Making the Most of the Brexit Deal
A chaotic Brexit, in which key questions about the relationship between the UK and the EU are left unanswered, may be avoided, but severe political and economic harm could still await both sides. What, then, accounts for the evident lack of urgency in taking the necessary steps to avoid such a scenario?
PARIS – On December 8, the United Kingdom and the European Union’s 27 members settled on some key aspects of the Brexit divorce agreement, opening the way for the decision, on December 15, to open a new chapter in negotiations, focused on addressing the future EU-UK relationship and transitional arrangements. This is good news, not least because it averts the worst-case scenario: a hard Brexit. But what lies ahead is much more challenging.
It seemed for some time that Europe would sleepwalk into hard Brexit. With the UK’s ruling Conservative Party deeply divided, and the EU seemingly unwilling to act strategically, the likelihood of a no-deal cliff-edge scenario appeared high.
Yet, in the end, the UK made critical concessions that allowed the negotiations to move forward. It agreed to pay much more to its EU partners than it had initially announced. And it committed to avoid the establishment of a hard border between Northern Ireland (part of the UK) and the Republic of Ireland (part of the EU), even as Northern Ireland retains full access to the British market.
The deal is a bitter pill to swallow for those who campaigned for Brexit in the name of saving money for the UK’s National Health Service. They will find it hard to tell voters that settling existing commitments to the EU will cost each British adult €1,000 ($1,189), if not more. And the latter-day Leninists who regarded Brexit as a way to complete the policy agenda initiated by Prime Minister Margaret Thatcher will find it hard to reconcile their vision of a deregulated Britain with the continued alignment of Northern Ireland’s regulatory regime with that of the EU.
But the fact is that a hard Brexit would have cost both the UK and the EU far more, in terms of jobs and prosperity. Even the threat of such an outcome was starting to cause damage, as private companies put investment on hold. The political consequences of a hard Brexit would have been dire as well. Both the UK and the EU would have lost substantial global influence at a moment when an erratic US administration is seeking to tear down the existing international order and an assertive Chinese leadership is beginning to use that effort to its own advantage.
Had the UK not acted to avoid such a scenario it would have lost the most, especially if it had ended up relying on a crumbling multilateral trade system to ensure access to foreign markets. In any case, because geography matters, the EU will remain Britain’s main market. And, because size matters, the UK will continue to depend on EU regulations, especially in services.
But averting a hard Brexit is just the first step. The question now is what sort of future relationship the two sides can agree on. And the answer is far from clear.
On the British side, the absence of a coherent vision for the future UK-EU relationship is astonishing. Prime Minister Theresa May’s speech in Florence in September remains the closest approximation on offer, but it left many important questions without a clear answer. And, as May’s legislative defeat in the House of Commons on December 13 underscored, the British government remains too divided to agree on a common Brexit agenda.
There is not much vision on the EU side, either. With the recent deal, Michel Barnier, the bloc’s chief negotiator, scored a tactical victory. But a template for future partnership is still nowhere to be found. The guidelines for Brexit negotiations issued last April by the EU’s heads of state and government certainly did not provide one. Instead, they established red lines, emphasizing the “indivisibility” of the “four freedoms” – free movement of goods, services, capital, and labor – that underpin the European single market. The December 15 declaration does not go much further.
For now, the EU’s negotiating stance continues to be shaped largely by the fear that too favorable an agreement would create incentives for other countries to follow the UK’s lead. Beyond that defensive attitude, lack of policy consensus has resulted in a preference for the status quo.
Policy wonks focus on weighing a “Canada option” (a free-trade agreement for goods) against a “Norway option” (a sort of junior membership in the single market). But both are unsuited to the UK-EU partnership. The Canada option would not address any of the fundamental issues concerning trade in services – a critical omission, given that the UK is a major supplier, and their provision requires a complex regulatory framework. And the Norway option would simply assume away the problem by requiring Britain to adopt passively any economic legislation adopted by the EU.
