Brexit: The Tipping Point

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20 mins. to read
Brexit: The Tipping Point
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The UK government finally published the long-awaited white paper on the shape of Brexit on 12 July. Just how soft a Brexit does this entail? Will the Tory Party wear it, even in amended form? And will the Europeans buy it?

The lady delivers the “Chequers Plan”

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The United Kingdom will leave the European Union on 29 March 2019 and begin to chart a new course in the world.

This is the opening paragraph of the historic government white paper entitled The future relationship between the United Kingdom and the European Union[i], which the cabinet endorsed at Chequers on 06 July. For over two years the European mandarinate had been muttering about wanting to know what the British really wanted. But, so far, the publication of a detailed plan has rendered them mute.

The document will only be read by Brexit anoraks (myself amongst their number) as it is a 104-page tract written by functionaries in technical language for the benefit of apparatchiks. Of those 104 pages only 37 are dedicated to the real meat – the economic partnership – which sets out the nature of the trading relationship between the EU and the UK post-Brexit. It is highly aspirational and surprisingly vague.

What are Mrs May and her remnant cabinet really proposing? Why don’t the Tory Ultras like it and (more importantly) will Monsieur Barnier say Non!?

The proposed economic partnership

The Chequers agreement aspires to achieve frictionless trade[ii] for goods. To this end the white paper proposes a free trade area in goods (though not services – there is no single market in services anyway). In order to sustain cross-border supply chains which operate on a just-in-time (JIT) basis, there will be no need for customs and regulatory checks at the border, nor will customs declarations be necessary. There will be just one set of approvals and authorisations – these obviously emanating from Europe. As a result, there would be no need for a hard border between Northern Ireland and the Irish Republic.

The government is proposing reciprocal commitments that will ensure UK businesses continue to operate in EU markets, and EU businesses operate in the UK as before. To this end there will be a common rulebook for all goods (including food and drink). That means effectively that the UK would have to conform to all EU regulations even though it would have no say in making them.

The UK will continue to participate in the principal EU agencies that regulate business activities – namely the European Chemicals Agency, the European Aviation Safety Agency, and the European Medicines Agency. The UK will accept the rules of these agencies and contribute to their costs even though it will not be a member of the EU.

The UK would have to conform to all EU regulations even though it would have no say in making them.

A new facilitated customs arrangement will be implemented in phases that would remove the need for customs checks and controls between the UK and the EU which will become a combined customs territory. The UK will control its own tariffs for trade with non-EU countries. There will be no tariffs on goods crossing the UK-EU border.

There will be new arrangements on services and the digital economy, ensuring regulatory freedom for the UK’s services-oriented economy. Similarly, there will be new economic and regulatory arrangements for financial services which will respect the right of the UK and the EU to control access to their own markets. The white paper notes that these arrangements will not replicate the EU’s passporting regimes.

The white paper envisages continued cooperation on energy and transport – preserving the single electricity market in Ireland, seeking to cooperate on energy, developing an air transport agreement, and exploring reciprocal arrangements for road hauliers and passenger transport operators.

The UK will regain control of its borders while enabling UK and EU citizens to continue to travel to one another’s other’s countries, and businesses and professionals to provide services. (So, no restrictions on Bulgarians setting up in the UK as self-employed plumbers, then, for example.)

There will be a common rulebook for state aid, establishing cooperative arrangements between regulators on competition, and agreeing to maintain high standards.

Making sense of it

In other words the UK must promise not to water down inter alia environmental and employment regulations. So we’ve got to continue to keep our beaches clean (quite right) and to maintain the working time directive (questionable). The UK parliament will have the right to decide which EU legislation it deviates from in the future, recognising there could be proportionate implications for the operation of the future relationship where the UK and the EU had a common rulebook.

We get a free trade area for goods by means of a treaty to harmonise EU rules on goods for evermore. But, as Shankar Singham[iii] has pointed out, harmonisation and a common rulebook are very different things. Harmonisation is consistent with a comprehensive trade agreement which would permit the UK to have an independent trade policy regulated by some kind of joint committee – not the European Court of Justice (ECJ). A common rulebook – i.e. all rules made in Brussels and adjudicated by the ECJ – would make it very difficult for the UK to strike trade deals with other countries – unless the benefits of those deals to services outweighed additional frictions associated with the export of goods to the EU.

the white paper amounts to remaining in Customs Union by another name.

