	arrangements’	to	a	destination	that	it	has	yet	to	be	defined.This	post	represents	the	views	of	the	author	and	not	those	of	the	Brexit	blog,	nor	the	LSE.Dr	Elsa	Leromain	is	a	research	economist	at	the	Centre	for	Economic	Performance,	LSE.LSE Brexit: Continental Breakfast 11: fragile politics and trading relationships Page 4 of 4		Date originally posted: 2018-09-04Permalink: http://blogs.lse.ac.uk/brexit/2018/09/04/continental-breakfast-11-fragile-politics-and-trading-relationships/Blog homepage: http://blogs.lse.ac.uk/brexit/

Continental breakfast 11: fragile politics and trading relationships

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Continental breakfast 11: fragile politics and trading relationships

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