Brexit: Withdrawal Agreement and Political Declaration

Lord Gadhia Excerpts

Thursday 10th January 2019 Lords Chamber

[Lord Gadhia (Non-Afl)]

My Lords, many of us hoped that the holiday season would clear our minds and lift the Brexit fog, but, alas, the fuzziness remains and has come back with a vengeance. More worryingly, the ideological divides between and within families, communities and political parties show little sign of being resolved, let alone healed.

Yet the eyes of the world are on us, particularly from the business community, whose primary focus is to secure a timely decision and path to certainty, especially at a moment when the headwinds of the global business cycle are turning against us. Our international reputation for political stability and mature, predictable and rational decision-making has already been dented. The actions of Parliament in the coming days and weeks will determine how the UK continues to be perceived by global investors, with very real economic consequences.

With fewer than 80 days to go before the expiry of the Article 50 period, this is not a time for political handwringing. There is plenty of evidence from Hansard of advice ignored and warnings neglected. The time for protracted debate has ended; it is time to decide. Extending the Article 50 period is unlikely to produce a fundamentally different set of choices or trade-offs that we are not already aware of. At this stage in the life of a complex negotiation it is not about tinkering with individual clauses but evaluating the balance of advantage of the deal, taken as a whole, compared to other credible and deliverable alternatives—to govern is to choose. That is why brinkmanship has its natural limits. Indeed, it feels like brinkmanship is the order of the day, whether between the US Congress and the White House on the federal budget, Washington and Beijing on trade tariffs or the Janus-like face-off on Brexit between the Prime Minister, Parliament and Brussels simultaneously.

Taking things to the wire can play a legitimate part in a robust negotiation and help test boundaries, but in international diplomacy there are limitations on playing poker with people’s lives and livelihoods. We should also remember that an open hand holds more than a closed fist. As the noble Lord, Lord Tugendhat, reminded us in the previous debate, Brexit is,

“a process, not an event”.—[Official Report, 5/12/08; col. 1000.]

We are barely at the end of the beginning so we will need to draw upon a store of good will with our European partners over many years—it is the end destination that matters most.

That is why leaving the EU without a negotiated withdrawal agreement has no credibility. The Justice Secretary rightly describes no deal as a unicorn. But, sadly, there are still enough MPs willing to chase the unicorn who can block the Prime Minister’s deal. They will continue to do so, however many times she brings a vote back to Parliament and regardless of any further assurances received. It is therefore abundantly clear and has been since last July, when the Chequers plan was unveiled, that a deal cannot secure approval without the support of opposition MPs.

The only viable path for the Prime Minister following the outcome of next Tuesday’s vote is to conduct a discovery process aimed at establishing whether there are enough opposition MPs willing to set aside their party Whip and act in the national interest to support an alternative Brexit plan. To draw an analogy with financial markets, a clearing price is often discovered through a book-building process to gauge demand at different levels. It is this type of process of indicative votes that is required to help determine the next steps.

Opposition parties, once they have exhausted their inevitable attempt at holding a no-confidence vote in the Government, should allow Parliament to have a series of free votes and enable MPs to reveal their true preferences. It is likely that such a process will confirm that the House of Commons opposes no deal, as the amendments to the Finance Bill have already signalled, and that MPs prefer a softer form of Brexit, perhaps tilted more towards Norway than Canada.

Some will inevitably view this as a betrayal of Brexit, but it simply reflects the change in parliamentary arithmetic following the 2017 general election. It also reflects the consequences of a simple, binary referendum. There are at least 17.4 million versions of Brexit and no settled consensus on which path to pursue.

The Prime Minister, to her credit, has tried to chart a middle course that strikes a balance between safeguarding prosperity and regaining sovereignty. The more difficult part to swallow is not the backstop but the flimsy nature of the future framework and the absence of any interconditionality with payments being made to the EU. To use a financial markets analogy again, we have simply secured a £39 billion option value on negotiating a trade deal. Some would consider this an expensive option but, in the context of a £2 trillion economy, it is a bearable price to pay.

