Brexit Impact Tracker - 26 December 2021 – Year II of Actually Existing Brexit: Détente or Deregulation?

 As the first actual post-Brexit year draws to a close various news outlets have provided useful roundups of how Brexit is going. While many things remain uncertain and the coinciding of Brexit with the Covid pandemic continues to make any clear assessment of Brexit itself more difficult, some things seem to make little doubt.

Firstly, the vast majority of economists and think tanks seem to agree that, even net of the pandemic, the impact of Brexit on UK’s GDP growth will be significant and negative. Estimates vary from 4% (Office for Budget Responsibility) to 6% (UK in a Changing Europe think tank), but are not fundamentally contested even by pro-Brexit economists close to the Institute for Economic Affairs (IEA).

Secondly, while estimating GDP is notoriously difficult given the myriad of confounding factors intervening, the negative impact of Brexit on the British economy becomes even clearer when focussing on factors that show more concretely how businesses are fearing now the UK has left the bloc. Here the decline in private-sector investment (down 11.7% compared to the fourth quarter of 2019 according to ONS figures) and trade (down 15.7% by October 2021 compared to a scenario where the UK had remained a member of the EU) speak a clear language.

Thirdly, whatever the macro-economic figures and trends and however much economists caution against drawing premature conclusions on the impact of Brexit, the mood on the ground does not seem good. There is a lot of – admittedly anecdotal – evidence that for small UK businesses (e.g. here and here) Brexit is at best a problem that businesses can adapt to and learn to live with and at worst an existential threat that makes UK companies uncompetitive in the EU market. Some sectors – notably the fishing industry and farmers – have become particularly vocal about the contrast between what they were promised and what actually existing Brexit looks like. Thus, the National Federation of Fishermen’s Organisations estimates the industry to be £300m worse off by 2026 than without Brexit.

Fourthly, whether or not what we observe is permanent, structural damage done by Brexit or just ‘teething problems’ that may still be overcome in the long run, it would seem that the British people start having doubts about Brexit. Recent polling suggests a change of mind in terms of EU membership with a ‘poll of polls’ suggesting that the country remains split down the middle about EU membership, but the trend is towards a majority now supporting EU membership (51% against 49%). Again, there is much uncertainty about such polls and clearly the two camps remain of roughly equal size, but what is equally clear is that Brexit is not the resounding success that people and businesses were promised.

Overall, the impact of Brexit on the UK economy and society is variegated, complex, and often subtle. For instance, as I wrote a few weeks ago, the prospect of Brexit may have hit trade well before Brexit actually took place, which means the effect has been spread out and therefore is being underestimated. Similarly, Brexiters decry ‘project fear’ pointing to the fact that the exodus of financial sector workers from the City of London has not happened to the extent predicted. Yet, that is forgetting that Brexit is not over and never will be and jobs may continue to move away from the City faster once the pandemic is over (see here ‘the party of finance?’ section). More generally, there are the largely neglected ‘unseen opportunity cost of new jobs being created in the EU that, but for Brexit, might have been created in the U.K.’ The fact that the impact of Brexit is often unseen, hard to quantify, and subtle constitutes a political problem, namely, that it will always remain subject to opinion, ideology, and manipulation.

That said, given this uncertainty and subtlety, it is even more remarkable that in December 2021 there are few Brexiters who claim that Brexit has been an unmitigated economic success. Even pro-Brexit economists, such as Julian Jessop, now admit that “[t]here’s not a lot of doubt that the things you can measure have been negative.”

So, year I of actually existing Brexit has not been a great economic success. Is there hope that year II will see things improve?

Post-Brexit UK at a crossroads

The answer to that question will crucially depend on the UK government’s political choices. There seem to be two ways forward: The first one is the ‘deregulation path’ which would essentially consist of a continuation of the confrontational approach towards the EU based on the belief that the more the UK moves away from the EU the better. Supporters of that path will argue that Brexit may not have been an immediate resounding economic success, but it could become one if the government finally made most of its new-found freedom to diverge from EU regulation. This path would lead the UK down a deregulation path towards a low tax, low regulation haven following the Singapore model. Interestingly, that theme was more prominent in Lord Frost’s resignation letter last week than Johnson’s softening on the NIP issues. This may presage the fact that, after one year with literally no Brexit dividends, the far-right of the Tory party that dreams of turning Britain into ‘Singapore on Sea’ is growing impatient. This was also demonstrated by the ‘Covid Rebellion’ in parliament last week, which may mean that pressure on the government to advance down the deregulation path will grow in year II of really existing Brexit.