In a 2016 paper, my colleagues and I argued that the EU should regard Brexit as an opportunity to define a new model for partnership with countries that want strong economic and security links, without political integration. We further argued that, at a time when enlargement momentum has been depleted, the EU should work to diversify its relationships with neighbors. We proposed building a “continental partnership” involving deep economic integration based on a common regulatory framework, with the EU, the UK, and possibly others accepting the free movement of goods, services, and capital, but not of labor. We also argued in favor of a permanent process of policy consultation that would, as a counterpart to the UK’s submission to EU economic rules, give the British a voice – but no vote – in the creation of European economic legislation.
In official EU circles, the paper was received coldly, to say the least, with critics deriding the breach of the four freedoms. But the fact is that, while an integrated market for goods and services requires a degree of labor mobility, it does not imply that all people must have the right to cross borders and look for a job in the country of their choice. To pretend that it does is to confuse a citizen’s right (essential, to be sure, in a political and social community like the EU) with an economic necessity. This is bad economics and dubious politics.
Our critics also resisted envisioning a longer-term arrangement before the details of the divorce were settled. But this chapter is now being closed, meaning that it is time for the EU to think outside the box, and make an ambitious offer to Britain.
Any sensible agreement between the EU and the UK is bound to result in the latter losing much of the influence it currently enjoys in European affairs – an outcome that will surely diminish the appeal of following its lead. But even if a current EU member does decide it would be better off outside the EU’s “inner circle,” it is not the end of the world. It certainly isn’t a reason to cling to the status quo.
The Brexit Tragicomedy
With the United Kingdom's withdrawal from the European Union looming on the horizon, party politics has become increasingly dysfunctional and divisive. But while Brexit will be bad for the EU, and even more so for the UK, it could also serve as a cautionary tale for other countries in need of a domestic political realignment.
PRINCETON – As the rest of the world looks on with a mixture of amusement and pity, British politics in the age of Brexit has come to resemble a soap opera. Can the chaos that is descending on the United Kingdom be good for Europe, or even for Britain? Perhaps, but only in the sense that train wrecks yield lessons about what to avoid.
British political actors know they are putting on a performance, and they speak candidly about life imitating art. Their model is the backstabbing drama of Game of Thrones or the dark comedy of House of Cards (the British version, not the long-winded American imitation that has been canceled in the wake of sexual-assault allegations against its star, Kevin Spacey).
Unlike in Hamlet, where everyone ends up dead, and an outsider (Fortinbras) shows up to reestablish normality, modern fictionalized political dramas never have a satisfying resolution. The Brexit drama, then, is faithfully imitating art: it cannot have anything but a messy conclusion.
Brexit is not just a political upheaval; it is a revolution. Historically, radical political realignments have been rather rare in British politics. One example is the Glorious Revolution of 1688, which produced a two-party system comprising Whigs, who supported the new settlement, and Tories, who resisted it.
That system lasted for more than a century, until the 1840s, when Whig became synonymous with Liberal, and Tory with Conservative. But then, in 1846, the Conservative Party split over curtailing protective tariffs for grain, which was bad for the party’s rural farming base, but good for manufacturing, and for society generally. The resulting political balance lasted for almost a century, until the 1920s, when the Labour Party replaced the Liberals as the alternative to Conservatism.
Arguably, another political realignment may be past due. In the 2000s, British Prime Minister Theresa May played a crucial role in cleaning up the Conservative Party’s image as the “nasty party.” But her Brexit strategy, in which she has avoided taking any clear positions, has transformed the party into something even worse: a dishonest, divided, weak political cabal whose decisions could prove lethal.
Brexit transcends the old two-party divide in British politics. The Conservative Party’s bloc in Parliament includes a small minority who regard Brexit as a disaster, others who want a well-negotiated compromise, and a substantial group who oppose any compromise and have embraced the idea of a clean break with the European Union.
Labour is similarly divided. The party’s leader, Jeremy Corbyn, is hostile to the EU, because it could prevent him from implementing his utopian socialist program. At the same time, many Labour MPs recognize that the EU plays a central role in providing economic opportunities and social mobility for British citizens.
