The UK’s three way stretch: Covid-19, Europe and America
With 30 June looming as the final deadline for any extension of the post-Brexit transition and negotiating period, the United Kingdom Government faces three massive tasks which are inextricably bound together. Each of which would on its own be an overriding priority for any government. These are: combating the SARS-CoV-2 virus (commonly referred to as Covid-19); negotiating a long-term free trade agreement (FTA) with the European Union; and simultaneously attempting to negotiate a major FTA with the United States.
Covid-19
At the time of writing the Covid-19 coronavirus has claimed 40,000 deaths in the UK that can be directly linked to it, and probably thousands more that are not so identified. Some estimates place the true death toll as nearer 50,000. This calamity, unimaginable a mere six months ago, has seen Britain, like countries all over the world, placed for more than two months under the most severe peacetime limits to personal freedom experienced in democracies in the modern era. Large proportions of the population have been confined to their homes, subject to exceptions for essential workers who cannot work from home and key workers in sectors like health, social care, education, food retailing, refuse collection and transport.
Unlike Italy and Spain, which imposed draconian “lockdown” restrictions as soon as the scale of the pandemic began to be understood, and Germany which set up an early and wide-ranging programme of testing and isolating potential sufferers, the UK Government moved stage-by-stage. This looked reasonable and prudent in the early months of 2020 but proved inadequate in the face of the infection which was given more time to rampage through the country, subjecting the UK to the highest number of notified Covid-19 deaths in Europe and the second highest national total in the world after the US. Various reports now argue that if the UK had imposed strict limits on movement earlier, many deaths could have been avoided.
Economic impact
Countering this virus has to be the overriding priority of any government affected by it, and it continues to swamp public policy debate. By some estimates up to one-third of the UK economy is shut down or under severe restriction, including airlines, the whole of the hospitality sector, much transport, colleges and schools, theatres, cinemas, galleries and other arts institutions, and shops selling goods other than food and medicines. Estimates vary, but overall the outlook is for the biggest fall in GDP for three centuries. The Government has introduced unprecedented financial measures to protect as far as possible the jobs and livelihoods of firms and workers impacted by the shutdown in order to keep them in existence ready for an eventual upturn. The ultimate cost of these measures can be estimated only in the most general terms. There are bound to be longer-term consequences for the UK’s international financial and trade stance, as discussed below.
Relaxation by “baby steps”
Despite some well-publicised exceptions, public acceptance in the UK of lockdown measures has been remarkably steady. However there had inevitably to be doubts about how long this public acquiescence could hold. In recent weeks, and especially in view of the extensive relaxation of restrictions in Italy and Spain, political and business pressure in the UK for some early easement, (whether wise or, probably, not), has become irresistible. Hence the marginal loosening of some UK lockdown requirements as from May 13, and others from early June. People are still urged to remain at home and work from home if they can, but are told to go to work if they cannot, however avoiding public transport. They may leave their homes for longer periods to take exercise and to shop. From June 1 schools may reopen for the youngest children respectively at primary and secondary levels, that is years 1 and 6. All measures remain subject to the basic “social distancing” requirement to keep a clear 2 metres away from all non-family members.
Infringements
Most people still obey the rules, but faced with several weeks of beautiful weather from April onwards many in England have begun to disregard official advice and are congregating on beaches and at beauty spots. Much public concern is recently been ignited in the current controversy over the conduct of the Prime Minister’s close personal advisor, an architect of the lockdown restrictions, who is alleged to have flouted those restrictions by driving to “self-isolate” in the North of England with his small child and his wife, who was already showing Covid-19 symptoms. Many politicians, press and scientific advisors condemned his action as undermining Government advice that continued movement restrictions are essential to deter spread of the virus in the wider population.
Positive action
The UK claims to be in the forefront of the worldwide quest for a vaccine against Covid-19 and for more effective tests that can show not only whether (as at present) a person is infected with the virus, but also whether he or she has in the past had the virus but is now clear, with antibodies in the bloodstream which can guarantee both immunity and inability to infect others and contribute to development of so-called “herd immunity” in the population at large.
