Introduction
The result of the UK General Election means that the UK will leave the EU at the end of January 2020, ending at least four years of uncertainty on that particular question. The wider uncertainty, of the UK’s future relationship with Europe, remains. There are big challenges ahead for the UK government, but also many others in the UK, including business, and the EU.
The UK and EU must find a new normal in their relationship, a basis changes of government don’t challenge, and business feels confident will endure sufficiently to invest. It can’t be a perfect relationship where both sides get the outcome they want. The UK will have to accept barriers to trade, and some rule taking, making decisions on the balance of these elements. The EU does not have a model just ready to go for a neighbouring strong economy. Discussions on a Free Trade Agreement may start the discussions, but a structure such as this or an Association Agreement can only be the start of a process which will probably take many years.
Brexit will be done. But defining Brexit has barely started.
The UK Government faces big challenges
Brexit has overwhelmed the UK government and parliament since 2016. While the negotiation of the future relationship with the EU might have a lower profile than remain or leave arguments, the breadth of future discussions is much greater. Among the issues that will need to be resolved in the UK will be long term tariffs, access to the labour market, state aid regime, access to fishing waters, regulations across the whole economy but particularly in food, relative priority given to domestic sectors such as farming, financial services and automotive, environment and labour policy in trade agreements, data flows and privacy issues, intellectual property, access to diverse EU regulatory programmes, and much more besides.
Boris Johnson committed to doing this all in 12 months. In the election campaign, he also struck protectionist notes on state aid, procurement and fishing.
The sheer volume of work, in such a short timescale, would challenge any government. The trade-off between trade and following EU rules, denied in the election, will be painful, the politics difficult. Not a sector of the economy or constituency of the country will be unaffected, and this will all be put in treaty form, to bind the economy for years to come. Adding to the challenge, Brexit will initially change little. Subsequently building barriers to trade could then seem more painful, the temptation to blame the EU strong, the difficulty of keeping government discipline difficult.
It is within government that a new normal must first be established. Since 2016 relations with business have been severely strained, arguments with parliament over scrutiny regular, secrecy endemic, inter-departmental relations difficult with the Foreign Office particularly seen to have been sidetracked, and understanding of the EU approach to third countries limited. Even with a comfortable government majority these issues remain. They may not stop quick deals, but those deals may seem transient, lack detail and struggle for genuine consent.
The difficulty of the UK government finding a new stable path has already been seen in Northern Ireland, where they cannot answer convincingly what checks may be involved under the Withdrawal Agreement. These have to be defined at the same time as the new EU trade deal negotiated, with concerns already expressed in large parts of the Northern Ireland business and political communities.
From Brexit day one the UK will also need to take over from the EU market access challenges facing UK companies across the world, continue to seek rollover of key trade agreements such as Japan or Canada from the end of 2020, and is planning to negotiate a US trade deal of some sort in months. Meanwhile internationally the WTO is in crisis. Under all these pressures the functioning of the UK government needs to improve significantly.
Nobody knows whether Johnson will stick with his commitment to deliver an EU trade deal by December 2020 or walk away with no deal, or indeed any other promise he has made. In reaching the deal with the EU in October he broke with former allies in Northern Ireland. Some argue no UK PM will risk the fallout of no-deal, but many in his party do not believe it would be such a big problem.
What we should watch for incoming weeks is any suggestion of a refreshed approach from the government, in particular bringing in more openness and reality now they have no immediate election to fear, for example about timing. Perhaps even a formal consultation on trade ties with the EU. If we don’t see this then the chances of crisis returning to government in 2020 are high.
Others in the UK also need to consider their response
UK business generally wanted to stay in the EU, or at least leave with a close economic relationship. Leaving with uncertainty in January is marginally preferable for them to leaving with no-deal, but they still fear no trade deal at the end of 2020, and that will continue to dampen investment. They have also been unsure of how to deal with a government that wants to share little and responds badly to even a hint of public criticism.
Business must find a way to balance public and private engagement with government, based on the specifics of what they want and don’t want from trade agreements. When the Department for International Trade ran their consultation on trade deals with the US and others, too many business responses failed to go into detail, suggesting only ‘no tariffs’ or ‘free flow of data’ as their priorities. Such general responses are easily ignored, and business will need to provide more on the barriers they may face in trade with the EU, how they could be overcome, and their priorities.
In engaging with government on trade policy business will also need to carefully consider their resources and channels. Diverse membership groups like the CBI cannot know the detail of firm level issues, so either sectoral organisations who share these or dedicated resources within a business will be needed for successful engagement. In general, the UK business community appears to be under-prepared for their challenge ahead.
Civil society groups face similar issues, many wanted to remain in the EU, and fear the impact of the UK choosing the US over the EU as a priority for a future trade agreement and regulatory alignment. Most likely their primary focus will be to oppose a US trade deal.
