‘No-deal’ Brexit is finally back as a real possibility

The UK-European Union trade talks haven’t started officially, but both sides are testing out negotiating lines. Britain is already colouring some of them red, setting up a fight later this year that will encompass the three Fs: fish, financial services and the freedom to diverge from EU rules.
To use another f-word, all three issues are fraught. But it’s the last of them that might blow up hopes for a quick trade deal.
Given the UK’s intentions to leave the EU’s customs union and single market and strike trade deals with other countries, the best it can hope for is a bare-bones agreement with zero tariffs and duties across most goods sectors. That’s pretty much all there’s time for before Prime Minister Boris Johnson’s self-imposed deadline for a deal by the end of this year. Yet even that might be hard to achieve if early soundings are correct.
Whatever else comes out of the trade talks, UK Chancellor of the Exchequer Sajid Javid said, Britain will reserve the right to diverge from EU rules and regulations. “There will not be alignment, we will not be a rule taker, we will not be in the single market and we will not be in the customs union — and we will do this by the end of the year,” Javid told the Financial Times. The statement raises two questions: Is he serious, and what exactly does he mean?
When Johnson’s predecessor Theresa May talked tough about Britain’s Brexit negotiating stance, she was bluffing mostly. She had too many warring elements in Parliament and her own party to please. Getting a withdrawal deal was the priority, to settle the status of EU citizens, divorce payments and the crucial question of the Irish border.
Nor did she truly believe that regulatory divergence from the EU could be anything but a source of friction and cost to British business; she saw Brexit as a damage-limitation exercise. She tried — and failed — to push through a Brexit deal that kept the UK closely aligned with the EU on goods trade.
Javid, however, must be taken at his word. His boss, Johnson, has a comfortable parliamentary majority of 80; the remainers, doubters and soft-Brexiters have been cleared out. And Javid’s position is an article of faith as much as its political expedience. Johnson and his allies see divergence as a chance to remake Britain’s economy and trading relationships. Regulatory autonomy is the sine qua non of a real Brexit.
The UK wants a free-trade agreement similar to the EU’s Canada deal, only with added agreements on services, data and other areas. Brussels wants something that ties the Brits in more closely, including an agreement by the UK to abide by so-called level playing field provisions, meaning Britain would need equally tough rules on social and environmental protections, taxation and state aid. Michel Barnier, the European Commission’s Brexit negotiator, long ago made these provisions central to the EU’s demands. Nor will Brussels shy away from linking different parts of the negotiations to get what it wants.
If Britain’s desire for divergence precludes meeting the level-playing field provisions, the scope for a free-trade agreement will narrow considerably. While the minimal expectation — known as the “skinny” deal — is for quota- and tariff-free access for UK goods, that’s not a given. Even Switzerland, with its myriad EU deals, doesn’t have tariff-free access to the bloc. Agriculture and food products may be areas of disagreement.
And if a goods deal is struck, there will be non-tariff barriers to trade. UK companies might voluntarily comply with EU regulations, but this will need supervision and “rules of origin” checks, and an EU representative to guarantee the legality of British products. All of that will carry costs. If the deal’s scope becomes so diminished as to provide questionable political and economic benefits, is it worth doing at all? That’s a key question.
Conventional wisdom is that the UK’s desire to maintain access for Britain’s huge financial services sector will keep it at the table; and that this might be traded for concessions on fisheries. That may be a miscalculation.
It assumes Johnson has room on the fishing industry. While it’s a tiny share of the British economy, taking back control of “our waters” was a totemic issue for Brexiters. Fishing is also important for Scotland; any perceived sellout might fuel the Scottish independence movement. The UK exports most of its own catch so access to EU markets certainly provides an incentive, but Johnson will want to show some gain here from Brexit too.
Now Britain’s departure is assured, the big question has been resolved. If the two sides can’t agree on the degree of trade friction they’re prepared to tolerate, no deal could easily follow.

— Bloomberg

Therese Raphael writes editorials on European politics and economics for Bloomberg Opinion