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Johnson’s deal –a precarious bridge to economic freedom

Written by Harry Western

The renegotiated deal Boris Johnson has agreed with the EU and recently presented to parliament is an improvement on that negotiated by former prime minister Theresa May. But it nevertheless offers only the narrowest and most precarious bridge to economic freedom for the UK.

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What are the upsides? From the perspective of putting the UK back in charge of its trade and regulatory policy, the main improvements Johnson has negotiated are:

  • The removal of the Northern Ireland backstop
  • An amendment to the political declaration which makes it clear that the future relationship between the UK and the EU will take the form of a free trade agreement, not a customs union as previously. This allows the UK the potential to develop an independent trade policy.

These changes are important as May’s withdrawal agreement would have removed all the UK’s leverage in phase two of the talks with the EU, locking the UK into a customs union with the EU and tight regulatory alignment in perpetuity – with the UK having to passively accept any trade and regulatory laws passed by the EU i.e. vassal status.

But there is still much to be concerned about:

  • Johnson’s ‘deal’ does not involve a new free trade agreement with the EU. This is a critical point that is often overlooked. All the deal does is open the way to negotiating a new free trade deal, a process that could take some time depending on how well the UK negotiates and how keen the EU is to proceed with such talks.
  • Until such a deal is finalised, the UK enters a ‘transition period’. This is actually a misnomer – normally one would understand this a period where the two sides take time to adjust to newly agreed arrangements. That isn’t what it is, in this case. Instead, it will involve the UK effectively remaining in the EU and subject to all its laws and regulations – old and new – with no say. The UK will be able to negotiate – but not bring into force – trade deals with third countries. Aside from this though, this ‘transition’ is a vassal state period.
  • The ‘transition’ could extend for up to three years. In theory the transition ends at end-2020, which might be tolerably short. But there is a clause allowing it to be extended for a further two years if no final agreement is reached. Moreover, a decision on this will need to be made as early as July next year. This leaves a very short space of time to agree a free trade deal.
  • In the transition, the UK will be wide open to regulatory attacks by the EU on key industries. We can be pretty sure this will happen – only the extent is in question. The EU will do this in order to try to maximise its leverage in talks and push the UK towards agreeing the most subservient relationship possible. Among other things, we can expect attacks on the UK financial services industry including the ramping up of existing EU attempts to charge the UK billions of pounds related to VAT on derivatives.
  • The UK has surrendered key leverage. The UK in Johnson’s deal has agreed to an exit bill of c£39 billion – and quite possibly significantly more. There is no link between the payment of this and agreeing a free trade deal
  • There is no get out clause from this deal if the EU proves unreasonable. This deal will take the form of a binding international treaty. Such treaties usually give the parties the right to withdraw, having given reasonable notice. This one doesn’t – the UK cannot walk away from it however unreasonable the EU proves to be.

Even given these major drawbacks – and there are many others, including the very suboptimal arrangements for Northern Ireland – it might be possible for the UK to use Johnson’s deal to achieve the kind of goals Brexit is supposed to achieve: control of trade and regulations, laws and taxes; an independent economic future for the UK. But this will be very difficult. It would need:

  • The UK to be absolutely willing to embrace a no-deal, WTO exit at the end of 2020 if necessary. Only if it is clear to the EU that this is the real default outcome if they fail to negotiate seriously, will serious EU negotiation take place.
  • The UK to aggressively pursue trade deals with third countries. These need to be used to pressure the EU. The more the EU’s current trade preferences in the UK market are potentially eroded, the more likely they are to negotiate a free trade deal. The UK absolutely must not soft-pedal on trade deals with third countries for fear of ‘prejudicing’ a deal with the EU – quite the reverse. The UK needs to create competition among its trade partners to get the best deal, rewarding the quick negotiators, punishing the laggards.
  • The UK should adopt tax and regulatory changes the EU won’t like, where it has the scope. A rapid move to cut corporation tax to Irish levels would be a good start. The UK should also make clear it will be clearing away some of the more damaging EU regulations (e.g. MIFID) as soon as it is free to do so. Such moves would be an important statement of intent.

The key problem with all of the three above approaches is that it is impossible to see them happening with the current composition of the UK parliament. This brings us to a clear and perhaps downbeat conclusion: Johnson’s deal has no chance of achieving the economic goals Brexit supporters might hope for from it, without a general election victory and radical shift in the makeup of the House of Commons.

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About the author

Harry Western