Because no fundamental issues separate pro-EU Conservatives from pro-EU Labourites, practical cross-party cooperation has started to occur. But for any such parliamentary alliance to have democratic legitimacy, it will have to present itself not just as a coalition of likeminded MPs, but as a new political party, with a program to confront realistically the challenges of technological change and globalization.
Similar shifts have occurred in other European countries when established parties and traditions fell apart. In the 1990s, Italy’s largely bipartisan system disintegrated when Christian Democracy was engulfed by corruption scandals and the Communist Party was pulled apart by the collapse of the Soviet Union. Italian politics has been plagued by instability ever since.
In France, President Emmanuel Macron’s new political party, La République en Marche !, has effectively supplanted the old center-right Gaullist party, Les Républicains, as well the center-left Socialists. Still, Macron rightly recognizes that his overhaul of French politics will not succeed unless it is matched at the European level. If a Europe-wide shift does happen, it will owe much to the cautionary tale playing out in Britain.
In Germany, the breakdown of coalition negotiations between the Christian Democratic Union, the Christian Social Union, the Free Democrats, and the Greens suggests that a political realignment may be necessary there, too.
In fact, realignments may have a better chance of succeeding elsewhere in Europe than in the UK. After all, Britain’s malaise runs much deeper than party politics. Brexit has ushered in a revolution in a country without a revolutionary tradition. Withdrawing from the EU will require uprooting a thicket of complex legal and institutional frameworks, around which most political norms and conventions revolve.
So far, every alternative arrangement that has been proposed has been problematic. For example, if Britain liberalizes its trade and regulatory policies, British workers could end up worse off than they were under the EU regime. Inevitably, every concrete step out of the EU is bound to lead to deeper factionalism.
Looking ahead, there are two possible scenarios for British politics. The first is the Hamlet scenario, in which the chaos continues until the UK crashes out of the European single market and customs union. The stage will be littered with political corpses, and an economic disaster will ensue.
In the second scenario, common sense prevails: Macron-style pragmatism takes root in Britain, supplanting the Poujade-style populism that fueled the anti-EU “Leave” campaign. This assumes that Macronism succeeds at the European level, so that it can serve as a foil to the dysfunctional, distorted politics of the United States, Russia, and Turkey, and to the new instability in Germany.
That outcome would also be Shakespearian, recalling nothing so much as All’s Well that Ends Well – one of the bleakest “comedies” in Shakespeare’s oeuvre.
Britain’s Road to Perdition
The British political establishment is now converging on a form of Brexit that will satisfy neither the "Leave" nor the "Remain" camp. With this depressing prospect setting in, some are starting to wonder what it would take for Britons to change their minds about leaving the European Union.
LONDON – Full English Brexit is off the menu. Before leaving the European Union altogether, the British government now wants an “interim period,” in which the United Kingdom would retain the commercial rights of EU membership, while still contributing to the EU budget, observing EU regulations and legal judgments, and allowing the free movement of people. This period would last for at least two years after March 2019 – the official deadline for the Brexit process – meaning that until 2021, Britain would essentially be an EU member state without any voting rights.
In the meantime, British Prime Minister Theresa May’s government, having promised to maintain a “deep and special” relationship with Europe, would try to negotiate a new “treaty-based arrangement” with the EU. But Britain will have a vanishingly small chance of concluding a new treaty in so short a time.
Indeed, come 2021, the UK will still be hurtling toward a “cliff edge”: a full break from Europe, with no alternative arrangement in place to cushion the blow. Politically, that timing would pose even greater risks for May’s government than it faces today, since the next general election must be held by June 2022. So the UK may try to extend the transition period beyond 2022. And as past experience tells us, once an extension is granted, it may never end.
The UK seems to be approaching the scenario I outlined three months ago. May’s fateful decision to hold an early election in June has allowed her opponents to demand that the UK negotiate a transitional arrangement similar to what Norway has as a member of the European Economic Area. The EEA was originally created in 1994 as a temporary framework for various countries preparing to join the EU. But because Norwegian voters rejected a referendum on EU membership 11 months later, the EEA has now lasted for 24 years.