Blame game
The UK is riven with controversy over the timeliness or tardiness of the various anti-Covid 19 measures introduced, over their effectiveness (or not), and especially over the reliability of published government statistics concerning virus testing, which is publicly challenged even by the UK Statistics Authority in correspondence with ministers.
Negotiations with the EU are stalled
Since March 2020 Covid-19 has swamped public debate around the two leading international negotiations either of which in normal circumstances would dominate policy: namely a post-Brexit agreement with the European Union, and a FTA with the United States.
UK-EU: legal texts
In late February 2020 both the EU and the UK published extensive statements of their negotiating objectives[1]. The EU side followed this up very shortly afterwards with a draft text for a Comprehensive Free Trade Agreement (CFTA), running to 440 pages. The UK responded with its own draft treaty text, which remained confidential to the negotiating partners until it was finally published in mid-May. This too amounts, with Annexes, to some 400 pages. It takes the form of a draft CFTA supported by a clutch of separate draft agreements on fisheries, air transport, aviation safety, energy, social security coordination, civil nuclear policy, criminal law enforcement and judicial cooperation, transfer of unaccompanied asylum-seeking children and readmission of people residing without authorisation.[2]
Publication of these documents was accompanied by a letter dated May 19 from the chief UK negotiator David Frost to his EU counterpart Michel Barnier. This letter, querulous in tone, consists mostly of a list of areas where the UK complains that the EU proposes to discriminate unfairly against it in comparison with its agreements with other trading partners. The EU response has been a robust reaffirmation of its established position.
Virtual negotiations
In early 2020 Covid-19 supervened to distract both sides from the details of negotiating a long-term post-Brexit relationship. Face-to-face negotiation, which is normally the stuff of international relations, became impossible because of lockdown and social distancing measures across Europe. Arrangements were made to continue negotiations through video conferencing, involving dozens of sector and subject experts on each side. Even given the best of goodwill it is difficult to see how in such difficult logistical circumstances tangible progress could be made in balancing the interests of dozens of individual sectors or administrations, on both sides and right across the economic spectrum.
Stand-off
The last possible date for extension of the transition and negotiating period is June 30. The fourth, and final planned, round of negotiations before the special European Council meeting on UK-EU relations later in June began on June 3. Up to that date there had been considerable recrimination between EU and UK negotiators, with very little progress made. The UK accuses the EU of taking a narrow legalistic approach; while the UK itself dogmatically rules out any compromise arrangement that might involve recognition of EU regulations in UK law. Ministers complain that the EU fails to recognise the UK as a sovereign state with its own fundamental rights. They overlook the extent to which that same sovereignty has long been subject to important supranational obligations assumed through UK membership of dozens of international cooperative and standards-setting bodies from the United Nations and NATO downwards. Unfettered national sovereignty is a concept which for at least the last two centuries has existed in theory only; and when it has been invoked, it has often been egregiously misused by governments.
Time pressures
It is normal for major international negotiations to run right to the last available moment, since for domestic political reasons no participant can risk appearing to throw in the towel at a point where – at least in theory – more might still have been secured. In the Brexit case however both the UK and EU governments have been seriously sidetracked by Covid-19 on the verge of the key June 30 deadline for extension of the transition and negotiating period.
The UK Government regularly insists that it will neither seek nor accept an extension. It did however shift its ground very significantly during the Johnson Administration’s renegotiation in 2019 of former Prime Minister May’s draft Withdrawal Agreement. So extension has still to be a possibility. If however the opportunity is not taken, no option will remain but to pull out every stop to conclude a UK/EU CFTA by the final date of the transition period, namely December 31 2020. In practice, that requires agreement by early October in order to permit ratification, ready for implementation on January 1 2021.
“No deal” (again)
If such agreement proved impossible, the much-dreaded “No deal” outcome would become a reality. Within the limits of World Trade Organisation (WTO) operational rules, UK exports of goods and services to the EU would become subject to all tariffs, standards and other limitations on market access which apply in the Union, while simultaneously the UK would have to put in place its own national import and establishment regimes ready for January 1 2021 (see below). Diplomatic and public comment concur that it is very unlikely in practice that so wide-ranging and complex an agreement could be achieved and implemented in the few months still remaining.
