Skip to Content

Coffee House

Ivan Rogers: the realities of a no-deal Brexit

2 September 2019

9:45 AM

2 September 2019

9:45 AM

As so often in the last three years, much of our political debate is ducking the central strategic questions and is obsessing, in increasingly hysterical fashion on all sides, about tactical ones.

We face the most explosive political week for years, perhaps decades. But remarkably little of the debate is about our real options. We should be thinking 10 to 20 years ahead, not 10 weeks.

The primary issue with a ‘no deal’ Brexit is not, and never has been, how far our domestic contingency planning enables us to mitigate the short-term shock. That is hugely important. If ‘no deal’ happens, the day to day consequences – malign or benign – will inevitably drown out all else in the news for months. No developed country will have done anything analogous in several generations, let alone by choice.

But this ought, nevertheless, to be secondary. The primary issue is our medium-long term destination. The central problem with ‘no deal’ is that it is being heavily (mis)sold as providing certainty, finality – a ‘clean break’ – when it would manifestly do nothing of the sort.

It encourages a public (many of whom are understandably fed up with the process and the game playing – on all sides – of the political class) to believe that ‘closure’ might be just weeks away. But this is completely spurious. The reality of ‘no deal’ is that it would leave all the most intractable issues about our future relationship with the EU unresolved, and leave it unclear whether there would even be a subsequent process to resolve them. It would, in other words, be just the start, not the end.

The idea, peddled by ministers, that businesses would have the ‘clarity’ and ‘certainty’ they need about the UK’s ultimate destination after a ‘no deal’ exit in eight weeks time, is laughable. They would not even know whether there would be ANY sort of preferential trading arrangement (in other words, one going substantially beyond WTO commitments, but going substantially less deep than Single Market and Customs Union membership, and hence delivering lower volumes of trade with the Continent than we have now) with our largest trading partner, let alone what sort and when.

In those circumstances well-run businesses will, inevitably and correctly, (and rapidly, because the expected transition period would have disintegrated) conclude that they have no option but to plan on the assumption that there might be no preferential deal for the foreseeable future.

Companies have fiduciary duties to their shareholders. ‘No deal’ would force and expedite radical decisions on business models and locations. By the time, several years later, any preferential trade deal might be struck, it would be far too late to reverse the bulk of those decisions.

This would be the worst possible outcome for the UK economy and for the public finances. The tax take implications would dwarf the sums politicians obsess about on the UK’s EU budget contribution. Fantasies of a Brexit dividend would perish rather fast in the public accounts.

It would also mark both a UK government failure and an EU failure.

It takes two for a negotiation to fail.

The blame game on both sides, as both recognise – belatedly – that the potential landing zone for an agreement has all but disappeared, is therefore already well under way. There is certainly plenty of blame to go around.

But if that is where we end up in a few weeks time, there is no politically credible path afterwards to where the Prime Minister says he wants to get. And the eventual outcome would be much worse for the UK, the EU and the entire West than it needed to be. Future political generations would excoriate this one for having let it happen – indeed in many cases for having worked assiduously to deliver, and celebrated delivering, this failure.

This era perhaps now bears more similarities with the gold standard era – with its free capital mobility, its open trade, and its staggering complacency – than any other. That era came to an abrupt and violent end with world war one and its key features could not be resuscitated for decades. Many sage figures bearing considerable similarity to our current political leadership confidently pronounced in the early 20th century that conflict was now completely impossible between developed democratic states, given their economic interconnectedness. We know how that turned out.

Dani Rodrik, writing both of the gold standard era and our own, coined the term ‘impossibility theorem’: that democracy, national sovereignty and global economic integration are mutually incompatible; and that we can combine any two of the three, but never have all three, simultaneously and in full. That is, in my view, profoundly right. And it is the trilemma at the core – or rather, it should be at the core – of our Brexit debate.

The essential Brexiteer view is that deep regional economic integration, including the Single Market and Customs Union, is undermining national politics, by aiming to align the scope of democratic politics with a supranational market.

Deep integration inevitably requires that we eliminate the transaction costs that traders and investors face in cross-border transactions, and end regulatory discontinuities at borders. To enforce, police and adjudicate this, by definition, requires supranational legislation and a supranational Court. And those necessarily undermine national autonomy in decision-making.

We used, across party lines, to be in favour of all that because we thought – and a massive extension of qualified majority voted to deliver it, supported by Margaret Thatcher – it a price worth paying for building a much larger and more open ‘home market’. The British were notorious, from Thatcher on, as the biggest enthusiasts for the Single Market.