Nobody can predict what will happen in 24 years. But the good news for Britain is that the EU may already be moving slowly toward a two-track structure. To prosper, the eurozone will need to establish a political union. This will leave non-euro countries such as Denmark, Poland, and Sweden forming an outer ring of economic cooperation outside the eurozone. These countries would have membership in the single market, but not in the monetary or political union.
A two-track Europe would be very different from the “two-speed” model that applies to Europe today. In the latter, every country is theoretically heading toward “ever-closer union,” just at different rates. In a two-track scenario, by contrast, Britain could comfortably re-join the outer track along with Norway and, perhaps, Switzerland.
Now for the bad news. A transition arrangement for the UK may be unacceptable to both EU governments and British voters. Committed federalists in the EU want Britain out as quickly as possible, because Britain has long given cover for others – such as Denmark, Poland, and Sweden – to resist deeper integration.
Federalist zealots hate the idea of a two-track Europe. They want to force all EU member states to adopt the euro within the next decade, and to embed themselves permanently into a full-scale political and fiscal union. And they rightly believe that achieving this goal will be easier with Britain out of the picture.
But a transition period is no panacea for the UK either. Britons have already started to get a glimpse of the economic costs of Brexit, as international businesses that once used Britain as a hub for their European operations have started to relocate some of their activities. As the UK government tries to maintain the fiction of a strictly time-limited transition, this process will accelerate further. Moreover, the EU will use the transition period to change its own regulations, so that businesses generating employment and large tax revenues will have to move onto EU territory.
For example, the European Banking Authority and the European Medicines Agency are already relocating from London, meaning the many legal, managerial, and lobbying jobs connected to highly regulated activities such as finance and pharmaceutical research will have to relocate, too. A transition period would thus hit international businesses based in Britain with a regulatory double-whammy: they would be subject to the whims of UK and EU bureaucracies at the same time.
Making matters worse, the promise of a long transition could delay the shift in public opinion needed to reverse Brexit before it is too late. After March 28, 2019, the UK will be officially out of the EU, where economic growth has already started to overtake that of Britain. If it ever wants to be readmitted, it will have to settle for far less attractive terms than what it enjoys today. Not only would it no longer receive budget rebates or special treatment on social regulations; it might even be forced to join the euro.
Even the 48% of British voters who voted “Remain” might reject such humiliating terms. Britain would thus be stuck in limbo – like Norway, but without the oil wealth or social cohesion. As the Labour Party’s trade spokesman has aptly put it, a semi-permanent transition period based on the “Norway model” would turn Britain into a “vassal state.” It would still pay large sums into the EU budget and adhere to EU laws, but it would have no say over how that money is spent or how those laws are made.
In the months ahead, the British public may start to foresee this humiliating endgame. The Norway model will satisfy neither Britain’s elderly, provincial Europhobes, nor the young, urban voters who want to preserve the rights of EU citizenship that they have taken for granted all their lives.
With this depressing prospect setting in, British voters could change their minds about Brexit before their leaders go through with it. But for such a Damascene conversion to happen, the country would have to experience a political or economic crisis large enough to shake public opinion out of its fatalistic complacency. As things stand, Britons have been emulating that beloved national slogan, “Keep calm and carry on.” Before things can get better for Britain, they will probably have to get much worse.
The UK’s Multilateral Trade Future
With Brexit looming, the UK has no choice but to redesign its future trading relationships. As a major producer of sophisticated components, its long-term trade strategy should focus on gaining deep and unfettered access to integrated cross-border supply chains – and that means adopting a multilateral approach.
CAMBRIDGE – As the United Kingdom negotiates the terms of its divorce from the European Union, it would be wise for the country’s leaders to begin looking further into the future to determine what approach to international trade relations would serve it best. Does the UK really want to hang its future on bilateral agreements with a long list of individual trade partners? Or would it be better off joining existing mega-regional free-trade agreements, while working to strengthen the global multilateral system under the World Trade Organization?
The bilateral approach would demand a huge amount of time and resources, with UK negotiators engaging in a series of discussions with each and every country with which they wanted to do business. The end result would be a tangled network of deals that would only exacerbate the balkanization of the international trading system.
