Brexit: Options for Trade (EUC Report)

Lord Gadhia Excerpts

Thursday 2nd March 2017 Lords Chamber

[Lord Gadhia (Non-Afl)]

My Lords, having made my maiden speech last October during the debate on championing free trade it feels appropriate to speak again today to welcome the excellent report produced jointly by the EU sub-committees chaired by my noble friend Lady Verma and the noble Lord, Lord Whitty. Having missed the opportunity to be the 180th speaker at Second Reading of the Article 50 Bill last week, I am provided another opportunity to share some broader reflections on Brexit. In particular, I shall focus on the central issue of how the dynamics of the trade negotiations might unfold once Article 50 is finally triggered.

With all due respect to your Lordships’ House I believe that we have spent far too much time on the process issues, at times generating more heat than light, and today’s debate allows us to get into the substantive and tricky issues which lie ahead. We should ultimately be comfortable in granting the Prime Minister maximum flexibility to negotiate unencumbered. We can do so in the full knowledge that the success or failure of this negotiation will make or break her premiership, as signalled by her rare appearance on the steps of the Throne last week. Put simply, the Prime Minister will have the clearest of political incentives to carry Parliament and people with her ahead of the 2020 general election—which will serve as a de facto referendum on the outcome, or define the negotiating parameters for the remaining process should the timetable extend beyond two years, which seems highly likely, as noted in the report.

Much of the debate during Committee on the Article 50 Bill this week has boiled down to different views on the art of the possible once negotiations commence. So instead of speculating, I say: let us get on with it. I have spent 25 years negotiating large and complex corporate and financial transactions, but those pale into insignificance compared with the heroic and daunting task ahead. It is now clear that we are seeking to conclude an unprecedented free trade agreement with deeper preferential access to the EU single market across both goods and, importantly, services than is currently enjoyed by any third country. Indeed, it is likely to form part of a wider association agreement encompassing other, non-economic areas of co-operation. So all the apparent hyperbole is more than justified. This will be the most ambitious and complex trade treaty of all time—particularly if it is going to deal effectively with alternatives to a customs union, not least in Northern Ireland, and the equivalence and/or mutual recognition issues for services.

Let us drill into how we might persuade our counterparts to conclude such an unprecedented FTA, and consider if we are overestimating the strength of our cards. We must certainly be ambitious, but at the same time make an honest assessment of whether our starting positions are realistic.

The UK Government’s position is built on four pillars of logic. First, the Article 50 process and the FTA should be undertaken in parallel since the withdrawal process is intended to take account of the framework for the UK’s future relationship with the EU. The other obvious reason for linking the two processes is that we can then maximise negotiating leverage from any divorce settlement.

Secondly, we start from a position where all the rules and regulations are identical on day 1, with zero tariffs and so, unlike most trade negotiations, we are not seeking convergence. The great repeal Bill underpins this position from a legal perspective. What is therefore important is to protect against divergence, so the dispute resolution mechanism will be key—which is why the Government’s White Paper includes a whole annexe of such examples.

Thirdly, we can achieve all this in two years and therefore any transitional arrangements are designed not to extend the negotiating period but simply to provide an implementation buffer. The actual negotiating period, as mentioned, would in fact be shorter—something like 18 months, or even shorter than that if we include the process for approval by both the European and UK Parliaments. Fourthly, if we cannot get the deal that we want then we fall back to WTO terms, and this represents what expert negotiation theorists call the BATNA, or best alternative to a negotiated agreement.

In contrast, the EU position is clearly at odds with our own starting position. On the first pillar, Michel Barnier has made it clear—repeatedly—that the EU proposes a sequential process: Article 50 first followed by the new trading arrangements. I believe the current stand-off can be unblocked only by the European Council in its negotiating mandate to the European Commission in response to the formal triggering of Article 50. Without this course correction the negotiations will get off to an acrimonious start and it will remove the leverage inherent in our monetary settlement.

