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Brexiteers be alert for a ‘Chequers Mk.2’ deal

Chequers House
Written by Harry Western

The Government may be mulling a Chequers mark-2 deal. Brexiteers need to remain alert

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If the Brexit trade deal outlined in James Forsyth’s recent piece for the Spectator accurately reflects UK government thinking, supporters of a genuine Brexit should be deeply alarmed. The key paragraph runs as follows –

‘A deal could declare that the UK has the sovereign right to move away from the EU’s level playing field should it so choose. But if it did, the EU would have the right to impose tariffs on UK goods. This would allow both sides to claim satisfaction. Johnson could say that the UK has the right to chart its own course without being bound by EU rules, while Brussels can point out that it has the tools to respond to any UK attempt to undercut it.’

The obviously fudged nature of what is being proposed here, along with the emphasis on political optics, should immediately raise concerns. But more worrying still are firstly, the intellectual pedigree of this notion, and secondly, how such a scheme would work in practice.

The idea outlined by Forsyth is not new. Its origins date back at least to 2017 and the notion of ‘managed divergence’ that inspired Theresa May’s much reviled Chequers agreement – an agreement that led to cabinet resignations and eventually the collapse of her premiership. More recently, something similar has been floated by sources close to the EU. These antecedents are not promising.

The scheme has superficial attractions. It recognises that the UK and EU start from a fully aligned position on regulations and with zero tariffs and quantitative restrictions yet appears to open up a route for the two sides to gradually diverge over time. There is no initial ‘cliff edge’ at the end of 2020 when the full panoply of trade restrictions kicks in.

But in practice there would be huge problems with such an approach –

  • How would it be decided whether regulations had ‘diverged’? How big would such a ‘divergence’ need to be to trigger penalties?
  • Would divergence ‘penalties’ apply to all sectors? How would this be decided?
  • How large would such ‘penalties’ be?
  • Would penalties be entirely reciprocal?
  • Perhaps most importantly, would ‘divergence’ be judged at a purely sectoral level e.g. cars or aerospace, or also with reference to horizontal regulations on state aid, labour standards, the environment and taxation – i.e. the EU’s much-vaunted ‘level playing field’? Would a change in UK state aid policy, for example, mean higher tariffs on all UK goods, or just some sectors?

Governing such an agreement would be a nightmare and lead to constant conflict, even if an agreed process for doing so could be set up – the EU would surely demand ECJ involvement (direct or indirect e.g. via the EFTA court) and expansive rights to retaliate against perceived divergences in one sector by hitting others.

The risk would be that huge pressures would be created for the UK to avoid diverging from EU rules, both the current rules and any the EU might choose to introduce in the future as divergences would trigger trade penalties. Any proposed changes to UK regulations – perhaps even the most minor of changes ¬- would lead to threats from the EU and aggressive lobbying by businesses. This would mean the UK effectively being drawn into dynamic alignment with the EU, precisely the state of affairs the government has (rightly) categorically ruled out over the last six months or so.
Needless to say, as well as stymying sensible regulatory reform in the UK and leaving it wide open to regulatory attack from the EU (i.e. they knowingly propose something harmful to the UK and wait for us to follow with the threat of trade sanctions, perhaps falling on entirely unrelated sectors, if we don’t), this would also make negotiating good-quality trade deals with other partners, where some regulatory give and take is a normal feature, very difficult.

As well as this, such a setup could institutionalise business uncertainty. Firms might benefit from free trade today but could see this change unexpectedly in the future – not a recipe for long-term investment. It makes much more sense for trade arrangements to be settled clearly, even on WTO terms, than to create a situation like this.

Talk of the UK also redeploying some of its aid budget to eastern Europe and the Balkans should also be a serious concern, as this looks uncomfortably like a disguised financial contribution to the EU.

Overall then, these proposals look very worrying. The agreement set out in Forsyth’s piece looks a lot like a reheated version of May’s doomed Chequers proposals – or ‘BRINO’ (Brexit In Name Only) and its intention is clearly the same – to force the UK into close alignment with the EU. We can only hope the UK’s Chief Negotiator David Frost is not seriously entertaining these ideas, and that they rather reflect kite flying by the EU and/or its friends in the UK. If not, we are in big trouble – again.

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Harry Western