The Christmas Eve UK-EU free trade deal provided an orderly conclusion to the nearly five-year-long Brexit nightmare. But will Britain really be better positioned to prosper going forward than under the status quo ante? Only time will tell, writes Victor Hill.
Devils in the detail
In the end, almost any deal would have been better than no-deal. The latter outcome would have plunged UK-EU trade into disorder and confusion at the nadir of the coronavirus-induced recession; and it would only have forestalled there being some kind of desperation deal later. The trick for Mr Johnson was to have pulled a rabbit out of the hat which (if you will excuse the mixed metaphor) would not frighten the horses (as in the die-hard Brexiteers in the Tory Party).
What we got out of the 1,246 pages of legalese was something that superficially looks reasonable. There will be no tariffs slapped on British exports to Europe and there will be no quotas imposed either. The UK, out of the single market, will no longer be subject to the rulings of the European Court of Justice (ECJ). So far, so Canada, then. But Clément Beaune, France’s Europe Minister, pointed out that no country in the world will be subject to so many export rules as the UK. That will be regarded by many Eurosceptics as a permanent straitjacket. There will certainly be more non-tariff barriers in the form, for example, of complex customs declarations and certification.
On the vexed issue of state aid, under the terms of the deal, both sides would be obliged to pay the other compensation if any party engages in anti-competitive bailouts of failing companies. An independent adjudicator will oversee the resolution of any disputes (which are sure to arise). Governments must demonstrate that any company that is the recipient of state aid has a credible restructuring plan. Significantly, this condition does not apply to banks (and there are likely to be European bank bailouts in 2021 – on which, more soon).
In terms of the automotive sector, in six years’ time UK manufacturers of electric cars will be subject to tariffs unless they can show that 45 percent of all components used were sourced from the EU. Mike Hawes, CEO of the Society of Motor Manufacturers, said that there is now “an urgent need for the government to create the conditions that will attract large-scale battery manufacturing to the UK”. Nissan welcomed the deal, expressing optimism about the future of its Sunderland plant.
So long, and thanks for all the fish
As for fishing, there will be a five-and-a-half-year transition period during which EU vessels will surrender 25 percent of what they catch in UK waters. That will last until 30th June 2026, after which date British fisherman will net about two thirds of the total catch. That is reasonable as the UK does not have the capacity to fish and process much more than that at present. Thereafter, fishing quotas will be subject to an annual negotiation process to be concluded by 10 December for each year. If Brussels is not satisfied with the outcome of these negotiations, then it may impose sanctions against the UK; but the UK would have the right thereafter to withdraw access to British waters by EU vessels.
There have been howls of objection from fishermen. The National Federation of Fishermen’s Organisations expressed “a profound sense of disillusionment, betrayal and fury…”. When the UK was in the EU, we used to trade fish quotas with European fishermen so as to devise an annual fishing plan. That will now be more difficult – but what we need is a national fishing policy with marine conservation rules. Watch this space.
Just after Christmas Mr Gove, the Chancellor of the Duchy of Lancaster, announced a £100 million funding package for the UK fishing industry. This money will be used to modernise and expend the fishing fleet and the fish processing industry.
Politically, it would have been a disaster for President Macron if the French had had to clear out of British waters on Day One. Fish – and fish culture – loom larger in French (and Spanish) life than in the land where fish and chips is the staple national fast food. Monsieur Macron will probably face Marine Le Pen, the Eurosceptic leader of the Rassemblement National, in the French presidential election of May 2022 – and such an outcome would have been mercilessly used against him. It seems fair to give those plucky French fishermen in their gilets jaunes time to adjust to a new dispensation. But what will that new dispensation look like? The truth is that we just don’t know.
Significantly, the newly independent UK banned pulse trawling on 01 January. This is a method, much favoured by Dutch trawlermen, of sending electronic shocks into the seabed, scaring flat fish such as sole up into waiting nets. This horrible practice can damage the marine environment and can even cause the spines of cod to break.
The political, commercial and social union between Northern Ireland and Great Britain (collectively, the UK) has been undermined. This was foreshadowed in the Withdrawal Agreement by means of which the UK left the European Union on 31 January 2020. The role of Northern Ireland is not provided for under the new deal-treaty. There will be a separate agreement concerning the passage of goods between the GB mainland and Northern Ireland, which remains part of the EU single market. The people of Northern Ireland will be able to determine their future in 2024 when the Northern Irish Assembly will vote on any new protocols.
The fact is that Brexit has placed a wedge between GB and NI, which effectively becomes a third party even if it remains in political union with the rest of the UK. The Brussels mandarins would devoutly wish to see a united Ireland, which would tie up so many loose ends from their point of view. No doubt, President-elect Biden thinks similarly (even though the Republic of Ireland is not in NATO).
And then there is Scotland. The union (as in Scotland-England) has probably not looked more fragile in my lifetime. The surge in support for Scottish separationism is directly attributable to the perception that Scotland has been prised from the European Union against its will. The Holyrood election due in May 2021 will almost certainly result in a decisive win for the SNP. Ms Sturgeon and her party will hail that as a mandate for a second independence referendum. Boris will refuse to grant it. And that will be the beginning of a constitutional crisis of insidious intent.