The EU has in passing suggested that it would be prepared to continue negotiating with the UK after 31 December, but has not suggested a legal or procedural basis for such negotiations, or what their scope might be. Even if the UK were willing to respond to this suggested flexibility, for practical reasons its scope could probably be only narrowly sectoral and marginal.
Negotiations with the United States
The UK Government urgently seeks to justify its “global Britain” ambitions by negotiating FTAs with friendly countries around the world. The jewel in that crown would be an agreement with the United States. Negotiations are reported to have commenced in May, with the involvement of teams of some 100 expert negotiators on each side for online virtual meetings. Quite apart from the technical difficulties of negotiating in this manner, the same problems of timing arise as with the UK/EU talks. In practice the US is most unlikely to agree to a FTA without detailed knowledge of where the UK will stand in its wider international economic relations, above all with the EU; and also, not before the Presidential election due in November 2020 when President Trump hopes to be re-elected.
Let’s get real
Back in February 2019, at a time when Mr. Trump and his senior officers were making encouraging noises about the prospects for a “fantastic” bilateral deal with Britain, the Office of the United States Trade Representative (USTR) published a detailed 15-page summary of negotiating demands addressed to the UK, aiming at what, if taken at face value, would be a wholesale reconstruction of the UK economy and regulatory systems according to US standards. In the real world such a sweeping change could never be agreed, but USTR is in charge of the negotiations with the UK, and given the Trump Administration’s “America first” stance, is unlikely to offer special concessions in response to UK “special relationship” pleas.
Some dangerously naïve comment among UK politicians and media recently suggested that conducting the EU and US negotiations in parallel could be helpful, as the UK could then play off the EU and US against each other so as to achieve the best outcomes with each. This ignored the fact that the UK is the demandeur in negotiations with both the EU and the US, and in a weak bargaining position with both. More likely it would ensure failure all round.
Pitfalls
Serious negotiations with the US have barely started, and everyone knows that they will run into difficulties over longstanding US demands to the UK for market access for processed foods (in particular chlorine-washed chicken and hormone-fed beef), as well as for US services suppliers and for access to National Health Service procurement. Public opinion in Britain as it stands at present could not accept any of these, let alone other major demands which USTR may make). The US also objects violently to possible involvement of the Chinese electronics firm Huawei in the UK’s 5-G IT network. The best informed guess must be that a negotiation with the US will take years, not months, and certainly no transatlantic agreement can be ready for the end of the transition period.
It must not be forgotten that the UK is negotiating also for major new FTAs with other major trading partners as well as the US. Few if any of those also would be likely to sign on the dotted line in London without knowing the full detail of the UK’s future relations with its largest trading partner, namely the EU.
Wider policy impacts
The Covid-19 restrictive measures raise longer-term policy issues for the UK. First, the respective approaches of the UK Government as a whole and of the devolved administrations in Scotland, Wales and Northern Ireland to relaxing lockdown have begun to diverge – mostly over matters of detail, and not yet by very far, but enough to raise questions about how far precedents set in the Covid-19 context might also open up wider concerns about national unity.
Second, the UK Government has necessarily put all its economic eggs in the basket of supporting and protecting British business and industry to the maximum possible. Because of the economic damage already incurred, such support will be needed, though not necessarily at the same level, until well after the eventual downturn in Colvid-19 cases. It has been extended to October 2020, but is scheduled to begin an extended phase-down period during the summer.
This intense government involvement in business may have consequences for the UK’s proclaimed global open trade stance. EU Trade Commissioner Hogan has been talking openly about building up the EU’s “armoury of trade defence measures”, in particular anti-dumping and anti-subsidy duties. The question is whether in view of the risks of trade diversion, a weakened United Kingdom outside but adjacent to the EU can resist having to resort to similar measures. The EU’s suggested protective action is predominantly in response to aggressive trade actions and threats respectively by China and the United States, and here too there may be implications for UK trade.
Tariff policy after Brexit
On leaving the European Union and customs union, the UK has reverted in the WTO to its original status as an independent national member. This entailed the obligation to submit to the WTO new schedules of national import tariffs as well as schedules of market access and other commitments under the General Agreement on Trade in Services (GATS) for foreign-based service providers. These schedules are important both in themselves for operational reasons, and because they encapsulate the UK’s future international trade policy.