But countries can, and must be able to, change their minds. It is a perfectly legitimate view to suggest that globalisation and Europeanisation have run ahead of democratic governance and that people are rightly uneasy about the hyper-globalisation of recent decades. This position reasonably asserts that Brexit is not ‘just the economy, stupid’, but also a governance, indeed a constitutional, issue.

I agree. And patently, so do lots of people who voted primarily on non-economic grounds. And perfectly reasonably so.

It may be hard for some to credit, but one can have been a technocrat and still believe that, on the whole, too much power has been vested in technocrats – both national and supranational. Just look at the UK today.

But…

This is our sovereign choice, not other countries’. It is the UK saying that national sovereignty and democracy should trump deep economic integration, which we are saying has unpalatable implications for both.

If we downgrade our ambitions about how much deep economic integration we want – or can stomach, given the implications for national sovereignty – we must also accept that there will be substantial barriers and transactions costs from trade ‘de-integration’ with partners who have made a different choice. We may deplore others’ national choices, but, if we are to be consistent, that is surely no more our business than our domestic choice is theirs.

No developed country has taken itself out of a trade bloc since the war because the costs of deliberately making trade substantially more difficult with your closest neighbours are obviously large. No trade deal has ever been struck between partners actively seeking to get further apart. Trade deals have always been between those aspiring to converge and to increase trade flows, not diverge and decrease them.

No amount of repetition of ‘this will all be terribly easy’ ever makes it true.  It is not unpatriotic or ‘declinist’ to point out that a process of ‘differential disentanglement’ – which is actually what Brexit is –  will be hard, complex and lengthy. How, seriously, after more than three years can so much of our political elite still be in denial on this?

If you leave a club whose other members are prepared to integrate more deeply politically and juridically than you, because they see economic and political benefits from doing so, you cannot tell the public that any adverse consequences of leaving are all the club’s fault, for wilfully not carrying on giving you club benefits when you leave.

Nor can you just wish away issues at borders, whether on land or cross-Channel, when the entire purpose of leaving the Single Market and Customs Union must be to run deliberately different regulatory regimes – chosen by your own Parliament – where you believe it suits you.

Such choices by definition entail a hard border. Borders across the whole world demarcate different regulatory regimes.

Even the border between Sweden and Norway, one in the EU, the other out of it but wanting to remain much closer ‘in’ to EU institutional and legal frameworks (Single Market, Schengen) than our government, is a hard border. If alternative arrangements currently existed which obviated the need for any such border, they would already be operating right there. They are not.

The new Prime Minister’s primary objection to his predecessor’s painfully negotiated agreement with the 27 EU members is, after all, that he thinks it keeps us too closely bound to elements of the EU’s regulatory order, from which he wishes to diverge more. He also wants a fully autonomous trade policy, which must entail not being in a Customs Union with the EU.

Fair enough. As I personally do not believe that the UK could, long term, remain in a Customs Union with the EU and become a ‘taker’ of a trade policy it has had no formal, voting role in setting, I agree with that. Labour’s current policy on this makes no sense.

For what it is worth, senior members of that dreaded EU nomenklatura whom I know well, never expected the UK to want a Customs Union with the EU post exit, as it contradicts the logic of wanting to exit. Central expectations in the months after the referendum were that the UK wanted to go much further out of the EU orbit than Norway, Switzerland or even Turkey.

Our friends may have regretted that. They did not set out to prevent it. They merely repeatedly registered that if you are not prepared to accept any of the obligations of Single Market and Customs Union membership, you cannot expect to continue trading on similar terms to those enjoyed by members.

They were puzzled by plenty in Theresa May’s approach. As was I.

And they now find themselves abused heavily by London for having imagined that giving her the backstop deal she repeatedly said she wanted (and they did not) and would deliver a Parliamentary majority for, turns out, according to the new government’s orthodoxy, to have been a near criminal act on their part.

But in signalling that he wishes to be free to diverge far more, and go for a much ‘thinner’  less potentially constraining, Canadian style Free Trade Agreement, the Prime Minister must understand that absolutely nothing could do more to convince the EU that the backstop is essential.

If an alternative proposal to the backstop is ever to be accepted, it is therefore not unreasonable for the EU to insist that the UK needs to produce something with identical effect which would demonstrably be legally operational the day after any transition period ended. Not waffly professions of good faith saying that they need to trust us that something will turn up.