The second path forward is the ‘détente path’ supported by those who believe that – at least in its hard form – Brexit was a mistake and the best the UK can hope for is to limit the damage it causes. On this account, the only way to mitigate its negative impact on the UK economy is by finding a more comprehensive arrangement for UK-EU relationships than what the barebone Withdrawal Agreement and the Trade and Cooperation Agreement (TCA) provide for. A more comprehensive arrangement would require for UK-EU relationships to become less acrimonious, more pragmatic, and more cooperative. It would require for Brexiters to finally show more realism when it comes to the very real trade-offs between ‘sovereignty’ and the economic impact of Brexit, which can only happen – as Chris Grey puts it – when Brexiters become more truthful about it. This would then allow it to move towards a closer arrangement that would include an agreement on services, but would almost certainly require some level of regulatory alignment of the UK on EU standards.

For PM Johnson this creates a difficult situation to navigate. He will have to choose between catering towards the radical and vocal libertarian far-right of the party and his more populist and state-interventionist inclinations that would help him keep the ‘Red Wall’ Tory voters and their MPs on board.

However, given his recent struggles, what the Johnson decides may be less important than what another leading Tory does in the New Year, namely Liz Truss. Indeed, the political fortunes of the Foreign Secretary – who the pro-Tory press already considers as a PM in waiting – may prove decisive for post-Brexit Britain’s direction in 2022 whether she replaces Johnson as PM or not.

In Liz we Truss?

Year I of Brexit ended with a bang. Namely, the departure of Lord Frost as Brexit Minister in charge of the renegotiation of the Northern Ireland Protocol (NIP). The PM’s decision to put Foreign Secretary Liz Truss in charge of the NIP dossier instead has led to a lot of comment and some hope that relationships with the EU will improve as a result.

There are two narratives around Frost’s departure an optimistic one and a pessimistic one.

The optimists see Frost’s departure as an opportunity to reset relationships with the EU at a time where a weakened PM seems to have lost his taste for direct confrontation with the bloc. The optimists consider that Frost was the main cause of the UK’s intransigent – some would say unreasonable and dishonest – stance over the Irish sea border and his removal will provide space for a solution.

The pessimists – the majority it would seem –, on the other hand, point towards to factors that make it unlikely that Truss will be able to put UK-EU relationships on a better footing. The first one has to do with the internal politics of the conservative party and her ambition to become the next PM. Some observers consider it unlikely that Truss stands any chance to succeed Johnson as PM unless she panders to the ‘Europhobic sentiment among Tory grassroots and backbench MPs, at the expense of sound diplomacy.’ Solving the NIP issues – which will be her first priority – would allow her to show that she can ‘get things done’ and possibly further increase her popularity. However, as I – alongside many othersnoted last week, it simply seems impossible to envisage any solution to the NIP issues that would satisfy the Brexit ultras inside the Tory party. Indeed, pessimists point to the fact that there simply is no solution to the so-called ‘Irish trilemma,’ and therefore no solution acceptable to all sides can be found if the UK sticks to its preferred hard Brexit. If Brexit excludes UK membership in the customs union, single market, or even extensive regulatory alignment in key areas such as sanitary and phytosanitary (SPS) standards, then Truss’s leeway will be too narrow to find a solution and there will simply have to be a border of some sort in the Irish Sea. On this account, Johnson putting her in charge has been interpreted as a cunning way of setting her up for failure and thus get rid of one of the frontrunners in replacing him as Conservative leader and next PM.

In addition, BBC’s Katja Adler points out that any positive impact of Truss on UK-EU relationships will also be hampered by the simple fact that Lord Frost was not the only problem, but that worsening relationships between the EU and successive governments going all the way back to Cameron means that ‘[m]istrust in the UK government will likely remain, long after Lord Frost leaves.’ This may not be helped by the fact that the EU presidency for the first six months of 2022 will be held by France, with whom British bilateral relationship has taken a particularly strong hit since the Brexit referendum, as a new paper by my colleague Prof. Helen Drake shows.