Soon after the Brexit referendum, in December 2016, the UK Government announced the intention of keeping as close as possible to existing tariff rates under the EU’s Common Customs Tariff (CCT), in order to minimize disruption to traders and to avoid challenges in the WTO by other members who might consider that the UK’s shift to domestically-determined tariff rates was damaging to their own trade. Eventually new draft schedules were submitted on this basis. They have been adjusted a number of times, and the latest and presumably definitive version was published on May 19 2020.
Generally low rates
In trade policy terms the new schedules are reassuring. Industrial (as distinct from agricultural) tariffs across the industrialised world are, following decades of liberalising negotiations, already low, on average around 3% ad valorem (with exceptions for a few persistently “sensitive” items and many agricultural products). This is also the case for the CCT, and overall the new UK rates do not exceed those in the CCT. Mostly they shadow them, and the many items such as raw materials which have zero duties in the CCT remain duty-free. The UK has taken the opportunity to simplify hundreds of low tariff rates, which probably have little protective significance anyway, e.g. from 2.7% in the CCT to 2% or from 5.2% to 5%.
The many agricultural items which are subject in the CCT to specific levies or duties (e.g. a fixed charge per tonne) are also subject to specific duties in the UK schedules and appear largely to mirror CCT rates, subject to conversion from euros to sterling. As to more “sensitive” items which bear higher protective tariffs in the CCT, the UK schedules also maintain some higher (though not increased) rates. Textile items charged in the CCT at 4% to 8% mostly continue with those rates, though some are reduced to zero. The UK proposes a uniform rate of 10% for imports of vehicles and parts, including for some items that are currently charged as high as 22% in the CCT. The CCT rate of 14% for a range of electronic items is followed by the UK, but watches are totally liberalised.
Liberal trade
The new UK tariffs are a broadly liberalising and tidying-up exercise, designed to affirm the UK’s “Global Britain” ambitions. They are not overtly protectionist in intent. They should in themselves create no new obstacles to trade with existing non-EU partners. In the case of UK-EU trade, if there is no long-term post-Brexit deal, the relatively low rates proposed and associated administration will still cause disruption to imports from the EU which hitherto have been free of duties and other trade procedures. However given that the vast majority of the new UK rates are very low, the UK has correspondingly little to offer as tariff concessions to potential FTA partners. This underlines the fact that while these days tariffs remain a headline item in international trade negotiations, including FTA negotiations, the real substance is in market access issues such as health, safety and environmental standards, establishment rights, licensing, investment protection and intellectual property. It is in these areas that the UK Government will reveal its true trade policy agenda.
Free movement
A key aim of the UK Government in Brexit was to end free movement between the UK and EU member states, and to treat immigrants from all sources, including Europe, in the same way. It is proposed to introduce a points system and a salary threshold designed to give priority to more highly qualified people while excluding or at least limiting the numbers of low- and less-skilled workers. The necessary legislation began the long process of parliamentary debate on May 18 and will need to be enacted in time to apply the new system of controls by the end of the transition period on December 31.
The timing is widely seen as very insensitive, given that the categories of the low-and less-skilled include many of the immigrant people whose vital work in combating the Covid-19 virus in UK hospitals and care homes is currently so highly prized. Inevitably debate on these longer-term immigration proposals has got tangled with current Covid-19 concerns about staffing of health and care services.
Interlinkages
The UK Government is in a triple bind. Substantive progress in negotiations with America depends indirectly on the outcome of UK negotiations with the EU; while the UK/EU negotiations, which in any case are crucially short of time, have been seriously derailed by doctrinaire negotiating stances and by the overriding public health crisis of Covid-19. We cannot yet know how successful current research initiatives will be in containing, then halting the pandemic in the UK. Tackling Covid-19, which could yet take another turn for the worse with the much-feared “second spike” in infections, is likely to remain for the foreseeable future the Government’s first duty and preoccupation. It’s broader challenge will be to head off a scenario in which the collision of Covid-19 with unfruitful Brexit and UK/US negotiations leaves the UK substantially worse off than it might have imagined at the start of the year.
[1] See our separate article comparing the two approaches: EU-UK: the chips are down, March 15 2020
[2] The EU side prefers to fold these specific topics into a single comprehensive treaty text.