Ms Sturgeon devoutly wished a no-deal outcome so that she could blame Westminster for the economic consequences. As it is, she has lashed out against some somewhat minor details of the deal. Scottish farmers may no longer send seed potatoes to Northern Ireland (I have no idea why). But there is much righteous indignation and Calvinist gnashing of teeth in seed potatoes.
And Gibraltar becomes part of the Schengen Zone, while Britain becomes a third party. That means that the EU could potentially impose visa restrictions on Britons who wish to visit a British territory. No wonder Gibraltar decidedly voted Remain in 2016.
Unfortunately, while it is game over, the negotiations will have to continue in years to come. A number of technical committees will continue to agonise about aspects of UK regulation indefinitely. The UK financial sector will continue to lobby for equivalence – but that will only be granted at a price. There are apparently 39 different types of equivalence of which the UK-EU deal provides just two. This makes London-based banks less privileged than those headquartered in Sydney, New York and Singapore.
It is unlikely that UK regulation will be able to evolve in a strategically different direction without consequences. The UK is still attached to Europe by an invisible thread: and every so often the twitch upon that thread will snatch us back.
Trade deals done
As Britain crossed the Rubicon of post-EU trade at 23:00 last Thursday evening, a new trade deal was announced with Turkey. One firm set to gain from this is Ford (NYSE:F) which builds 660,000 diesel engines a year in Dagenham (East London) and then ships about 75 percent of them to its Otosan assembly plant in Turkey. These are used in the production of Transit vans, many of which are shipped back to the UK. That exchange alone accounts for about 10 percent of UK-Turkish trade. Imports of white goods (NB Beko and Arcelik) from Turkey to the UK will carry zero tariffs.
Overall, the Department for International Trade (DIT) under Ms Truss has secured about 60 bilateral trade deals in the last year or so – including with Japan, Canada, Switzerland and Mexico – covering about £200 billion of trade annually. The UK exported £164 million of automobiles to Mexico last year and was anxious to avoid WTO tariffs of up to 20 percent. But that is as nothing compared with the 750 agreements that the EU has negotiated around the world.
A trade deal with the USA remains elusive due to differences over agricultural products and animal welfare issues. Even Australia – where Elizabeth II is monarch – is proving a difficult nut to crack. That may be why Mr Johnson has appointed former Australian PM Tony Abbott as advisor to the Board of Trade. Once agreements with Australia and New Zealand are secured, that would be a good vantage point from which to apply for membership of the 11-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) which America, under Mr Biden, might choose to join too. Ms Truss has pledged formally to apply for membership during 2021. Britain’s automotive sector could be a major beneficiary of such a move.
But the Christmas Eve deal requires a high degree of continued alignment between the UK and the EU on labour market regulation, environmental standards, state aid and much else besides. Britain might become a CPTPP member, but it might prove difficult to adhere to CPTPP rules while remaining compatible with EU regulations.
Outlook for the FTSE
On Tuesday last week (29 December) the FTSE-100 opened 2.3 percent higher. AstraZeneca was up 6 percent on the back of rumours that the Oxford University-AstraZeneca vaccine was on the cusp of approval – and then rose a further 1.6 percent when that approval was confirmed on Wednesday. On the other hand, bank stocks were down, given the lack of specific provision for financial services within the agreement – especially Barclays (LON:BARC), Lloyds (LON:LLOY) and NatWest (LON:NWG). The FTSE-100 ended the week at its highest level since early March.
The pound has been buoyant against the dollar at $1.37 this morning (04 January), though it is still looking weak against the mighty euro. Gold firmed while Brent Crude retreated modestly. I’ll take a look at the outlook for oil stocks early in the New Year.
Overall, the outlook for the London market in 2021 looks positive, with the prospect of recovering earnings and a slew of high-tech IPOs due to launch in London, including Deliveroo, Darktrace, Trustpilot, Moonpig and musicMagpie. (On these, more soon.) There is a high degree of confidence in the City that it will retain its pre-eminence amongst the major international financial markets. The commentator Mathew Lynn has speculated that once we manage to put Covid-19 behind us – possibly as soon as Q3 2021 – the FTSE-100 could reach 10,000 in reasonably short order.
Was it all worth it?
The Brexit referendum came about because the people who controlled the Tory Party wanted to strike a knockout blow against the Eurosceptic forces which had coalesced around Mr Farage’s UK Independence Party. By so doing, they would paralyse the forces of Brexit within the Tory party itself represented by the European Research Group (Mr Rees-Mogg et al). But to this end they were supported by Labour and even the Lib-Dems who wanted to stymie those anti-progressive forces who opposed, amongst other things, large-scale immigration. On 09 June 2015, the House of Commons approved the European Union Referendum Act by 544 votes to 53. Only the Scottish National Party opposed it.
