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Shanker Singham: Brexit – and why the transition period must not be extended beyond December this year

Written by Shanker A.Singham

As Covid-19 rages around us, putting the economy of this country and the world into a self-induced coma, EU officials and some in the UK have questioned whether the ambitious deadline of concluding the EU-UK FTA by December this year has in fact been rendered a “fantasy land”

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As Covid-19 rages around us, putting the economy of this country and the world into a self-induced coma, EU officials and some in the UK have questioned whether the ambitious deadline of concluding the EU-UK FTA by December this year has in fact been rendered a “fantasy land”  – and argued there should be an extension of the transition period. While the EU is unlikely to seek an extension, it expects and hopes that the UK will. But if the UK were to make such a request, it would be falling into a trap from which it might never escape.

I am a realist, and I have nothing against the idea of taking on board the force majeure event that we are currently living through. But this should not be conflated with extending transition on its current terms.

Transtion is extremely unfavourable to the UK for a number of reasons, and while it might be justifiable for a short period, the UK cannot afford to be under these terms for a moment longer than necessary.

In transition, the UK remains under the Common Commercial Policy (CCP) of the EU. This means that it will remain bound by the EU’s trade policies for the duration of the extension, which will be either an extra year or two years. If in that time, as seems likely, the United States imposes a range of retaliatory tariffs on the EU, the UK would not be able to escape them, whereas the US administration seems anxious to conclude a deal with the UK as soon as possible, and put its arrangements on a different footing from those it has with the EU.

The Covid-19 crisis has demonstrated the propensity for member states to embrace various forms of trade protectionism – in particular export restrictions on medical equipment,m and so on. The UK has a very different approach, but will not be able to execute on any of this while bound by the CCP.

The CCP means that countries with which we are negotiating, such as the US, Australia, New Zealand, Japan and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) countries will no longer have the certainty that their deals can be implemented in any reasonable time frame.

The crisis has accelerated those timetables rather than slowed them. We will need to do everything in our power to revive the comatose economy once we are out of our various lockdowns. Asia is likely to come out of this crisis faster, and the CPTPP countries are presently looking for other countries to join. We have finally convinced these countries that we are like any other country negotiating with the EU, and they do not need to wait to see what our arrangements with the EU will be before they negotiate with us. This hard won advantage will be lost if we extend and remain under the CCP as our other trade partners will not want to expend political capital when the UK’s position is less certain.

Of particular importance is getting on with the US negotiation, which is the cornerstone of the UK’s independent trade strategy. This is even more important now, as we need rapid private sector growth, since governments have raised their own debt levels to unprecedented and frankly unsupportable levels. The UK economy will have to look every bit as entrepreneurial as the US’ is to generate and scale new businesses. It is vital that we diversify our supply chains through new FTAs and reduction of trade barriers to UK exports in a host of countries. And it is vital we use those relationships to create larger zones for new and efficient supply chains, such as UK-US financial services and defence areas.

Radical steps will be needed to help developing countries to escape this Coronavirus catastrophe. The UK will have no flexibility to execute them, and help to build private sector growth in these countries if it has to continue the EU’s policy of regulatory bans on the very agricultural products these countries export. This is also a reason to oppose the Hoare amendment to the Agriculture Bill, which would gut that trade completely, depriving developing countries of the agricultural exports which constitute perhaps their only path out of the crisis.

We are regulatory rule-takers under the Withdrawal Agreement – the worst of all worlds. To be in this position for a short time is not fatal. But to remain in it for any longer than necessary when we know the EU is fearful of a competitive UK on its doorstep would be extremely foolish, and leave the fragile economy we will have after Covid-19 very vulnerable.

Importantly, the parties are much closer than the media would have you believe. Indeed, many of the so-called differences – such as the EU’s level playing field requirements, for example – are relatively easy to resolve if the parties behave in a commercial and economically rationale manner, something they will be forced to do because of the huge economic hole we are now in.

The UK has already agreed it will have its own anti-subsidy regime, and if the EU wants to specify what should be in that regime at a high level that would not be objectionable. The UK has already agreed not to lower labour and environmental laws to secure trade advantage. And on regulation, the economic imperative will be on maximum mutual recognition within a free trade agreement context.

Fisheries access is regularly negotiated among members of the North East Atlantic Fisheries Commission and other Regional Fisheries Management Organisations, and the dispute about the overall structure of the relationship is more about the container for the relationship rather than the relationship itself.

On Northern Ireland, the UK does have to come forward with a plan to manage the GB-NI trade channel. The UK can certainly suggest one based on segmentation of the trade, and tiered layers of trade, taking advantage of the fact that most of the trade is carried by big firms that qualify for Authorised Economic Operator plus plus status now. Both sides now want a free trade agreement, and the economic meltdown occurring all around us will force them to agree a comprehensive one.

If I were the EU, and I wanted to tie the UK’s hands while I attended to my own existential crises, I’d want it to beg for an extension and lock it in the waiting room, while I attended to my own problems, safe in the knowledge that their capacity for necessary independent action had been choked off.

But how would the world be better off if we continued with the indecision and uncertainty of an extended transition? We simply don’t have the luxury for business as usual. The political forces on both parties to get to a deal as a matter of urgency and dispense with the games playing, and the phony war. We are now in a real one, and the virus and the economic coma it has induced is the real enemy. The crisis and the compression of a deadline will lead to the result we all need.

We may have to recognise the pause in the global economic system that the virus has forced us to collectively impose on ourselves. But that does not mean that the terms of the transition period should continue beyond December 2020. Furthermore, it is crucial that we separate out the period of time during which the UK and EU are actually negotiating, when we are uncertain as to the results of that negotiation, and the time spent ratifying and implementing whatever was agreed. There is scope for flexibility in the latter, but not in the former.

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About the author

Shanker A.Singham

Shanker Singham is Chairman of Global Vision, CEO of Competere and former advisor to UK Trade Secretary and USTR