Politics in Scotland and Northern Ireland are already heavily affected by Brexit, and the election result makes the tensions worse. Under the Withdrawal Agreement, Northern Ireland will in effect be in the EU’s regulatory and customs arrangements, though without any formal say. The province will also remain a part of the UK, but for the first time in history there are more MPs supporting ties with Dublin (nationalists) than with London (unionists). There has been talk of unionist protests against implementation of the deal, including checks on trade between Great Britain and Northern Ireland, but it is now just as likely that we are on an inexorable path to Northern Ireland leaving the UK.
The big victory by Scottish nationalists in the election may suggest Scotland’s future in the UK is also uncertain, though polls suggest at the moment there is not a majority for independence. This could though be affected by the new EU deal and how Scotland is involved. It is unclear what powers the devolved governments will have over issues that will feature in trade agreements such as agriculture, how these powers will be decided, and how devolved administrations will be involved in negotiations. Growing resentment is possible, though the practical difficulties of a border between Scotland in the EU and England outside would be formidable.
Once the UK has left, it is difficult however to see rejoining the EU being feasible in the near future. Yet 50% would support remain in a referendum and what this group campaign for in coming years could be a powerful influence. If remain campaigners move to demanding a close relationship with the EU this is more likely to happen. Remain campaigners were however some of the most vocal critics of joining EEA or a Customs Union, and it won’t be easy for them to now reverse.
The government will hope that many former remainers accept a new loose relationship, or even feasibly no trade deal blamed on EU intransigence. In the short term, this seems possible if unlikely. In the longer term, it is likely at some point that a pro-EU government will be elected seeking a closer relationship than whatever has been negotiated. It is this above everything else that means the UK will not find a new normal relationship with the EU quickly, for the Labour Party is likely to remain overwhelmingly in favour of close EU ties, the Conservatives mostly against, for the foreseeable future.
Challenges for the EU as well
While preparing thorough, many in the EU always hoped the UK would not in the end leave. Arguably that was a deterrent to creative thinking about the future relationship. Throughout the Brexit saga the EU has said that there are existing models and the UK should choose one. That negotiation on the future would then commence after a Withdrawal Agreement to safeguard the Irish peace process, citizens rights, and budgetary contributions. Now the Withdrawal Agreement will pass, the EU is starting to discover they too will need to do some thinking.
Most importantly, key players in the EU are starting to realise that the UK does not easily fit into any existing economic relationship model. Most neighbours accept EU rules in return for market access, with little say, a model uncomfortable for the UK. A Canada style trade agreement, on the other hand, involving tariff free access but little regulatory alignment, is unlikely to work over time for either party, too many barriers for the UK, too few level playing field rules for the EU. So even if something could be negotiated by the end of 2020, about which there should be many doubts given usual EU timescales for trade agreements averaging around 5 years, it is unlikely to be stable. Member States in particular have scarcely started to think through their aims from a UK deal.
The EU has had to resist the UK desire to retain all trade links while losing everything else, a contributory factor in the rigidity shown. But now a serious debate is required, about what the EU actually wants to see. This isn’t about substituting existing models for the ‘concentric circles’ approach suggested by some. Rather it is to ask test the limits of the possible for a relationship with a powerful neighbouring economy that does not currently want to be part of the EU. In terms of timing it will be interesting to see if the EU follows usual process of a public consultation and initial impact assessment (so far neither UK or EU have done either).
The UK’s desire for a US trade agreement, and thus leaving the EU’s regulatory area in terms of agriculture and technical regulation, complicates matters. The EU will have to determine priorities carefully, in particular between demonstrating the value of membership, and pushing the UK into US hands. It is possible that President Trump will help by making a UK-US trade deal toxic to UK public opinion, but the importance of a US trade deal as a Brexit symbol cannot be underestimated. Perhaps not at the cost of the NHS, but definitely at the cost of close trading relationships with the EU, whatever the economic cost. The EU can offer much more in terms of market access than the US, but both will want UK regulatory alignment as part of their wider battle. The US and EU are both well aware of the other’s intentions, and this tension will be a crucial part of the future UK-EU relationship.
Conclusion
Johnson’s convincing victory means Brexit will be done, but still not defined. The challenges of leaving ultimately involved the UK signing up to the EU’s core demands, while pretending otherwise. The challenges of the next stage are far more complex, the permutations greater, and the timescales unclear beyond an unrealistic one year deadline to negotiate a trade agreement. Brexit may be nearly done, but nobody is really ready for Brexit, not until we know what it really means in practice.
But at the same time there was a distinct sense of European relief. Dutch Prime Minister Mark Rutte noted the election result meant “on the British side they can speed up the process (of Brexit)”. Three years of Brexit uncertainty has been corrosive – not just in the UK, but in the EU too. It has overshadowed the workings of the bloc and been costly for European business.