Mr Cameron, as with almost everyone else on the Remain side, assumed that the referendum would be easily winnable – and ran a lacklustre campaign, in contrast the focused messaging of Mr Cummings and others. Even after the enormity of the result, most Remainers within the establishment were convinced that the outcome could be reversed.
The narrow margin of 52-48 percent was never a mandate for a hard Brexit, leaving Britain outside the customs union and the single market. The referendum might easily have gone the other way had it been held later – and had Remain focused more on educating the public about the tangible advantages of EU membership instead of trying to terrify people about the consequences of leaving. I also think that the referendum came at a moment when a huge number of Baby Boomers had just discovered social media and became trapped in digital echo chambers which amplified their preconceptions. (That’s something I’d like to explore elsewhere this year.)
There was never a movement on the Remain side to pursue a moderated Brexit by, for example, joining EFTA (as former Tory MEP Dan Hannan advocated). Once in play, a hard Brexit became inevitable.
The four-and-a-half years between 23 June 2016 and Christmas Eve 2020 will not be seen as Britain’s finest hour. The acrimony at every level of society, the infighting, the parliamentary balletics; the sackings, the resignations and excommunications; the endlessly tedious arguments; the amount of energy that could have been directed elsewhere – not least to the task of building a low-carbon economy: all these things became a ball and chain around Britain’s feet.
Clearly, Britain has lost prestige abroad – a country that spent over 45 years in the House of Europe and then flounced out for reasons that were never well explained, and which most Europeans still find inexplicable. The traditional home of empiricism and pragmatism was exposed as a nation of flaky ideological factions.
Besides, the world has changed since the summer of 2016 in at least three fundamental ways.
Firstly, China has emerged as a real and present danger. In Covid year, China cynically and ruthlessly immolated Hong Kong’s special status in outright defiance of the Sino-British Declaration of 1984. Not only are so-called pro-democracy activists being persecuted but now Christians too. And the West has shown itself entirely unable to respond. Meanwhile, China’s little brother, Russia, has become a perennial cyber-pest. With one tenth of China’s population and less than one tenth of its GDP, Russia, whose economy is still almost entirely dependent on the export of hydrocarbons, demand for which is declining, feels it has nothing to lose. Britain once wielded some clout in Moscow; I doubt it still does now.
Second, America under Mr Trump, has shown itself to be a highly unreliable partner in the support of democratic values and in its response to the unfolding climate crisis. Mr Biden’s presidency may represent some kind of regression to the norm; but America emerges from the Trump presidency much weakened by the culture wars (critical race theoryand all that jazz). This fragmentation of the West must sound like music in Beijing. The almost total absence of a solid security framework in the UK-EU “trade” deal is thus likely to become a source of anguish in the future.
Third, one of the major themes of the remainder of this decade is likely to be how to regulate (or perhaps to socialise) rampant big tech. The UK-EU agreement leaves the UK with less access to global data sets. Evidently, Britain will have to follow either the European or the American regulation model (though what the latter will look like is unclear). We shall not be regaining much sovereignty in cyberspace.
Many people, myself included, will never forgive the loss of freedom of movement. Whereas hitherto, British citizens had the right to live, work or retire in any part of the EU, we will soon require e-visas (as for America) and our presence there will be tolerated only for up to three months at a time. Roaming charges for mobile phone calls will soar. Transaction charges will rise; there is no deal on sharing data about criminals nor even on services generally (mind you, there never was a real single market in services).
Brexit was always going to be an extremely high-risk gamble, with so much that could go awry. Only time will tell if it has paid off. The dissolution of the union of England and Scotland would be an incredibly high price to pay for Mr Cameron’s Gamble (as I described it in November 2015).
As Pope John-Paul II once asked a congregation: How did you use your freedom? Let’s hope that this and future governments can use restored sovereignty to galvanise this country. As it happens, 2021 offers the chance to showcase Global Britain: the UK takes the presidency of the G7; it chairs the Commonwealth; and Britain will be the host for the COP-26 climate summit in Glasgow in November. By this time next year, we’ll know if Global Britain stacks up – or not.
When British Prime Minister Edward Heath entered the Egremont Palace, Brussels, to sign the Treaty of Accession to the European Union on 22 January 1972, he was splattered with ink by a protestor. It took him over one hour to get cleaned up – then the ceremony proceeded.
The ink-thrower had registered as a photographer from a non-existent newspaper, the England-Sweden Times, which is how she managed to get into the press core. She offered the name Karen Cooper, but it turned out that her name was really Marie Louise Kwiatkowski, born in Murnau, Germany in 1941, a resident of Sweden but living in London. Kwiatkowski was not prosecuted because Heath did not want to press charges.
That incident struck everybody at the time as a bad omen (I was 13 then, but still vividly remember it).
Winston Churchill, a Francophile, wrote in 1930:
We are with Europe but not of it. We are linked with it but not compromised, interested and associated, but not absorbed.
So why did the British political elite dally with Europe at all from the late 1960s onwards?
Oh dear. That’s another long story.