Moreover, it seems that the EU will continue to collect tariffs on goods destined for the EU and pay them over to Brussels. Conversely, a mechanism would have to be devised to repay UK businesses importing goods solely for UK consumption, assuming UK tariffs on, say, Kenyan pineapples, were lower than those imposed by the EU.

As Mr Singham revealed, a delegation of experienced international trade negotiators visited the IEA in late June. He writes: “They made it clear that for the UK to have any kind of independent trade policy it must have regulatory autonomy, and be able to diverge from EU regulation in all areas”.

As far as I can see, the white paper amounts to remaining in Customs Union by another name. It might be called Associate Membership of the EU. But if Brussels were to accept that you can be sure that Hungary and others would be baying for EU-lite status too…Which is why unless there is a fundamental change of mood they will almost certainly say Non!

Tory torture

Thus far, as I write, Mrs May has lost ten ministers from her government since the away-day at Chequers on 06 July, the most prominent resignations being those of the Brexit Secretary Mr Davis and the Foreign Secretary, Mr Johnson. That in itself is politically unprecedented. Those ten Brexit ultras return to the back benches where they can propagate further dissent. To his great credit, Mr Davis has adopted a conciliatory tone, describing Mrs May as “a good Prime Minister”. Mr Johnson kept purdah until his resignation speech on 18 July – even when President Trump, stirring the bubbling cauldron vigorously, described him as a very good friend of mine who would make a great Prime Minister.

Mrs May knew that the Chequers Plan and the white paper would be opposed by the Ultras. Mr Rees-Mogg – who now chairs the European Reform Group (ERG), the torch-bearer for hard-line Brexiteers – was soon on the airwaves describing the plan as one which reduced the United Kingdom to the status of a vassal state. Peter Bone, MP for Wellingborough, accused Mrs May of surrender[iv]. Mr Johnson thinks it is a miserable plan. Mrs May’s effective defence was Mrs Thatcher’s leitmotif: there is no alternative. She even suggested that if the Chequers Plan were abandoned there might be no Brexit at all.

What Mrs May probably found more surprising was that the Remain tendency within the Tory Party, instead of rejoicing that a de facto soft Brexit was within their grasp, took the publication of the white paper as an opportunity to derail Brexit altogether. Their favoured means of doing this is a second referendum – which presumably they assume will yield a different result to that of 2016.

The Ultras cannot oust May but they can effectively block any initiative the government makes.

The parliamentary arithmetic is delicate. Of the 317 seats the Tories won at last year’s election there are about 80-100 hard-line Brexiteers (I call them Ultras). There are just 15 or so fervent Remainers, for whom Ms Soubry is the shrill fairy godmother. The other 180-200 are what The Academic Agent calls Brexit Pragmatists & Careerists who are more disposed to compromise. The Tory constituency associations are overwhelmingly run by Ultras which puts more pro-Brexit pressure on MPs. In addition, the 10 DUP members (Northern Ireland) can be relied upon to support the Ultras.

In order to remove Mrs May, the same rules apply as were applied when Tory MPs assassinated Mrs Thatcher in 1990. They would need a request for a ballot from 48 MPs and then they would have to secure 159 votes against her. That is very unlikely to happen as none of the Tory Brexit Pragmatists will vote against the PM. So the Ultras cannot oust May but they can effectively block any initiative the government makes.

Last weekend, while all eyes were on President Trump, Mr Rees-Mogg set to work to draft four key amendments to the white paper (technically to the Trade Bill) which would change its impact fundamentally. It was the Mogg-amended bill that went through the House on Monday evening.

A frenetic week in the Brexit circus

On Monday (16 July) another ex-cabinet minister with a grievance came up for air and was lavished with attention by the BBC and the rest of the mainstream media. Ms Greening’s proposal is that the British people should be afforded, not a binary referendum like the last one, but a menu of three options: the Chequers Plan; no deal; or remain in the EU.

It is not difficult to determine why this proposal is ill judged. What would happen if the British people, in their infinite wisdom, accorded each option one third of their support? Could this referendum really be staged before 29 March 2019 so that Article 50 could be rescinded at one minute to midnight?

And even if Remain were to gain a majority of votes cast, what precisely would the UK be returning to and on what terms? The EU today is not the same entity that it was two years ago. Thanks to President Macron’s mania for further integration within the eurozone, it is rapidly acquiring fiscal powers to match the monetary sway of the ECB. Would awkward squad Britain still benefit from a budget rebate after two years of outrageous, churlish hooliganism?

