Now that the Prime Minister’s withdrawal agreement has been decisively rejected by Parliament, the challenge, as Theresa May said last night, is to find an alternative way forward. But the reality is that the fall of the agreement is less important for the UK than widely assumed. It did not pin down any long-term trade arrangements. Even in the short term, the main gain to the UK was a transition period which now looks less essential than was the case when it was first mooted over a year ago. It is true that there is now a possibility of tariffs from March 30th but these tariffs are mostly small and the EU has stronger reasons for avoiding them than the UK. The EU exports £54.6 billion of high tariff goods to the UK (animals, meat dairy products and road vehicles) compared to £21.1 billion of UK exports of these goods to the EU. This equates to one per cent of UK GDP and 0.5 per cent of the GDP of the main EU exporters to the UK.
Such has been May’s apparent unwillingness to consult more widely that there is no known plan B. Nevertheless, clues exist on what the Government may attempt and how Brussels will respond. The withdrawal agreement contained positive and uncontroversial features but also included problems. Right from the start – in the December 2017 joint report from the negotiators of the EU and the UK Government – there were ambiguities and contradictions. Only when the withdrawal agreement was signed last November did it become clear what the PM’s strategy had been all along. Her promise to honour the 2016 referendum result extended only as far as legally leaving the EU in March 2019 with control on migration from the EU reverting to the UK. In almost every other respect, the UK was to remain close to the EU with close alignment to EU regulations. This satisfied the wish of most UK companies for minimal change in trading arrangements and went a long way towards satisfying the EU and Irish government on the avoidance of a hard border in Ireland.
Unfortunately, the withdrawal agreement also had fatal flaws. Firstly, the two to four-year transition period kept the UK bound to all EU rules but without any representation in making those rules. Secondly the so-called ‘backstop’ arrangements to supersede the transition period kept the whole UK in a customs union but Northern Ireland additionally retained many of the EU’s single market rules. The anomalous position of Northern Ireland would have led to increasing regulatory divergence over time and hence customs checks at the Irish Sea. This was anathema to the DUP. These arrangements also undermined and contravened the Good Friday Agreement which had devolved to the NI assembly powers that were now to be exercised by the EU. Thirdly, no clear long-term trade deal was agreed despite the large payment of around £39 billion to the EU. Claims that the UK was to leave the CAP and common fisheries policies were less than clear. In particular, the backstop gave the EU much control over agriculture in Northern Ireland and, via state aid constraints, this was also the case in Great Britain.
The PM’s claim that the backstop was a temporary insurance policy unlikely to be used was irrelevant, since any future agreement with the EU to replace the backstop was bound to have features similar to the backstop itself. After all, there was little prospect that the Irish government would settle for any new agreement which would mean giving up the major gains secured in the withdrawal agreement. The latter meant that Northern Ireland could increasingly become a semi-detached part of the UK unless Great Britain permanently remained in line with all existing and new EU regulations. The claim that the EU had conceded too much in an ongoing customs arrangement and would wish to negotiate a replacement to the backstop was also unlikely to result in a better deal for the UK.
The withdrawal agreement secured a key aim of the EU, which is to limit the scope for the UK to become more economically competitive than the rest of the EU. Already with its own currency, a UK able to set its own tariffs and regulations could become a competitive threat to the EU. For this reason, there is advantage in the EU attempting to tie the UK into the EU’s common tariff arrangements and close to EU regulations for goods, labour, environment and state aids as was done in the now rejected withdrawal agreement.
Theresa May now faces the choice of attempting to secure changes to the WA that will be sufficient to convince a majority in parliament or, alternatively, deciding on a completely new approach. She has already said that she will seek a cross-party compromise and a deal with Labour may be possible based on the party’s stated desire for a formal customs union. The EU might be willing to amend the political declaration to offer such a deal, although not in a legally binding form, and at a push might amend the wording in the WA backstop on a customs union. Since Labour adopted this policy mainly as a stopgap in its strategy to provoke a general election, the way ahead may be less clear than it seems and Jeremy Corbyn continues to play for time by setting pre-conditions for talks that he knows the PM cannot accept.
The less likely alternative is to drop the WA as a dead duck and proceed with a combination of lesser agreements. Chief among these would be to take up the Tusk offer (repeated last October) of a free-trade agreement and to clarify in the political declaration that this is the UK’s preferred option. More immediately, the UK could confirm a series of side deal offers already made by the EU on aircraft landing rights, air safety certification and road transport licenses. Further side deals would also be needed but many of these are already in preparation. If the new HMRC customs arrangements are not fully online, an extension of the Article 50 withdrawal period could be sought for a few months.
Either way, the Irish backstop would remain an obstacle to EU compliance with UK preferences. We have written at Policy Exchange that the avoidance of new physical infrastructure at the border is easily achieved. The evidence of Hans Maessen to the NI select Committee in November makes it clear that the application of existing arrangements within the EU’s common transit convention (of which the UK is now a member) can avoid the need for border checks of any sort.
The letter sent to the Prime Minister this week by Donald Tusk and Jean-Claude Juncker gave some comfort that such arrangements might at least be discussed:
‘Given our joint commitment to using best endeavours to conclude before the end of 2020 a subsequent agreement which supersedes the Protocol in whole or in part, the Commission is determined to give priority in our work programme to the discussion of proposals that might replace the backstop with alternative arrangements. In this context facilitative arrangements and technologies will be considered’.
Of course, none of this is legally binding and one might ask why, if this can be done now, it had been impossible over the last two years (in which such an approach was described by the EU as ‘magical thinking’).
Nonetheless, there is the possibility of movement on this front. The letter also says that there is nothing in the backstop which contradicts the Good Friday agreement. But this cannot be the case, given that agriculture is a devolved matter under the 1998 Northern Ireland Act which implements the GFA. This means that powers over agriculture cannot be transferred to the EU. Such undermining of the GFA is another reason for revising the backstop. Whatever the eventual arrangements, there is a case for following the suggestion of Martin Wolf in the FT and moving discussion of the backstop into the post-Brexit trade talks.
Time is short but there is little need for much more than a free trade agreement and sensible side deals conferring equal advantage to both sides. Outside a customs union, some border checks will be needed but since modern procedure involves electronic customs clearing and only risk-led checks there is little here to prevent firms from continuing the business in much the same way as at present.
Dr Graham Gudgin is Policy Exchange’s chief economic adviser