This approach limits gains from trade. For example, the Inter-American Development Bank reports that the trade gains from Latin America’s 33 small regional trade agreements have been meager. The key to boosting those gains, according to the IADB, is to adopt a new strategy that expands access across and within markets.
This suggests that, for the UK, mega-regional trade agreements – which provide access to multiple markets, but entail lower levels of fiscal and regulatory integration than the EU – are the best way forward. After all, it is this approach that would enable UK firms to position themselves in well-developed and integrated supply chains, serving much larger markets than those to which a bilateral agreement would grant them access.
The argument can be made that a multilateral approach is not just the better option; it is the only one. Consider the recent challenges faced by Bombardier, a Canadian multinational that produces 100-150-seat passenger jets using globally sourced parts, including wings made by Bombardier UK, the largest manufacturing employer in Northern Ireland.
Bombardier negotiated the sale of up to 125 of its jets to Delta Air Lines. But the American aviation giant Boeing challenged the sale, alleging that, enabled by subsidies at home, Bombardier was selling the jets at below-market rates, giving the company an unfair advantage. Despite loud protests from Canada and the UK, the US Department of Commerce now seems set to impose an extremely high import tariff of about 300%. The effects of that duty will radiate throughout the supply chain, hitting the 4,200 employees of Bombardier UK.
This experience demonstrates the limitations of bilateral agreements, especially in a world where supply chains and markets extend far beyond the countries involved. The UK may negotiate a bilateral free-trade agreement with, say, Canada, but UK firms will secure few benefits, unless Canadian firms can sell products with UK components to their other trading partners.
The Bombardier episode also highlights the importance of engagement in – and reform of – the WTO, under whose rules the US-initiated proceedings against Bombardier are taking place. The impact of WTO rules and resolution mechanisms is far-reaching, as 164 countries worldwide subscribe to them.
Yet WTO rules have their flaws. For example, they allow exporting countries to provide financial support and subsidies to specific industries; but they also give importing countries the right to use tariffs to offset these subsidies. The WTO has heard countless disputes over its subsidies and dumping rules, and it is now sure to hear one more, over the Bombardier case, because the US and Canada have different ideas about how to interpret these rules.
Though no one is happy with the current WTO rules, efforts to reform them have so far ended in deadlock. But recent high-value cases involving high-tech products like airplanes, semiconductors, and green technologies, including solar panels and biodiesel, make clear that the problem cannot be ignored. And the fact is that concerns over state aid and competition policy can be addressed only in a multilateral forum like the WTO.
Because the UK has historically shown far less appetite for industrial subsidies than its trading partners have, it stands to gain from clear international rules on industrial support and anti-subsidy tariffs. Given this, the UK has a strong incentive to engage with – and help to upgrade – the WTO.
Another multilateral forum that could prove invaluable to the UK is the Trans-Pacific Partnership, a mega-regional trade agreement that provides for duty-free trade and includes modest commitments in areas like state aid and competition policy, without requiring EU-level integration. Though the TPP suffered a setback last year, when Donald Trump withdrew the United States, last month the 11 Pacific Rim countries remaining in the deal committed to keeping it alive.
The TPP does not have to limit its membership to the Pacific; the UK could engage with it. Given its free-trade credentials and international stature, the UK could help to breathe new life into these and other trade negotiations that have been thrown into disarray by the Trump administration’s protectionist impulses.
With Brexit looming, the UK has no choice but to redesign its future trading relationships. As a major producer of sophisticated components, its long-term trade strategy should focus on gaining deep and unfettered access to integrated cross-border supply chains. That means pivoting away from bilateral deals, toward a multilateral approach that enables the country to rebalance and expand its trading arrangements around the world.
Coming Clean in 2018
US President Richard Nixon and many of his aides learned during the Watergate scandal that the cover-up makes the original mistake ten times worse. In 2018, the Trump administration – and companies like Uber and 21st Century Fox – will ignore that lesson at their peril.