Despite these constraints, some observers still think there is cause for optimism; pointing to the fact that Truss’s reliance on the Tory hard-right in any leadership contest may be exaggerated. Thus, Politico’s Mujtaba Rahman, points out that Brexit ultras actually may not have any more right-wing and Eurosceptic candidate to choose from than Truss. She therefore may be able to pursue a more conciliatory approach towards the EU than many expect without damaging her chances of becoming the next PM. This is even more likely now that the Brexit dossier is reunited with other international relation briefs in the Foreign Commonwealth and Development Office, because a less fraught relationship with the EU would help her realise her foreign policy priorities – such as taking a tougher stance towards China and Russia.

Career & Country: The Australia deal and trade capitulations

Given her popularity with conservative voters and her chances to succeed Johnson as PM, it is worth taking a closer look at what she has achieved as Cabinet minister to date. Truss’s rise from a relatively junior member of the cabinet to the likely frontrunner in the next Tory leadership election is symptomatic of politics in the era of Brexit. Like few other politicians does she represent the vacuity and unsubstantial symbolism that Brexit has introduced into British politics.

Her rise is almost entirely due to positive reporting in the far-right press on her work as Trade Secretary when she was touring the world rolling over trade deals the UK already had as an EU member and claiming credit for this alleged Brexit dividend. This has propelled her career, but will do very little to deliver any concrete improvement in British people’s living standards. Her biggest achievement to date – the new Free Trade Agreement (FTA) with Australia that was signed a couple of weeks ago – illustrate her priorities very well: her career over the country’s interests.

In the midst of all the scandals and problems facing the conservative party in the run up to Christmas, the government announced – how could it be otherwise? – a ‘world-class trade deal’ with Australia.

On the other side of the globe, trade experts clearly could not believe what they were seeing. Australian trade expert Dmitry Grozoubinski considered that “[t]ariff elimination on this scale through a free trade agreement is almost unprecedented” especially because it was “[…] not clear what UK negotiators managed to extract in reciprocal concessions.” Indeed, after a transition period, the deal essentially guarantees Australian farmers tariff free and unlimited access to the UK market.

Given the extent of UK concessions to the Australian side, the FT’s Alan Beattie reported on the Australia deal (and the New Zealand one concluded in October) under the heading ‘trade capitulation news.’ According to Beattie, the post-referendum story of British trade policy has been marked by an annual capitulation on important red-line issues (such as the Irish Sea border in 2019) – the supposedly world-class trade deal with Australia falls into the same category.

Unsurprisingly UK’s National Farmer’s Union as well as other actors in the agricultural sector were appalled by the one-sided deal in particular because any safeguarding measures regarding import quotas are time limited. The Soil Association’s Rob Percival described the government’s approach as “free trade at all costs, served with a side of hormone-treated cattle.” Indeed, the government’s own impact assessment shows that the deal will actually do damage to UK farming and the food industry.

However, the FT’s Beattie does commend Liz Truss for her ‘pretty bold move’ for a Tory secretary of state, especially one representing a heavily rural constituency, to eliminate farm tariffs for two of the world’s most efficient agricultural exporters. Yet, this boldness illustrates another deeper truth about Truss and the Tory party in its current state: Sometimes, when you really do not care about the country you are governing but only about your own career, you are able to do things no other politician would think possible. Concluding a far-reaching trade deal with Australia in the agricultural sector without any protection for UK farmers is one of them.

There is another interesting aspect of the Australia FTA that illustrates Truss’s thought- and recklessness: The deal includes a clause that states that Northern Irish Whiskey should be treated like British Whiskey regardless of input from the Republic of Ireland. According to RTE’s Tony Connelly this constitutes an important precedent for ‘rules of origin’ in other trade deals in the sense that ‘inputs from either side of the [Irish] border get recognised under rules of origin.’ This could indeed become an important issue in particular for dairy products and will privilege all irish production. That is not a bad thing of course and may mean that both the Republic and Northern Ireland will benefit more from Brexit than they already have. From the UK government’s perspective, however, this seems like another case where the UK government seemingly oblivious of (or indifferent towards) any long-term effects of its actions has created a precedent that may considerably restrain its leeway going forward. The principle that products resulting from Irish North-South collaboration can be considered as having a single origin surely is not just economically, but also politically very important. The UK government does not seem aware of the implications of this concession.