What is less bearable is replacing one form of uncertainty with another. We have limited control over the future timetable and cannot impose any sanction or penalty on the EU if a deal is not finalised by the end of 2020. In fact, my noble friend Lord Macpherson has suggested that it will take us until the middle of the next decade to finalise a future deal. So we are forced to take much on trust and must be prepared for an extended period in Brexit limbo. It is ironic that the foremost of the Prime Minister’s 12 negotiating objectives in her Lancaster House speech in January 2017 was delivering certainty and clarity. I have previously described the situation we find ourselves in as a grubby compromise, but it is a necessary compromise if we are to find a way through that reconciles so many conflicting objectives, pressures and realities.

I sincerely hope that Parliament can solve this most difficult of Rubik’s cubes, but we must be prepared for the very real possibility of a blocking minority for every option, resulting in deadlock. In those circumstances, we will rapidly become a zombie Parliament and lose all remaining authority. In such a situation, a fresh democratic process—whether a referendum or general election—will become inevitable.

Brexit: Preparations and Negotiations

Lord Gadhia Excerpts

Monday 23rd July 2018 Lords Chamber

[Lord Gadhia (Non-Afl)]

My Lords, I will bring a business voice to this debate, among a sea of politicians and former civil servants. My comments build on two previous speeches in this Chamber. The first was in March 2017, immediately before Article 50 was triggered, when I described certain flaws in the Government’s negotiating strategy, particularly in the sequencing of discussions. The other was in January this year, about the inherent lack of credibility in threatening a no deal scenario, while acknowledging that it might be the unintended consequence of a breakdown in negotiations. Subsequent events have been like watching a slow motion car crash: utterly predictable but still excruciating to witness, because remedial action at an earlier stage could have averted some of the difficulties we now face.

Despite these frustrations, we should welcome the White Paper and find a way to make it work in the national interest—assuming, crucially, that it is not killed off prematurely in Brussels or Westminster. The Chequers proposal might be a grubby compromise, but it is a necessary one to deliver a softer Brexit, which the economy, parliamentary arithmetic and the Irish border require. The romantic idea of Brexit was always more alluring than the messy reality of implementing it. That is perhaps why some lament the dying of the Brexit dream. It is no surprise that it is fading rapidly, because it was always an illusion about regaining sovereignty. Modern democracies pool sovereignty so that they can secure better economic and security outcomes for their citizens than any individual country can achieve acting alone. So the argument is really about where we draw the boundaries between collaboration and self-determination. The idea of absolute parliamentary sovereignty is as outdated as the Corn Laws.

We are now entering a critical phase of the Brexit negotiations, during which the prospects for a deal could diminish dramatically and talks might even break down before being revived. It will be a turbulent six months and I will focus my comments on four specific points relevant to this next phase.

First, will the EU be open for serious discussions on the Chequers proposal, or is it simply going through the motions before killing it off and, instead, offering us CETA with a border down the Irish Sea, since the EEA alternative would require accepting freedom of movement? Michel Barnier has played the UK like a fiddle and it has been simultaneously impressive and deeply depressing to endure. It is clear that the Prime Minister is walking the tightest of tightropes, so if the EU overplays its negotiating hand, it will not take much to throw the discussions off balance.

Secondly, the weakest link in the Chequers plan is the facilitated customs arrangement. It was the target of the wrecking amendments to the customs Bill last week and is viewed sceptically by key stakeholders in Europe as unworkable. Last week I joined a cross-party visit of the Industry and Parliament Trust to Germany, where we heard first hand from the influential Federation of German Industries, or BDI. The tracking of goods could be a bureaucratic nightmare and potentially open up a smugglers’ charter. The advice going from German business to Angela Merkel does not support our customs solution.

Thirdly, the White Paper says that,

“the Withdrawal Agreement and the framework for the future relationship are inextricably linked”.

However, it is clear that the withdrawal agreement will be a binding treaty under international law, but the future framework will take the form of a political declaration. I ask the Minister—he is not in his place, but maybe through the Front Bench—precisely what legal status and interconditionality will attach to these two agreements? The new Secretary of State at DExEU has said that no payments will be made to the EU unless we get an acceptable trade deal. It is a novel legal concept to have a binding agreement with non-binding terms. Will the Minister please explain how that would work? Otherwise, Parliament is destined for a meaningful vote on a meaningless deal, since the political declaration gives us nothing more than the option to negotiate a binding treaty during the transition period.