Instead of being led away by women in flapping white coats, Ms Greening was ushered into every TV studio going to disseminate her wacky drivel.

But instead of being led away by women in flapping white coats, Ms Greening was ushered into every TV studio going to disseminate her wacky drivel. Just as Labour’s Chuka Umunna, MP for Streatham, is given every opportunity to promote his plan for a second referendum though it is not even Labour Party policy.

In any case, within days the white paper was subjected to amendments by two distinct groups. The Brexit Ultras (inevitably) condemned the white paper as a sell-out – even a betrayal. The fervently Remain wing on the Tory backbenches pronounced that Mrs May’s solution was a worse dispensation than the status quo ante (and they have a point).

On Monday (16 July) the Customs Bill was amended after Government concessions by 305 votes to 302. The amendments amounted to a requirement for reciprocity: the UK will only collect tariffs on behalf of the EU if the EU agrees to collect any putative tariffs on behalf of the UK. This was regarded as round one to the Tory Ultras.

On Tuesday (17 July) the Trade Bill came back to the House of Commons. This is an essential piece of Brexit legislation which will put in place the legislative framework allowing the UK to operate its own independent trade policy post-Brexit. As expected, Tory rebels hostile to Brexit joined with pro-EU members on the Opposition benches to table amendments seeking to make membership of a customs union with the EU a negotiating objective.

Another amendment (a new Clause 18) tabled by Nicky Morgan and Stephen Hammond proposed that the Government seek an international agreement to enable the UK “to establish a frictionless free trade area for goods between the UK and the EU”. If this were not achieved by 21st January 2019 then the existing customs union would kick in. This amendment was defeated by a wafer-thin margin of six votes thanks to four prominent Labour Leavers – despite 12 Tory Remainers voting against their own government.

Just as King Charles I dismissed a fractious parliament in 1642, so Mrs May might be better off without this one.

On Wednesday (18 July) rumours that parliament might be adjourned early were denied. Just as King Charles I dismissed a fractious parliament in 1642, so Mrs May might be better off without this one. Except that the unfortunate King precipitated a civil war on that occasion, which culminated in his own execution.

Ms Soubry opined on BBC R4 that Mr Rees-Mogg had seized power and that there was a desperate need for a government of national unity. (But who would lead it, Ms Soubry? – and what would be its Brexit plan?) This is because, as The Academic Agent says, the Ultras have now taken Mrs May hostage and challenged the Remainers to oust her – which they can’t.

The Prime Minister was combative at PMQs, demolishing Mr Corbyn with ease. She tried to persuade the House that the four amendments passed on Monday night were in keeping with the original white paper.

On Thursday (19 July) the new Brexit Secretary, Mr Raab, actually got a face-to-face meeting with Monsieur Barnier – something that had eluded his predecessor for about six months.

Conspiracies within conspiracies

If there is a conspiracy by the cross-party Remain tendency to hold a second referendum – as if one were not explosive enough – there is also a plot to prove that the first referendum was illegitimate.

On Tuesday (17 July) the Electoral Commission ruled that Vote Leave, the official voice of the Leavers, had cheated during the referendum campaign and referred two of its senior members to the police. Vote Leave was fined £61,000 for allegedly over-spending by £500,000. The Electoral Commission is a quasi-independent body set up by parliament to identify electoral malpractice in England, though it has been severely criticised by Leavers as all its members are voluble Remainers. Mr Umunna told the House of Commons that the findings called into question the legitimacy of the entire Brexit process. In saying this he was supported by the veteran Tory MP, Sir Nicholas Soames.

It is as if David were being sued by Goliath for overspending on slingshots.

Mr Umunna did not say that during the campaign the Cameron government spent £9.3 million of public money sending out daft glossy leaflets extolling the virtues of the EU – the cost of which did not come within the purview of the Electoral Commission. Nor did he mention that the entire mainstream media, the City, big business, the poll tax-funded BBC and the Anglican Church pumped out pro-EU propaganda for the entire four months of the campaign.

It is as if David were being sued by Goliath for overspending on slingshots.

Labour’s position

The Labour Party went to the polls at the last election on a ticket of leaving the EU – and the customs union. In the last year, however, its stance on Europe has been so equivocal, so fickle and so vague that it is difficult to determine what Labour’s negotiating position might be. The only thing we know for sure is that Labour will do anything they can to damage the Tory government – even if that undermines the government’s negotiating position in Europe.

