07 Feb 2018

Brexit Blueprint. Is it a bird? Is it a plane? No, it is ‘Reverse Ukraine’

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It has not been an elegant month or so in terms of the Conservative Party and the management of Brexit. Despite the fact that the short-term questions largely concern the transition understanding, (as outlined in BVCA Insight last week) almost every faction concerned seems keen to leap to the next stage as soon as possible.

Matters have not been helped by the surely deliberate comment by the Chancellor to a business audience that the impact of the UK’s departure from the EU would be “very modest”. This prompted a predictable backlash among Conservative MPs fanned by the leak of a ‘preliminary’ Treasury document indicating the UK would be poorer by 2030 as a result of leaving the EU (although virtually no one appears to have noticed that this new analysis was not as negative as the forecast issued by the same department before the 2016 referendum). To which was added a truly epic speculative story by the Sunday Times suggesting a kind of Brexit coup d’état that would install Boris Johnson as PM, Michael Gove as his deputy and also Jacob Rees-Mogg as Chancellor.

Time to calm down all round, methinks. Admittedly with the health warning that the whole of this year is destined to be dogged by coverage of this kind. It can be contained up to a point while the transition dialogue continues. Once that is settled, hyperbole on the future will be uncontrollable.

So, before all this occurs, it is worth looking ahead and working out what is politically plausible.

What does the Government want from Brexit?

Ministers are accused by internal opponents and the EU alike of not knowing what they want out of Brexit. This is not really fair. The collective position has already been articulated, accurately, by David Davis, the Brexit Secretary, as ‘Canada (as in the EU-Canada Free Trade Agreement) plus, plus, plus’. The first of these pluses refers to South Korea whose FTA with the EU is more advanced than that of Canada in (pretty incremental) respects. The second is a nod to Japan whose FTA also has a few sections that are more liberal than those of Canada (although in the wider scheme of matters not terribly exciting). By contrast, the third plus - services - is somewhat more of a political blockbuster.

Which it is clearly is, subject to some context. The domestic UK economy can be crudely described as 20% manufacturing and 80% services. The UK’s relationship with the EU is a little more subtle than that. In 2016, the UK exported goods worth £144 billion and imported to the value of £226 billion (a deficit of £82 billion). It exported services worth £90 billion and imported to the tune of £76 billion (so a surplus of £14 billion). Of that £90 billion, comfortably more than 70% is financial services. These are intriguing numbers and make the services lobby weaker than it thinks.

Anyway, what would ‘Canada plus, plus, plus’ mean in practice? The closest equivalent, the ideal from the UK’s perspective, would be a tweak of the Trans-Tasman Mutual Recognition Agreement of 1997 that allows for the Australian-New Zealand super-duper free trade agreement. If you are really into this stuff, then let me assure you the TTMRA is where it is at.

Basically, both sides agree to trust each other on standards in goods and services and carry on from there. A mechanism exists to cope with any allegation of departure from fair play but it is procedural and political without the courts or any form of supranational entity becoming involved. It is also without any other tricky complicated business such as universal free movement of people or official transfer payments and there are no restrictions upon either party as to what independent accords they might choose to negotiate with other nations.

It is the ‘Hard Brexit’ nirvana. It would be a great outcome. The UK would be out of every aspect of the European Union that not merely the 52% who voted to Leave but quite a sub-section of the 48% that backed Remain have long found less than enticing.

Is there any chance that it will happen?

None whatsoever. As ministers well know. Such a treaty would allow the UK not only to have its cake and eat it but scoff a further cake as well. Shall we move on to a more consequential question?

Is there a middle position then?

Potentially there is. In the best spirit of this exercise, it is complex and probably needs to be lubricated by cash (surprise, surprise) but is worth a decent flutter if your bookies offer you odds. Despite all of the assertions that the menu consists of a binary choice between either a ‘Norway’ or a ‘Switzerland’ formula or one that just photocopies the EU-Canada pact, there is more out there.

It is a ‘Reverse Ukraine’. This might sound like the sort of move that a gymnast or a high diver may attempt but actually refers to the Deep and Comprehensive Free Trade Agreement (DACFRA) that the EU signed with Ukraine in 2016 that came into effect last year (on 1 September). For any purists reading, this deal is more relevant than superficially similar bargains with similar names struck by the EU with Georgia and Moldova as well.

First, why the ‘reverse’ part? I suppose ‘inverse’ would be as valid but ‘reverse’ is used because in the instance of the Ukraine, this is a nation where a narrow majority (the western section) would like to be part of the EU but a substantial minority (the Russophile part) is strongly hostile to the notion. The EU thus offered the bargain it did to Ukraine as an alternative to full membership and in a hope of creating a better atmosphere with its ‘Eastern Neighbourhood’. For the UK, it would be less of an alternative to entry than a means of managing exit by having a ‘Western Neighbourhood’ stance.

What the EU-Ukraine DACFRA means in practice, and why it matters, is as follows. The ‘goods’ stuff is pretty much in common-or-garden free trade agreement terrain (although better in some respects than the EU-Canada Accord). The more impressive element from the UK’s vantage is services.

The Ukraine compact has EU access to services in most (but not quite all) regards. At its core, if a Ukrainian service sector ‘opts in’ (and this is a sector-focused understanding), then it has a clear run at single market access, but it has to (a) agree to work with existing and future EU regulations, (b) respect EU ‘cross-cutting’ standards (such as state aid restrictions and environmental rules), and (c] settle disputes (if they occur) by an arbitration panel that is not the creature of, but respects, the edicts of the European Court of Justice. There is no free movement and there is no Ukraine-EU budget bill.

Any UK variation of this blueprint would have to be, of economic and political necessity, different. The UK would not be wild about automatically accepting all new EU regulations for those sections of the economy that opted in (and it is highly sectoral. In the case of Ukraine the banking industry is broadly ‘in’, but insurance is essentially ‘out’). The UK would also would want an EEA-style ‘right of reservation’ if it felt new directives and regulations were hostile to its national interest. London would prefer that the EFTA Court (not the ECJ) was the pertinent supranational judicial authority (mostly for symbolic political reasons).

To acquire that outcome (which will inevitably initially be denounced as entirely impossible in Brussels) it will need to stump up the offer of some cash to the EU budget (the magic mushroom in all of this, allegedly principled, dispute as we have already discovered). Exactly who is sent the invoice (the UK taxpayer at large or the economic beneficiaries via a tax/charge/levy) is to be decided.

Nevertheless, print out these words and keep them for later. It is unrealistic given the timescale involved for the EU and the UK to hammer out a ‘bespoke’ bargain that has no template. It will have to be rooted in something. Of the available options, Reverse Ukraine is the best runner.

Tim Hames
Director General, BVCA


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