Dr. Rebecca Harding
CEO, Coriolis Technologies
With nine days to go until the UK is supposed to leave the EU, if ever there was a time to stop and think about the future of UK trade it is now. The “get Brexit done” mantra has taken hold of political rhetoric since Mr Johnson became prime minister, and as a result there is a real risk that some of the aspects of the current political declaration for trade will be at best brushed over, and at worst ignored. Westminster will debate Northern Ireland and the border in the Irish Sea this coming week. The danger is that in the desire to get things over with, politicians will not scrutinise the political declaration with sufficient care and therefore miss some of the risks that are buried within it.
There are big dangers that lurk within the depths of the declaration that are particularly important for trade. These go beyond the complexities of trade between Great Britain and Northern Ireland after Brexit.
The key to these dangers is the “level playing field” requirement that is part and parcel of the frameworks that will be in place after Brexit and inherent to the “ambitious” free trade agreement (FTA). In essence, the EU and the UK have agreed to “robust commitments to a level playing field” to ensure that, from the EU’s perspective, the UK is not, in Angela Merkel’s words, “a competitor on our doorstep.” The UK and the EU agree to work together, and in line with international agreements, on climate change, the environment and social standards. Similarly, they agree to “high standards” in governance – including state aid rules and social and employment terms. Alongside this is a commitment to “good governance” in tax to avoid any “harmful practices of trade distortion.”
It’s clear why the EU would want this: regulatory and financial divergence in the UK could distort competition and as a result, give the UK an unfair advantage in some markets over the EU. However, the hard-line Brexiteers want precisely that which the warm words of the declaration attempt to avoid – the capacity to set standards that are divergent and that mean that trade deals can be struck with other countries outside of the EU.
Do these words mean that the UK will be tied to the EU and unable to make its own trade deals as a result? The short answer is no: the wording has changed on the political agreement accompanying former prime minister Theresa May’s deal earlier this year. There is now a principle to work towards and while the FTA will be “ambitious” it is not “as close as possible.” So from the point of view of forming deals with other countries, it appears that the agreement is leaving a great deal more scope for regulatory and competitive divergence and therefore opening the door to more substantial agreements elsewhere.
All of this refers to goods trade, of which the EU accounts for fully 48%. Sixty percent of the UK’s trade with Europe is focused in five strategic sectors: automotives, aerospace, pharmaceuticals, electronics and mechanical engineering. These are global supply chains where Europe dominates, accounting, for example, for 49% of all automotive exports in the world, over 60% of all pharmaceutical exports and over half of all aerospace exports. These are also among the UK’s biggest export sectors.
So what are the risks to that trade? Here, of course, the answer is more complicated because these are not supply chains that the UK can deliver end-to-end by itself. In other words, there is no such thing as a level playing field in these sectors because they are bound either by EU rules, since most of the supply chains originate in Europe, or by international standards, as in the case of aerospace. UK businesses will simply have to comply. This is not a matter of competition; it is a matter of being in the global supply chains in the first place.
These are our biggest sectors and also, as is the case with cars, aerospace and pharmaceuticals, among our biggest exports to the US, China and Japan. While we may have some regulatory divergence in, say, agricultural standards on imports to enable trade with the US, we will never want to have divergent standards in other areas because that in itself would render whole sectors incompatible potentially with the rest of the world and certainly with Europe where the major market currently is.
Yet this looser association will be the main driver of discussions once the UK Parliament has accepted the deal as it currently stands. As a result, all the arguments after the UK leaves on the 31st October will be about defining what the “level playing field” actually means. As was hinted at over the weekend, if the EU and the UK cannot come to an agreement over that, then a no deal is likely in 2020. This happens because the language in the declaration, particularly around goods trade has loosened and enables no agreement around an “ambitious FTA” as an outcome where the “single customs territory” did not.
This whole process has been costly to the UK’s exporters. The temptation will be to accept the deal as it stands and move on to those fabled sunlit uplands. In trade terms this is a lazy and dangerous outcome. The UK’s trade growth since the financial crisis has been fragile and highly dependent on the weakness of sterling outside of the EU. There is no guarantee that businesses will suddenly invest if the deal is done, not least because there will be no certainty for at least a year in relation to the “level playing field” and what that means in terms of the costs of two parallel systems for UK businesses.