Finally, I turn to the future of financial services, which appears to be the sacrificial lamb of the Chequers plan. In March this year, in his HSBC speech, the Chancellor acknowledged that the EU’s established third-country equivalence regime would be wholly inadequate for the scale and complexity of UK-EU financial services trade and argued for mutual recognition. He explained that the EU regime is unilateral and that access can be withdrawn at short notice. We now have a volte-face where the White Paper proposes something close to equivalence but with “expanded” scope. Exactly how significant that enhancement will be is not clear and there is very little time to pin down the precise details.

All the major financial services bodies have expressed their deep disappointment at this reversal. The inevitable consequence is that we are destined for split platforms across the UK and EU, which means the transfer of jobs and investment and, most importantly, the loss of a chunk of tax revenue from the £72 billion which the sector contributes to the Exchequer annually. If the Government are set on equivalence, they must now look at a comprehensive sector deal for financial and related professional services, much as they have done for other areas of industrial strategy, to reinforce the competitiveness of these world-leading sectors of our economy.

In conclusion, it would be churlish not to respect the quietly heroic way in which the Prime Minister is attempting a Houdini act to beat all others. The road ahead is treacherous, but I still hope for an 11th hour deal, cloaked in high drama, which is typical of how the EU resolves all major crises. There is, however, only so much uncertainty that the business community can stomach before voting with its feet and its investment cheque book. All the other alternatives for Brexit are too unpalatable and the mood of the country is to get on with it, so I hope that the great British tradition of pragmatism will prevail and the Government will persevere with their plan, as no deal would be a monumental tragedy for all sides.

Brexit: Deal or No Deal (European Union Committee Report)

Lord Gadhia Excerpts

Tuesday 16th January 2018 Lords Chamber

[Lord Gadhia (Non-Afl)]

My Lords, I welcome yet another important report from the EU Select Committee, which has now produced a total of 29 such contributions since the referendum. Your Lordships have been truly prolific in contributing to the evolving Brexit process, providing timely interventions and valuable insights at every turn.

My last public comments about Brexit were made on 2 March last year in a debate on the options for trade after leaving the EU. I had the pleasure of speaking alongside my noble friend Lord Jay, whom I wish a speedy recovery. In that debate I sought to dissect how the dynamics of the negotiations might unfold, based on the Government’s stated strategy. Looking back, much of what I said then has proved prescient, particularly on the impact on the sequential process of prioritising withdrawal arrangements first, as advocated by Michel Barnier, which David Davis confidently insisted would run in parallel with talks about the future framework. Also, on the need for a transition period, Ministers were confidently predicting that everything could be wrapped up in two years and such a period was therefore unnecessary. There is also the importance of the financial settlement in unlocking further progress.

The lesson from phase 1 of the negotiations is that the EU is a disciplined and determined counterparty, with very little appetite or need to deviate from its negotiating mandate. As a result, there has been more give than take from the UK side. Notwithstanding this, we should welcome the fact that agreement was reached in December, which reduces the risk of no deal, as noted by the noble Lord, Lord Kerr. As we move into the next phase of negotiations, I hope the Government will show a little more humility and be less dismissive of the input received from many sides of this House.

As I said last March, a no-deal outcome would be the Grand Canyon of cliff edges and is not a credible threat. That assertion is now backed up by evidence contained in this report across multiple industry sectors. In any normal commercial negotiation, you would certainly define your walk-away position based on a calculation of the private gains and losses that you are prepared to accept and the best alternative to a negotiated agreement—known by professionals as the BATNA. The Brexit negotiations, however, involve too many externalities and political ramifications to treat them like a private deal. The whole question of deal or no deal is not some kind of game show for armchair negotiators but a serious, nation-defining decision.

Although no deal is not a credible negotiating strategy or tactic, we need to accept that it might be the unintended consequence of a breakdown in negotiations, and it is therefore sensible for contingency plans to be made on both sides. In some ways, I would draw parallels between no deal and the 2008 decision by the US authorities to allow Lehman Brothers to fail: it would be a premeditated decision with unknown contagion effects that could easily be underestimated. You could call it a grey swan event.

