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What does the UK want?

12 January 2019

31 letters making 8 points

2 December 2018

Brexit sequencing and the ‘interim period problem’: Limbo in our time?

15 September 2018

George Yarrow

Withdrawal from the EU (Brexit) will occur at an instant on 29 March 2019 and that moment divides the policy questions and processes entailed by Brexit into two periods. The post-Brexit period will itself be divided into two stages since any new, long-term trade arrangements will not be in place on the day after Brexit. It will take time for them to be negotiated, then ratified and implemented. The time sequence we face is therefore:

Article 50 period -> Interim period -> Operational long-term agreement period

Over the two years since the referendum the great arguments about Brexit have revolved largely around the first and third intervals of this sequence, but the interim period is important too. It will be when the substantive long-term negotiations take place and some of its features will be important influences on the outcomes of those later negotiations. The two that I will focus on are the likely length of the period and the degree of control over rule-making that the UK will enjoy during it.

Even now, close to its opening though we are, it is impossible to forecast the detail of how things will pan out during the interim period: there are too many possibilities to contemplate and assess. Even if it were feasible, there is little value in trying to plan out now, in any great detail, what the UK’s ‘positions to take’ on particular issues should be. As Field Marshall von Moltke (the Elder) put it: “No plan of battle survives first contact with the enemy”. Flexibility is required to adjust to changing realities and to have influence on them. It depends on having (a) a menu of options to choose from and (b) the power to exercise those options. This is what is meant by ‘control’ or, in broader terms, possessing ‘sovereignty’ over decisions.

Since ‘taking back control’ was the major theme of Vote Leave’s referendum campaign, it is natural to ask the following question: In the early part of the interim period, what progress in ‘taking back control’ can be expected? The ‘taking back’ aspect of the question implies that the assessment is benchmarked against the current status quo, in which the UK is a Member State of the EU.
More specifically, consider first what the UK’s degree of control over market rules and regulations will look like on the day after Brexit. Ask of each of the two long-term Brexit proposals currently receiving most attention (Canada+ and Chequers): Will it lead to a stronger or weaker position for the UK on the 30 March 2019? Will it provide more or less control/influence over rule-making?

Approaching things in this way, it is immediately apparent that the terms of the current, draft Withdrawal Agreement (WA) imply that Brexit Day will see a reduction in UK control. That is, in response to a popular injunction to ‘take back control’ the Government will have delivered a surrender of control (judged relative to the status quo ante, the EU system). This can be called the “interim period problem”, since it is likely that this initial control deficit will persist throughout the period (although its severity may vary over time). On the control/sovereignty agenda of the referendum campaigns, the UK will have paddled backwards.

That is a major point, because other things equal very few voters would favour a reduction in sovereignty. Remainers are no different to Leavers in this respect: they might argue for a lesser sovereignty, but only if it was accompanied by the prospect of compensating benefits of greater value. Taken by and of itself (i.e. ‘other things being equal’) a loss of sovereignty is a negative factor.
As things stand under the draft WA of March 2018 there is a plan for a ‘transitional period’ that will last for 21 months, but ‘no plan survives its first contact with realities’. At the start of almost any complex process of negotiation it is difficult to be confident about how long it will take. Benchmarked on international FTA experiences, a four-year start-to-implementation length would be a very impressive achievement for an agreement of the depth, scope and complexity anticipated by the Canada+ and Chequers proposals. These things look simple in abstract, but they invariably turn out to be more challenging in practice. It has, after all, taken the Government more than two years even to come up with only a very broad outline of its own aspirations (Chequers).

The WA in its present form would therefore see a division of the interim period itself into two: (a) the first 21 months and (b) a yet to be agreed extension, necessary to bridge the remaining gap until such time as a new long-term agreement is operative. There would likely be a further price for the UK to pay for the extension and the closest, identifiable benchmark appears to be around £10 billion per annum (the sort of payment that the draft WA indicates has been agreed for its 21 month transition period, although things are not put that way in that document).

There is an underlying three-dimensional trade-off between depth, speed and cost at work here. Mrs May opted at the outset for a “deep and special relationship” and that aspiration remains UK policy. The interim period could be shortened by giving up on depth and opting for a shallower, simpler agreement, but that would entail a major shift in government policy and the likely benefits of the agreement would be lower.