It is unlikely that Labour will save Mrs May’s bacon by backing the Chequers Plan – even though it seems close to what Sir Keir Starmer has been advocating of late. The Parliamentary Labour Party, 258 strong, is as divided on Brexit as the Tories are. Opinions range from those of Kate Hoey, MP for Vauxhall, who is an inner-city Moggist with a County Antrim accent, to the aforementioned Mr Umunna, a better looking, sharper suited and soberer disciple of Jean-Claude Juncker. On the ground, it seems that working class Labour supporters are pro-Brexit while Labourite metropolitan professionals (almost all of the BBC, then) are fervent Remainers.

The only thing we know for sure is that Labour will do anything they can to damage the Tory government – even if that undermines the government’s negotiating position in Europe.

Mr Corbyn has therefore sought to remain, like a good constitutional monarch, above the fray. In reality, as I have explained before, he regards the EU as an obstacle to the red-blooded socialist policies he would like to pursue – but of course he does not say that.

How did we get here?

Mr Cameron promised that a referendum on Britain’s membership of the EU would resolve the matter once and for all. He could not have been more wrong. As I wrote at the time, holding the referendum was a foolish gamble – supported, by the way, not just by a Tory cabinet but by Sir Clegg and the entire Silly Party. The outcome has split the Tory Party three ways. The Tory Ultras are at war with the softies (of which Mrs May) and both of those are at war with the recusant Remainers.

Mr Cameron, as we know, did not have a Plan B – except to press the self-destruct button. (If he had been Japanese he might have committed seppuku on the steps of Downing Street – which would have been more diverting than his resignation.) Nor did anyone in the Leave campaign have any roadmap for Brexit. Quite apart from what the Europeans are likely to agree to, there has been no Brexit plan around which all Brexiteers can agree.

You cannot trash 45 years of complex integration overnight without extreme dislocation.

If Mrs May had led the Tories to a convincing victory in last year’s election, things might have been different. Thanks to the Tories’ shambolic campaign, that was not to be. We knew that a hard Brexit was going to be impossible at 22:00 hours on 08 June last year when the exit polls accurately predicted a hung parliament.

You cannot trash 45 years of complex integration overnight without extreme dislocation. The British public has no appetite for such dislocation and a divided government and parliament knows it would be held accountable. Therefore, a nuanced (i.e. very soft) Brexit is the best compromise – but the Ultras will never agree. The Tory Party’s civil war will persist indefinitely.

The shadow of Suez

Mathew Parris has compared Brexit to the Suez Crisis of 1956 – the moment at which Britain was effectively demoted from the first class lounge of world affairs to supping with the shattered Europeans below stairs. But the demotion of 1956 was the culmination of the consequences of World War II – when just two super-powers emerged from the foray, each surrounded by supplicants.

At the Yalta Conference in February 1945 between the “Big Three” war leaders, Churchill (by then 70 years old) dozed off during a late night confabulation between the legendary British leader, President Roosevelt and Comrade Stalin. Stalin stopped talking, paused – and then winked at Roosevelt. That was the moment when the British Empire died[v].

Suez was also the swansong of the French Empire – and the watershed event that forced the French to look East across the Rhine to Germany. They concluded that the only way forward was to embrace their hated adversary – and the entire European project is a consequence of that unhappy arranged marriage.

Should we learn from the British experience of Suez or the French? I still think that Britain would be best off in the company of kindred English-speaking nations which share a common legal system and head of state – Canada, Australia and New Zealand. (Not the USA! Any trade deal with them will cause trouble.) But it is extraordinary that very few leading politicians have articulated this “CANZUK” vision, with the noble exception of Daniel Hannan MEP.

Getting to Non!

President De Gaulle’s first rule of negotiation was very simple: Begin by saying no! He was good at this and it usually worked. When Britain applied to join the EU in 1961 the General dismissed our application. He argued that if Britain were to be admitted America would no doubt follow – an Anglo-Saxon takeover. Monsieur Barnier understands de Gaulle’s negotiating tactics very well as they run deep in the French psyche. One of the nation’s favourite words is impossible (pronounced with tightly shrugging shoulders).

Beyond that, the Europeans (who are at least as intelligent as we are) understand that it is not worth agreeing to a deal that will only later be rejected by the British parliament. They have been observing events in Britain very carefully. It is much easier to negotiate with a strong man (as Mr Trump knows) than a weak one. A weak man can promise you anything – but will be unable to deliver.