LONDON – It has been a bumper year for making the invisible visible. The last 12 months have overflowed with leaks, allegations, and other disclosures, not just of misconduct by individuals, business leaders, and politicians, but also of proactive schemes to prevent that misconduct from ever coming to light.
Last month, it came out that a 20-year-old hacker breached Uber’s system in 2016 and accessed the information of about 57 million people, including some 600,000 of its drivers in the United States. Rather than admit to the security flaw, Uber quietly paid the culprit $100,000 to destroy the data, in the hope that the victims – and, perhaps more important to Uber, the company’s investors – would never find out.
The Equifax data breach – in which hackers gained access to sensitive personal information, from birth dates to Social Security numbers, for about 143 million US customers – was not covered up to quite the same degree. But there was still a six-week period between discovery of the breach and disclosure to the public, during which three executives sold a small share of their stock, though they insist they had no knowledge of the breach at the time.
A security breach is frustrating, even infuriating, for customers and investors. But willful denial of such a breach decimates trust. If a company discloses a breach, at least customers know they can expect to be told what is happening with their information (and can keep watch for fraudulent activity on their accounts), and investors can assess business risk accurately.
If the truth comes out much later – as in the case of Uber, in particular – a story about a technical problem quickly becomes a story about corporate integrity. Consumers’ fears about sharing personal information with companies – difficult to avoid in modern life – deepen, and business becomes an object of heightened skepticism.
But businesses have not just been covering up mistakes; they have also been hiding major crimes by senior figures. Nowhere is this more apparent than in the long-term patterns of sexual harassment and cover-ups that have been exposed in recent months.
At Fox News, leading personalities – from commentator Bill O’Reilly to the company’s chair, Roger Ailes – were long protected by the network’s parent company, 21st Century Fox, in the face of allegations of sexual harassment. Not only did 21st Century Fox help to keep quiet a $32 million settlement reached in January between O’Reilly and a frequent guest on his show (at least the fifth such settlement over O’Reilly’s behavior); the company offered its star a highly lucrative new contract soon after.
O’Reilly was eventually pushed out, but only after the truth about the allegations and settlements were revealed to the public. The company followed essentially the same script with regard to Ailes during his 20-year tenure.
A similar machine protected the Hollywood heavyweight Harvey Weinstein during his decades of using his position of power to harass and assault women. As The New York Times recently documented, Weinstein received help from all sides. His brother and partner, Robert Weinstein, participated in the payoffs. His business associates were incentivized to look the other way. Reporters were tasked with discrediting accusers. Even the victims’ own agents and managers were pressured or paid to advise their clients to stay quiet.
The good news is that when more powerful figures are held to account for their abusive behavior, more victims may gain the confidence to come forward. As power dynamics shift, victims overcome the belief that they must suffer in silence, and come to trust that enough people will actually listen to them.
In this sense, the acceleration in revelations of the last year is a culmination of a longer-term trend, in which larger-than-life power players and seemingly unshakable institutions have been brought down by their own misdeeds. In the aftermath of the global financial crisis, financial-sector executives may not have been held fully to account for their actions, but the outcry surely contributed to the “shareholder spring” that began in 2012, with investors rejecting executive pay packages and paying more attention to corporate governance issues.
In sport, numerous FIFA officials, including the international soccer organization’s president Sepp Blatter, were brought down, after decades of match fixing, bribery, and other corrupt practices. And Russia has been banned from the coming Winter Olympic Games for using a complex system to circumvent the drug-testing regime at the 2014 Olympics in Sochi.
One area where the other shoe has yet to drop is in the big cover-up in US politics: the connection between members of Donald Trump’s presidential campaign, including his son Donald Trump, Jr., and official Russian circles. The facts, which are gradually emerging, are damning enough. But the ham-fisted attempts to hide the truth are making the situation much worse for the Trump administration, and for US politics more broadly, not to mention the country’s international standing.
If nothing else, recent revelations should drive home the maxim that the cover-up makes the original mistake ten times worse. President Richard Nixon and many of his aides learned that lesson during the Watergate scandal. In 2018, the Trump administration – and companies like Uber and 21st Century Fox – will ignore it at their peril.