A more basic Canada-style agreement, without pluses, might shorten the interim period, but even then it is not just a case of replicating an existing FTA template. The value of UK-EU trade is many times the value of Canada-EU trade and the goods and services mixes involved are rather different. A UK-EU agreement would be a significantly bigger thing than Canada-EU from the outset.

Then there are the customs issues to consider. The operation of even a basic agreement would require a major upgrade in systems and businesses throughout the land would have adjust to rules-of-origin reporting. These adaptations are perfectly feasible, but there is another trade-off to consider: the faster things need to be done, the higher will be the costs, including costs arising from operational failures.

The UK cannot unilaterally determine the length of time things will take. EU systems will need to be adjusted too and there is an obvious question to ask about the incentives of EU Member States regarding speed of progress. The transitional arrangements contemplated in the WA are very comfortable for the EU: the longer the interim period the larger the financial contributions of the UK are likely to be. A UK request for greater speed could be expected to elicit a request for higher financial contributions to cover the EU’s own incremental adjustment costs that a greater pace would entail. There is also the issue that 28 counterparties with differing interests will have influence in the negotiations, each of whom will be unlikely to stay silent on matters that touch on its own, economic and political sensitivities.

In the case of the Chequers proposal there is a very real question as to whether it is realistically feasible at all. By and of itself the first sentence of the list of Chequers proposals raises enough difficult operational questions to indicate that this would be an administrative snake pit. For the EU and the other EEA contracting parties, the UK discretions (rights) sought in the proposal would serve as an ever-present risk to the well-functioning of the Single Market rule-books (which work as systems of rules – the addition or subtraction of a rule can affect the way the other rules function). The detail here can be left aside for current purposes: the only point that matters is that the interim period entailed by a negotiation based on Chequers could be expected to be particularly protracted.

The problem in all this is obvious. It can be reasonably be expected that it will take four years or more, possibly several more years in the case of Chequers, to settle long-term future trading and commercial arrangements. The UK will face four or more years in a sort of fee-paying Limbo. The interim period could be expected to end in 2023 at the earliest, which lies at the far side of the next scheduled General Election.

A double, public stocktaking of how well things are going on the ‘take back control’ agenda can the be expected: the first around the time of the Brexit (29 March 2018), the second at a subsequent General Election. On both occasions the government of the day will likely have to acknowledge that, relative to where the UK stood when in the EU, the UK will have surrendered control, the opposite of the Leave injunction to take back control. No doubt the word ‘temporary’ would be used a lot in the Conservative Party campaign and better things would be promised soon, but, at a General Election in 2022, a record of nearly six years of promising benefits that had not yet arrived would likely pose something of a credibility problem.

Fortuitously, history has presented the UK with a potential solution to the ‘interim period problem’. Evaluated against the principles of best-practice policy making (which in their regulatory version are enshrined in domestic statute) it is pretty much a bull’s eye: it comprehensively deals with the problem by eliminating the interim period. Whilst, being precisely targeted on the ‘interim period problem’, it causes minimal collateral economic harm and has a minimally foreclosing effects on other paths of policy development. Since it rests on an extant international trade agreement, already ratified by all its contracting parties, it can be implemented immediately upon a consensual agreement. Its most accurate shorthand descriptive label is “Norway First”.

The opportunity arises because of the existence of the European Economic Area Agreement (EEAA) and seizing the opportunity is facilitated by the fact that the UK is itself an existing contracting party to that Agreement, and indeed was one of its founding parties. Although not heavily advertised, the draft WA signifies acceptance by both the UK and the EU that the EEA should continue operating for at least the first 21 months of the interim period.

As things stand, the anticipated rollover of the EEAA will be on the basis that the UK continues to be treated as an EU Member State. If that remains the case the UK will fall within the EU governance pillar of the EEA Agreement. There it will be subject to decisions about EU and EEA legislation and about its operation that are taken on the UK’s behalf by the European Commission, supervised by the European Court of Justice, without any significant UK role in the making of that legislation or the taking of decisions.