After years of evasions, the trivialisation of real problems and the refusal to acknowledge trade-offs, it is time to be serious.

There is still no sign of seriousness to date. The ministerial assertions that more progress has been made in recent weeks than for years are met with either bafflement or derision in key capitals. They are assumed to be about preventing key votes going wrong for the government before prorogation.

If we prove simply to be on the umpteenth iteration of the non solution that used to be called ‘maximum facilitation’, the EU will conclude that there is no serious intent to reach a ‘new deal’. There is merely an appetite to try and blame the EU for a breakdown as the cornerstone of of the Prime Minister’s election campaign by peddling something as viable which the government knows perfectly well isn’t.

In those circumstances the 27 will, I fear, be considerably more relaxed about ending with ‘no deal’ than this government imagines.

The government’s own unilateral tariff schedule decisions in the event of a ‘no deal’ Brexit have also made the EU’s life much more comfortable in the absence of an FTA. They need one appreciably less than us.

If, as many suspect, the real plan proves to be that we have an election campaign devoted to blaming an intransigent EU for a ‘no deal’ outcome, then please let us not harbour illusions that afterwards, were this government to be returned, normality could rapidly return. And that both sides would just amicably sit down and hammer out the Canada-EU style Free Trade Deal to which the Prime Minister aspires. Or that a plethora of legal sectoral mini deals would quietly be struck to lead, seamlessly, to the same result.

Not a chance in hell.

After exit, even the opening of any trade negotiation requires unanimity amongst the 27. The preconditions the 27 would set are already obvious and we would during the election campaign have heard repeatedly from the Prime Minister – indeed, we already have – that he would not accede to any of them. In which case, no trade negotiation will even commence.

This would not be a short-term phenomenon. Businesses would react accordingly. As I say, they have no choice.

On ‘mini deals’, the reality is, as UK officials have already long experienced, that the legislation the 27 put in place to govern economic relations with the UK after a disorderly exit has not even been up for consultation with us, let alone negotiated.

These are not ‘deals’. ‘Deals’ by definition require negotiation and compromises. These are faits accomplis, set solely in the interests of the 27 by the 27, in both their content and longevity. This is not the UK in any sense ‘taking back control’ but forfeiting it entirely. Campaign slogans are fine. But they are not a policy.

This EU legislation would not, to be clear, deliver economic armageddon to the UK. It is not in the EU’s interests to bring all trade to a halt, or make arrangements punitive. We do not, mercifully, live in the era of Napoleonic War blockades. But the arrangements, sector by sector, would fall very far short of what could be achieved even in a modestly ambitious FTA.

And for UK businesses, they will be uncertain, provisional, and open to adverse revision – solely by the other side, where the UK is not present. Faced with a more belligerent UK which has chosen to walk, the EU has every interest in keeping the pressure on by making these arrangements asymmetrical and highly suboptimal for UK interests.

And, let’s be clear: EU regulators across many sectors will press firms after a ‘no deal’ to comply with their requirements about location and ownership. The UK will – immediately – face tough choices about whether to counter that with reciprocation, which moves us away from a tradition of openness I hope we would maintain, or whether to remain open and risk losing substantially by sticking to our principles.

The EU will assuredly not hold back in a ‘no deal’ scenario, in forcing those issues.

But in doing so, it would of course further exacerbate the increasing tensions in EU-UK relations, and make it more likely that the current breach becomes a permanent rift within the West. Both sides of the Channel are in my view really far too blasé about that prospect.

The EU is wholly within its rights to defend its interests and the integrity of its legal order. As I say, it cannot be expected to change its principles and club rules for an exiting state. If we actively want to be a fairly distant ‘third country’ on sovereignty grounds we can scarcely complain that the EU applies to us what it applies to others in the same category.

But the EU’s relationship with the UK has geostrategic implications. This is no ordinary trade nerd process. And the almost wholly technocratic Article 50 process has led to persistent strategic myopia from the EU, not just confusion and incompetence from the UK.