Those who are more relaxed about no deal point out how WTO terms are perfectly workable, and they might be. Their focus on tariffs, however, is a red herring. Yes, trade in goods is important, but it is the least of our worries when exchange rates can provide a market adjustment to offset the impact of tariffs. It is services, where non-tariff barriers and market access issues are at play, and which represent 80% of our GDP, where no deal would inflict the most damage. So, as we move into the next phase of the negotiations, I would like to make four key points.

First, we have been outmanoeuvred on sequencing and are destined for a political fudge when it comes to the future trading arrangements. As the report acknowledges in paragraphs 124 to 127, we do not have a single deal; we have two or more deals—the withdrawal agreement and the future trading arrangements. There may indeed be other agreements on non-economic issues, such as security and counterterrorism. The decoupling of the process means that there will be a detailed withdrawal agreement by March 2019, which will become binding, but the future trading agreement will be less advanced and take the form of a political declaration or heads of terms which will not become binding until finalised and ratified by all member states during the transition phase. It drives a coach and horses through the notion that nothing is agreed until everything is agreed, as noted in paragraph 126 of the report. Most importantly, it locks us into a financial settlement in March 2019 without the absolute certainty of a trade deal.

Secondly, securing an early transition deal will, ironically, remove the pressure on reaching a sufficiently detailed heads of terms on the future arrangements prior to March 2019. At this date, we will leave the EU in name only. If this were a commercial negotiation, the most practical legal solution would be to extend the withdrawal date, as described in the report. It would also helpfully preserve “nothing is agreed until everything is agreed”. This is, sadly, wishful thinking, and we must accept that extending the date beyond March 2019, other than for a very short period, is politically unacceptable because it removes the fig leaf of saying that we have left the EU.

Thirdly, come March this year, when the European Council signs off its negotiation mandate to the Commission on the framework for a trade deal, I fear that we will be offered a “take it or leave it” arrangement, largely modelled around CETA, with limited time or flexibility for substantive improvement. We will be left with no choice but to accept the deal and try to improve it later during the transition phase or even beyond, since our future EU relationship will be a continuous, rolling process and not a static, one-off negotiation.

Fourthly, and finally, our focus must now shift to achieving a soft landing for a hard Brexit. The proposed transition phase would defer the cliff edge only to the end of 2020. There is a case for providing a further true implementation phase beyond 2020 so that we can genuinely adapt to new procedures and processes. We should also acknowledge that trade is ultimately a function of competitiveness, not simply deals done by politicians. The ability to compete effectively depends on other factors not necessarily covered by an FTA, including continued access to skills, R&D collaboration, integrated supply chains and even the discipline of having state aid rules. So policy levers within our control, such as new immigration or anti-trust rules or research funding, will be equally as important as the FTA in securing a soft landing.

In conclusion, I believe that the risk of a no-deal scenario has diminished and that we will muddle through the Brexit process, taking us, in stages, out of the EU towards something like a Canada arrangement by 2020, even though our trade with the EU is eight times larger. The timetable is not guaranteed and might be extended again by design or necessity, but what is certain is that Britain will become a rule taker in accessing the EU single market, particularly on services. It is less than an ideal outcome, but we can take some comfort that it is better than no deal, which remains the worst possible scenario for both sides.

EU Exit Negotiations

Lord Gadhia Excerpts

Monday 13th November 2017 Lords Chamber

[Lord Callanan]

A number of proposals have been flying around and I am sure that the noble Lord would not expect me to comment on the basis of leaked documents, but we have been very clear about our objectives. Those objectives are shared by us, by the Irish Government and by the European Commission; we just need to find a practical and realistic way to bring that into effect.

[Lord Gadhia (Non-Afl)]

My Lords, does my noble friend agree that CETA is not a “perfectly good starting point” for any trade agreement with the EU—to quote the words of the Secretary of State, David Davis? CETA has no chapter on services, which represent 80% of our GDP, and our trade with the EU is eight times larger than Canada’s. Surely we need to be much more ambitious in protecting the UK economy and jobs in any Brexit trade deal.

[Lord Callanan]

We have been very open that we do not want to copy any existing agreement. We want a bespoke, made-to-measure agreement that is suitable for both ourselves and the EU, because free trade benefits both sides. We think that an agreement is achievable. If both sides show commitment and willingness, we can work towards it and we should be able to achieve it.