The position would change, however, if the UK transitioned to the EFTA governance pillar of the EEA Agreement, in which sit Iceland, Liechtenstein and Norway. These sovereign nations do not share EEA competences with the EU as EU Member States do, nor are they subject to the authority of the ECJ. The EFTA States have their own supervisory arrangements.

This is the ‘Norway option’ in its full sense and, if the transition between pillars occurred simultaneously with Brexit (UK withdrawal from the Treaty of Lisbon), it would eliminate the interim period entirely, for trading and regulatory arrangements at least (there would still be need for transitional arrangements in other areas such as customs). If the transition to the EFTA pillar occurred at a later date (than 29/3/19), the interim period would end on that later date, for example three or six months after Brexit Day.

Adopting this pillar-switching approach, the question of the precise nature of the longer-term relationship would be a can that is kicked down the road until after Brexit Day, which is something that will likely happen anyway given the compressed timetable of the Article 50 process. What Norway First would add is UK empowerment during the interim period: in respect of trade-related matters, UK sovereignty would be increased, not diminished, relative to the EU benchmark.

It can be noted at this point that Norway First has a strong resonance with the strategy adopted by the Leave campaigns before the referendum: in a sense it can be viewed as the natural continuation of that strategy. As a matter of conscious choice, those campaigns did not try to specify a ‘plan’ for what should happen in the event of a Leave victory: that would be a matter for democratic determination in the post-referendum period. The electorate voted knowing that the basis of the choice was ‘Leave First and let Government and Parliament determine the future EU relationships later’ vs Remain (although I suspect that few of us expected such hapless governance to follow). Nothing about the strategy was concealed: the can labelled ‘what next?’ was, transparently, to be kicked down the road.

Given that, the only mandate that properly needs to be met by 29 March 2019 is withdrawal from the Treaty of Lisbon. There is no mandate to leave the EEA: it was one of the matters that was put in the kicked can at the time of the referendum. Norway First is therefore a full and complete response to referendum vote: it would deliver the Leave First result that the majority voted for.

A Prime Minister speaking on the day after Brexit could then truthfully say “We have delivered the Brexit mandate to withdraw from the EU and have already achieved the greater part the implied injunction to take back control. We have done that in these areas: [insert list of areas here].” The list of areas would include free movement of workers, which may come as a surprise to many, but is no less true for that: the EU Treaties themselves allow for limitations to be placed on freedom of movement and the EEA Agreement provides greater scope to do that than do the EU Treaties (Lisbon and TFEU), but the really big point is that Norway First would transfer the competences to make the relevant decisions from the EU to the UK. This transfer of competences can be most easily seen at the final sentence of Article 113(3) EEAA, but it runs through the entirety of the EEA Agreement’s provisions.

At the time of writing, Norway First is receiving attention because of interest in a NorwaythenCanada Brexit strategy that has been advocated by the Conservative MP Nick Boles. The strategy comprises an aspiration for a long-term Canada+ agreement, but with the earlier, interim period problem resolved by Norway First. It has very obvious attractions for a significant group of parliamentarians who favour Canada+ or some shallower type of FTA for the longer term, but its key aspect should command a wider support. That key aspect is the elimination of the interim period, i.e. the avoidance of a potentially protracted period of Limbo.

Norway First is directed solely at the interim period problem and can be combined with any of several alternative approaches to the operational long-term agreement period. These include, in increasing order of depth and scope: a bare bones FTA, Canada, Canada+, EFTA, EFTA v2.0, Chequers, Norway (EEA only), Norway (EEA+EFTA), and return to the EU.

The can labelled ‘long-term arrangements’ should, advisedly then, be kicked down the road, and in all probability it will be anyway. It is a can that has given rise to lots of noise, game-playing, and bitter personal rivalries, all of which have distracted attention from the second can in play, which carries the label ‘the interim period’. The contents of the latter can should be dealt with immediately, because the opening of the interim period is getting very close now. The most important question the can contains is: Empowerment or Limbo?

It is not the most difficult question a government has ever faced, but for some reason I cannot suppress a picture in my mind of a UK Prime Minister returning from Brussels with a document that says “Successful Agreement” on the cover, but whose content implies “Limbo in our time”.

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