On the second plank of our argument, about starting from a unique position of trading conformity and offering zero-for-zero tariffs, we are placing huge faith in Homo economicus that rational decision-making will prevail. Having had dinner in Brussels with senior European leaders earlier this week I am not sure that they see it entirely this way. Brexit was a political choice and it will receive a political response. The EU is determined that Britain pays a price for leaving the club—not out of vindictiveness but because it fears that a favourable deal for Britain would create a bad precedent and potentially encourage other member states down the same path. It clearly want us to pay a price, while we naturally want to minimise the economic impact. Put crudely, can we get away with a slap on the wrists or will it be a slap on the face? I believe that we will not really know until much later in the process, when all the big contentious items are on the table and we progress to 11th-hour horse-trading.

There is a significant risk that the arrival of Macron in France and Schulz in Germany could embolden European hawks to play hardball. There is also a big bear-trap waiting for us: clasping at what might appear a relatively attractive deal on goods—where the EU runs a trade surplus—but a relatively poor compromise on services, where we enjoy our biggest competitive advantage. I am afraid that standing up for City interests is clearly unfashionable, but I hope that protecting the £66 billion tax base that pays for essential public services is something we will not trade away lightly. To secure a preferential deal on services we will inevitably be asked for some form of preferential access to the UK’s new immigration policy; so we must define that, as a matter of priority.

On the third area, relating to the timetable and transition, a big expectations gap is opening up. Understandably, the Government are targeting two years to conclude the whole process. It would certainly be in our national interest to minimise the period of uncertainty. However, all the empirical evidence and expert opinion is stacked up against us and I fear that Ministers are creating a rod for their own backs. It seems more likely that within a two-year timeframe we can conclude Article 50—including our new WTO schedules—alongside a substantive framework for the future trading relationship and how to reduce customs friction; but more time will be required to complete and ratify the FTA. In those circumstances, a strictly time-bound transitional phase would be extremely valuable. That would be about not just implementation. I note that my noble friend Lord Bridges has side-stepped the question of temporarily remaining in the EEA but this option, or something more bespoke, could provide a bridging phase from one regime to another. We will also need this phase to replicate all 53 third-country FTAs.

I can assume only that the Government’s logic is driven by the desire to keep maximum pressure on timing, and that a transition period which elongates the timetable is a fallback and any such proposal is tactically better off coming from the EU. I believe that there is significant risk that the Government ultimately will be forced to retreat on both timing and transition, so perhaps it might be preferable to hedge their bets.

Fourthly, I come to our fallback position that,

“no deal for Britain is better than a bad deal”.

The EU is likely to view that in a diametrically opposite way, namely, “Any deal is better than no deal”. Why? Because the cost of abrupt exit is significant. From where we stand today it would be the Grand Canyon of cliff edges and therefore falling back to the WTO will be seen as an empty threat. As Sir Ivan Rogers pointed out in his evidence to the House of Commons Brexit Committee last week, no other major country trades on pure WTO terms with the EU. Since the WTO does not cover services in any depth it is doubly disadvantageous for a country like the UK. We would be walking into a legal vacuum in many areas.

On all four pillars of our negotiating strategy, therefore, we have serious work cut out to win over hearts and minds. The honest assessment is that we do not hold many cards and face a negotiating asymmetry of 27 versus one, set against a ticking two-year clock without an easily palatable fallback. Put starkly, we will need to buy our way or charm our way out of this situation. Fortunately, our surprisingly resilient economic position since the referendum provides us with some room for manoeuvre on the financial settlement, particularly if the amounts can be stretched out over time. It is also crucial to galvanise the good will among our European partners. In the words of Sir Simon Fraser, speaking at the Worshipful Company of World Traders last week, we will need to avoid “gratuitous political friction”. This is a time not for gifted amateurs but for serious and professional negotiators.

We might also need to draw upon the mediation skills of leaders and countries that enjoy the trust and respect of both the UK and the EU and can see the benefits of enduring non-economic co-operation across Europe. The voice of European businesses will also be important in focusing the minds of national Governments back on to the economics and not just politics. I suggest to the Government that this wider advocacy mission is not just for Ministers and that we should actively draw upon the expertise and Rolodex of the House of Lords in reaching out to parliamentarians and key influencers across Europe.

In conclusion, to achieve a successful, smooth and smart Brexit and secure the most advantageous trade agreement going forward, we will need to have our cheque book ready and, above all, make efforts to win friends and influence people as never before.