There is the real possibility that time will be called and both sides walk away towards no deal.

As I see it, the reason for the radio silence in Brussels is that they are waiting to see which way the wind blows. If Mrs May regains her authority and looks like being able to drive a soft Brexit through parliament, that is one thing. If she is toppled and replaced by Mr Johnson (very unlikely in my view) that is another. If the second referendum movement gets its way – that also offers a number of possible scenarios (all of them bad in my view). And then there is the real possibility that time will be called and both sides walk away towards no deal.

In any case, August is almost upon us, when much of Europe closes down completely. Best to hit the beach – and wait to see what those mad British are up to in September.

What investors should make of it?

Britain is in an unprecedented political void. Mrs May’s government is under siege – yet there is no alternative candidate Prime Minister to challenge the reluctant Remainer who became a reluctant Leaver. There is no one who could unite the Tory Party around a credible Brexit plan. The country is exhausted by Brexit, which is now sucking the life blood out of government. Nobody knows for sure what is going to happen next: but we can speculate.

Enjoy the sunshine while it lasts: but prepare for rain, for rain it will.

Come September-October the Ultra-amended Chequers Agreement (as embodied by the Trade and Customs Acts) will be formally laid before Monsieur Barnier – and he will reject it. Parliament will have to vote again. The Ultras will stymie any attempts by the Prime Minister to go back to the original white paper. But what if Mrs May tried to push it through with the support of the Lib Dems, the SNP and upstanding Labour Remainers? That would be the cue for her party to launch a leadership challenge – which would fail. A crippled government will limp on until there is an election – which Labour will most likely win.

A no deal, chaotic Brexit is now the most likely outcome, whether the politicians or the people want it or not. The markets will not like it – and the pound will slide further.

The novelist Amanda Craig recently wrote that, in the British novelistic tradition, a glorious summer implies that something is about to go horribly wrong[vi].

Enjoy the sunshine while it lasts: but prepare for rain, for rain it will.


[i]Download at: https://www.gov.uk/government/publications/the-future-relationship-between-the-united-kingdom-and-the-european-union

[ii]Bold denotes the key new jargon that the white paper introduces.

[iii]Director of International Trade and Competition at the IEA. See article in the Sunday Telegraph, 08 July 2018.

[iv]See: https://www.express.co.uk/news/uk/989131/Brexit-news-latest-update-EU-WTO-deal-Theresa-May-Andrew-Marr-BBC

[v]Incidentally, Roosevelt died two months later from a stroke but Churchill lived for another 20 years.

[vi]Sunday Telegraph, 08 July 2018: From Atonement to the Go-Between, British novelists love a heatwave.

Comments (3)

  • Tim says:

    Thanks for this. Very informative. Appreciated by this reader.

  • Lawman says:

    A fair summary by Mr Hill: it is unusual to have a balanced assessment without additional snide comments that Remainers/ Leavers [delete inapplicable alternative] are mad, bad or both.

    The only unanimous agreement is that it is a mess; and the Conservatives will be judged harshly. There is no obvious solution. As such, although another referendum sounds dire, perhaps we do need a definitive authority from the populace on the basis suggested by Miss Greening 3 options, with Single Transferable Vote. Failing this legitimization of the final decision, the people could be angry and fragmented for a long time.

    The U.K. must now prepare for a hard break next March 29th. Can Master Investor (Mr Hill) please publish an article on the implications for us as investors: sell UK equities & bonds and buy overseas assets?

    As a very different matter, what if we have a Corbyn government with the risk of confiscation and Exchange Controls? Sell everything and buy physical gold to be held in Canada or Switzerland?

  • Victor Hill says:

    Hi Lawman – the implications of a no-deal, chaotic Brexit will manifest themselves well before 30 March 2019 – possibly as early as this Christmas when big business and the markets react to the view that we are about to fall off a cliff (which will be disseminated manically 24/7 by the BBC and the rest of the mainstream media). Panic will ensue as a self-fulfilling prophesy… I shall indeed write soon about the consequences of a no deal Brexit as I now believe that there is an outside chance that the entire Eurozone banking system will be plunged into critical systemic failure once the EU closes down access to the London-based derivatives markets which has kept it going despite its inherent weaknesses thus far…This is going to be the biggest game of Chicken ever…Keep reading and keep posting. Victor

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