If the Prime Minister is serious about a post-Brexit vision in which the UK concludes a multiplicity of bilateral free trade deals, both with all major trade  blocs and with emerging markets, he knows as well as anyone that:

  • All these deals will take some years to negotiate. If they are to have any serious economic value for the UK, they will entail difficult compromises. Trade negotiations are not sentimental seminars full of economic liberals: and that applies just as much, if not more, to negotiations with the US, let alone China and India. No trade deal will ever be agreed by any of those partners, without delivering major economic dividends for them. I favour negotiating such deals post Brexit, but it is already long past time to be honest with the public about the dividends other superpowers will demand are put on the negotiating table.
  • Much more of our trade is, and will be for the foreseeable future, with our neighbouring bloc – notably in services, in which the UK is highly competitive and all cross-border trade liberalisation is immensely difficult, precisely because it inevitably impinges heavily on domestic regulatory sovereignty. We export more services to the EU than to our next eight markets put together, because, for all its many deficiencies, the EU has made more progress in liberalising services trade than any other bloc in the world. Those patterns can, should and will change over time. But not hugely more abruptly than they have while we were in the EU. My experience tells me that the Prime Minister will very soon discover, should he ever manage to start a trade negotiation with the EU, that in practice he wants vastly better market access in the EU on services than Canada (which does a small fraction of our volume of trade with the EU). As with his predecessor, red lines will fade inexorably to pale pink as reality bites. The sooner the public hears some honesty about the trade-offs, the less furious it will be when they emerge.
  • It consequently makes absolutely no sense whatsoever to have a lattice work of preferential deals which excludes the EU. If we do not want to live with WTO-only commitments with the US, Japan, Canada, Korea and others, that must apply also to the EU.
  • Any abrupt ‘no deal’ exit would constitute a genuinely major supply shock to the UK, and would oblige us to negotiate post exit from a position in which the negotiating baseline – which will be in operation in the real world of commerce – will be no preferential deal. The pressure of the ticking clock will therefore be on the UK: precisely the same trap into which Theresa May fell so spectacularly on Article 50. Any government minister who believes the EU would not exploit that leverage to force better terms has clearly not been paying attention for the last three years. Any minister who believes that ‘no deal’ improves the UK’s negotiating leverage for the next, crucial, phase, does not understand trade negotiations.

The EU knows all of this too. Which is why the briefings that the EU is rattled because it knows it finally faces someone with the cojones to walk away is fine for domestic press consumption but gets more of a shrug outside the UK. Sure: the EU believes the risk of a ‘disorderly Brexit’ has risen even further in recent weeks. Most see it as a majority chance. Some as a near certainty.

But the mistake I am afraid the Prime Minister is making is to believe that, because they believe that, he is likely to get some materially different and better deal than his predecessor. My instinct is that they conclude from recent events that his primary objective is to win an election by reunifying the right and squeezing the Brexit party.

In which case, delivering a ‘no deal’ Brexit, or committing unequivocally to it in an election manifesto and trying to keep the Remain side of British politics split for that election will be the Prime Minister’s aim, regardless of the revisions the EU offers him on the Political Declaration or examining the alternative arrangements to the backstop. Indeed anything offered to the Prime Minister would have to be loudly declared insufficient and an indication of EU intransigence, or the strategy does not work. If that is one’s analysis, then one of course politely expresses enormous interest in urgently seeing new concrete legal ideas in print from the UK, but one does not hold one’s breath.

That EU politeness is of course being oversold here pre-prorogation as indicating new openness to non-backstop solutions. ‘Do not damage my hand, just as my tough new approach is making progress’. It is appreciably more likely that it is a careful blame avoidance strategy from the EU.

Both sides now have just one final chance in the coming weeks to draw back from the brink, and not reconcile themselves to this now being simply a blame, or blame avoidance, game. Seen from my seat it looks most improbable that they will. It will require courage, creativity and compromise. And the political market for those may be exhausted by both sides.

But if we do lurch to ‘no deal’ it will not, I am afraid, be some easy rapid patching up of reasonably amicable relations after an election, and smooth progress towards a fairly ambitious free trading and security relationship.

It will much more likely be a fractious, potentially quite seriously conflicting relationship, in which, for years, not months, the UK lives on much worse trading terms with the EU than most of the developed world. Trading terms which will depend overwhelmingly on decisions taken in rooms where no Brit is present. In which trading tensions will inevitably spill over into other areas of cooperation, of which there ought, at this time, to be legions, because the appetite will wither on both sides. This is bad for all.

Former colleagues on both sides of the Channel talk with some foreboding of a potentially lengthy deep freeze in cross-Channel relations as these tensions mount and the incentives to cooperate diminish.

Real political leadership – on all sides – involves weighing up very soberly where alternative paths are likely to end, and then communicating to the public why both your destination and your route to it are in the public’s best interests.


See also

Show comments
Close