Do not extend the Brexit transition

The development of the post-Brexit future relationship between the UK and the EU was always likely to be a long-term project. The issues are many, some of them are complex and others are politically difficult (eg fishing arrangements). We do not live in static environments: technologies move on, markets evolve, political priorities change. Changes in treaties and agreements are part of this flux and the development of the future relationship will likely be an ongoing process spread over an indefinitely long period.

It is, therefore, sensible to think of a policy strategy as a series of sequenced steps, not as something directed at achieving an agreement that will put an end to the process. From this perspective the immediate, strategic questions are to do with where the two sides want to land by 1st January 2021, the day following the termination of the transition period according to current government policy.

The most pressing matter is the call for an extension decision by the end of June, ie whether to seek to extend the transitional arrangements of the Withdrawal Agreement (WA). The first, basic point to make is that this is not the same as a decision on whether or not to end all negotiations by 31st December 2020. There are other ways to provide for their continuance.

The UK position appears to be to seek an early tariff-free, quota-free agreement by year end (a position recently adjusted to encompass the possibility of less comprehensive trading arrangements) with a view to negotiating deepened arrangements thereafter. Such a simple tariff agreement would not address significant non-tariff barriers to trade: it would be a first step only, possibly made on a time-limited basis (to protect the EU’s base position prohibiting cherry picking). The main feature of the policy is simply that the UK does not wish the later negotiations to be conducted during an extended transition provided for by the WA framework.

Leavers’ objections to the WA are well known and, to put it in a nutshell, extension of the transition amounts to accepting EU rules and jurisdiction, but without representation or participation in rule-making processes, and with entailments for EU budget contributions, but without the Thatcher-negotiated rebate. It also delays the development of an independent, international commercial strategy by the UK. As Yanis Varoufakis famously put it, it is the kind of treaty signed only by a nation defeated in war.

Recently, however, an argument has emerged to the effect that the UK should seek an extension to avoid “overburdening” and distracting the government while it is addressing Covid-19 issues. That sounds like common sense, but it is not an argument that, when examined, can bear much weight.

It fails to recognise that an extension of the WA is not the only way of “buying more time,” if such be needed. It also doesn’t address the various negative aspects of the WA for the UK, some of which the Covid-19 pandemic has arguably served to magnify.

For example, the pandemic has deepened the sense of crisis surrounding existing EU institutions, which now find themselves facing all of its inevitable economic, social and political fallouts on top of the pre-existing challenges of trade wars, fragilities of the eurozone banking arrangements, and risks of a global financial meltdown. Its future decisions are now less predictable than they might have appeared a few months ago and these would be decisions to which an extension would continue to give the UK a substantial exposure.

The most obvious source of complicating entanglements lies in the EU’s budgetary processes. Extension would require major financial contributions to an EU budget whose development and size will be much influenced by Covid-related issues and any developing financial crisis, and the UK would have no seat at the tables where matters are decided. That is a major risk factor and seeking to address it would not simplify the tasks of government in the second half of 2020. The political rhetoric is easy to anticipate (we have been here before): “if we have £10bn or £20bn or whatever’s necessary to buy an extension, why not spend it instead on the reconstruction of our devastated social care system?”

Another aspect of extension is the additional political uncertainty it would bring to an EU-dependent UK. Economic performance in the UK has generally held up reasonably well in the face of policy dithering since the referendum, but one area of exception is business investment, which is particularly sensitive to political uncertainty. Businesses are badly in want of at least some early resolutions of political decisions, not yet more can-kicking.

At a more granular level, customs issues provide a further example of where the “overburdening” argument is much weaker than it might first appear. Michael Gove has announced that around 50,000 new customs officers are to be recruited and that has naturally attracted comments about greater bureaucracy and greater cost. It is, though, simply a bringing forward of a measure that would be taken later if the WA were extended: exit from the customs union, by whatever path it is achieved, entails additional customs work.

Two points might be noted in passing here. First, continued participation in the EU customs arrangements delays the development of the independent UK international commercial policy that virtually all Leave supporters (and likely some Remain supporters also) favoured. Second, there is a credible argument that now is a particularly opportune moment to engage in the expansion of customs capacity. The UK faces a Covid-19 recession likely to be characterised by both high unemployment and depressed international trade flows. Those are conditions in which (a) additional employment and increased human capital formation are usually welcome developments and (b) the “queues at Dover” risks, arising from pressures of demand on customs capacity, are likely to be at a lower level than in less depressed times.

Looking at things from the EU perspective, it is easy to see that it has strong incentives to seek continued negotiations within the WA framework, rather than against a backdrop of alternative, shorter-term, trading arrangements that might temporarily be put in place. Here, however, the 30th June deadline in the WA assists the UK. If the UK says no, the ball is put firmly into the EU court. It will have to decide whether, viewed from its own perspective, the prospect of a second-best, but still relatively deep, future relationship is better or worse than no agreement at all.

“First best or be damned” became the way of hardliners in the Brexit wars, but I keep fingers crossed that EU leaders will display a more pragmatic wisdom than that when they next have to play the ball.