Liz Truss, the architect of the Australia FTA, seems to have one thing in common with Johnson at least: Namely that superficial symbolic politics is more important to her than the dull specificities of policy briefs. That does not bode well for the NIP negotiations now that Truss is in charge of that dossier. But her success also seems to have inspired a new culture in the Department of Trade with Trade Minister Penny Mordaunt’s US tour clearly motivated by a similar type of mediatic diplomacy that is heavy on empty rhetoric but devoid of almost any substance.

The Road ahead

On the eve of year II of real existing Brexit, the UK is at a cross-roads. 2022 will show which path the UK government chooses to go down: The path of moving away from the EU in search of elusive Brexit dividends, or the path of more conciliatory and closer relationship with the EU. Deregulation or Détente.

Regulatory divergence and especially deregulation was of course one of the main arguments for Brexit. Yet, the UK in a Changing Europe’s recent ‘UK-EU Regulatory Divergence Tracker’ shows that to date very limited divergence from EU regulation has taken place even in areas where such divergence is actively pursued. However, the report does identify two areas in which divergence from EU regulation could actually provide ‘Brexit dividends.’ Namely, in the area of the Common Agricultural Policy – where Defra has drafted a new payment scheme that could lead to considerable environmental benefits – and green finance, where few regulations exist and the UK could pull ahead of the EU. So, the regulatory divergence path is not in all cases fantasy. But the problem is, understanding when divergence creates opportunities and does not simply duplicate EU regulations would require level-headed and competent policy making driven by realism not fantasy. Yet, the UK’s governing party is dominated by what Peter Foster calls its ‘fantasy wing’ whose economic policy preferences draw on libertarian extremists like Shanker Singham – whose views are in turn a rehash of evidence-free libertarian common places rather than on a realistic understanding of how regulation shapes economic activity. Continuing down the road of confrontation and deregulation would be disastrous for the UK. Indeed, the economic policies of deregulation the Tory right is advocating are precisely the sort of policies that caused Brexit in the first place. Rather than providing any solutions for the problems Brexit was meant to address, it may very well make all these problems worse.

Truss has a mixed record in terms of extremism. While she once was a Remainer, which may suggest less hostility towards the EU than most of her fellow Cabinet members, she also is a co-author of that infamous libertarian manifesto ‘Britannia Unchained,’ which casts serious doubt on her economic literacy (one does wonder sometimes what they teach on that Oxford PPE!).

Here, Truss’s opportunism may be a greater source of hope than her economic and political competence. It becomes increasingly clear that many conservative voters and even party members do not share conservative politicians and MPs extremist views on Europe and other things. In the general public, the extremist views of the Tory far-right seem even less popular. Only 15% of the UK population, for instance are in favour of far-reaching deregulation. Here, Truss’s instinct to focus on symbolic politics for the sake of her popularity may create some space for her to escape the grip of the Brexit ultras. Managing to solve the NIP issues with the EU will most certainly mean she will come under fire from the Tory hard right, but – depending on how the pro-Brexit press reports on such a solution – the conservative grassroots may actually give her credit for yet another ‘masterstroke.’

From that perspective, it is to be hoped that Liz Truss’s personal ambitions mean she will swing-back onto the path of moderation. A real détente between the UK and the EU would allow us to solve many of the issues that unnecessarily leave UK citizens worse off than before Brexit – from the big ones like the NIP, the UK universities’ participation in the EU’s Horizon programme, to the tiny ones like British citizens having to pay for visa wavers when entering the EU. Equally important, however, if Truss were to succeed in the NIP negotiations while disregarding the Brexit ultras’ demands for conflict and intransigence, this may be the beginning of the Tory party wriggling out of the iron grip of its far-right wing. If that is the result of Truss’s opportunism and personal ambition rather than her pursuing the country’s best interest is secondary; for British citizens it would provide a glimmer of hope after another very dark year.