Your A to Z Guide to the Brexit trade negotiations


A. Article 50 of the Lisbon Treaty set out the rules for leaving the European Union. As with most negotiations, it assumed the leaving country would present its proposals for the post-withdrawal period – which would then be finalised with the other members. The UK government, however, has still not yet set out its post-Brexit trade objectives.  So the UK left the EU on Friday and entered the Transition period without anyone knowing what might happen at the end of the year.
B. ‘Brexit means Brexit’, has been the UK’s core statement since Article 50 was tabled. But as I noted in September 2016, Brexit can actually mean a variety of different outcomes – and they have very different implications as the chart above shows. At one extreme, the ‘Norway model’ is very similar to full EU membership, but with no say on EU decisions. Whereas the ‘Canada model’ – which seems to be the UK’s objective – is simply a free-trade agreement. It would offer some access to the Single Market for goods, but less access for services (which are 80% of the UK economy). A ‘No Deal Brexit’ – which is the likely alternative outcome – means working under WTO rules with arbitrary tariffs and regulations.
C. The European Commission manages the day-to-day business of the European Union on behalf of the European Council, and is effectively its civil service. Its president is Ursula von der Leyen and she re-appointed Michel Barnier to lead the post-Brexit negotiations. As with Brexit itself, the UK’s failure to agree its objectives has allowed Barnier to gain “first mover advantage”, and effectively control the scope of the negotiation, by finalising and publishing the EU’s own negotiating objectives.
D. The Default date for the UK to exit the Transition period is 31 December 2020. It has also been agreed that this can be extended for a further 2 years, if the UK requests this before the end of June – but the UK government has said it will refuse to do this. The UK stance gives the EU a very strong negotiating position, as it means they effectively control the timetable as well as the scope of the negotiations.
Barnier has suggested they have “3 goals for 2020: to maintain a capacity to cooperate closely at the global level; to forge a strong security partnership; and to negotiate a new economic agreement (which, most likely, will have to be expanded in the years to come).” Given the EU’s focus on its proposed EU Green Deal, and the need to ensure a positive outcome for the UN Climate Change Conference in Glasgow in November, there may not be much time left for trade talks, given that security is their second priority. This view is reinforced by Barnier’s suggestion that the new economic agreement will have to be expanded after December.
E. The European Union is a treaty-based organisation of 28 countries. As its website notes, it was ‘set up with the aim of ending the frequent and bloody wars between neighbours, which culminated in the Second World War.’ The UK joined the original six members (Belgium, France, Germany, Italy, Luxembourg and the Netherlands) in 1973, along with Ireland and Denmark. Further expansions took place, especially after the end of the Cold War between the West and the Soviet Union. At the suggestion of then UK Prime Minister Margaret Thatcher in 1986, it was agreed to establish a Single Market and Customs Union in 1993, based on four key freedoms – free movement of goods, services, people and money – and this transformed trading relationships across the continent.
F. The Financial Settlement or ‘divorce bill’ is part of the Withdrawal Agreement and covers the costs of the programmes that the UK agreed to support during the period of its EU membership. Like most organisations, the EU operates on a pay-as-you-go basis and only charges member countries as and when bills actually come due. The UK calculated this to be between £36 billion-£39 billion (€40 billion-€44 billion), depending on the assumptions used.
G. The UK held 2 General Elections whilst finalising the Withdrawal Agreement. The first, in 2017, forced premier Theresa May to rely on the Ulster Unionists in order to gain a working majority in Parliament. The second, in 2019, gave Boris Johnson a comfortable 80 seat majority on the basis that he would “Get Brexit Done”. In reality, however, the only bit of Brexit that has been “done” is the exit from the EU. The process of replacing all the arrangements built up over the past 47 years, since the UK joined the then European Economic Community, has yet to begin.
H. A Hostile No-Deal at the end of December would be the worst of all possible outcomes, as it would mean the UK had to trade on WTO terms. Unfortunately, this is a significant risk, given the range of areas that could cause friction – fisheries policy, financial services, immigration and EU citizen rights etc. The underlying issue is that the UK has now become a “Third Country“, and lost all its veto rights in Brussels as well as the ability to help determine policy. Trade negotiations always cause Winners and Losers to emerge, as they are based on the negotiators conceding something of value to the other side in one area, in order to get back something of value for themselves. And potential Losers generally complain very loudly.
I. Ireland proved to be a key sticking-point in the negotiations, as nobody wanted to disturb the peace created by the Good Friday Agreement in 1998. The Withdrawal Agreement means that Northern Ireland will remain in the UK customs territory and, at the same time, benefit from access to the Single Market without tariffs, quotas, checks or controls. In turn, this means the end of frictionless trade between it and Great Britain. The border will effectively run down the Irish Sea, as the EU will need sanitary and phyto-sanitary checks on food products and live animals entering from GB. The EU will also be able to assess risks on any product coming into its market and, if necessary, activate physical controls.
J. June 2016 was the date of the referendum that voted to take the UK out of the EU by a 52%: 48% majority.
K. Keeping the UK aligned with EU standards is a key concern for many UK businesses. They rely on complex supply chains, and would face major expense if they have to operate to 2 different standards. However, the Chancellor of the Exchequer, Sajid Javid, told the Financial Times last month that “There will not be alignment, we will not be a ruletaker, we will not be in the single market and we will not be in the customs union — and we will do this by the end of the year.”
L. Legal issues are, of course, a critical area in the negotiations as the UK currently operates under the jurisdiction of the European Court of Justice (ECJ), and now intends to ‘take back control’ to its own courts. The ECJ role will continue during the Transition Agreement, but seems unlikely to continue after the Transition period ends.
M. Tariffs on Materials and goods will be introduced between the UK and EU27 unless a comprehensive trade deal can be finalised by the end of the year. The EU’s terms for this depend on continued UK alignment with Europe’s societal and regulatory model. If the UK refuses to agree to this, then its trading terms will likely also change with countries outside the EU27. It currently operates under more than 750 free-trade and trade-related agreements negotiated by the EU – and it is unlikely that the UK could continue to benefit from them

N. No Deal means that the UK would have to operate under WTO rules after 31 December 2020. This short Ready for Brexit video explains the complications this would create. The WTO has also warned that the number of Technical Barriers to Tradehas grown significantly‘ in recent years, and these can often severely restrict trading opportunities. Plus, EU laws would still have a role under WTO rules for all UK products sold into the EU27 under No Deal. The EU Preparedness Notices also suggest there could be a ban on UK banks providing financial services, as well as a whole host of other restrictions including on travel.
O. The Operation of the Transition Agreement will be in the hands of a new UK-EU Joint Committee. This will replace all the formal and informal interactions that the UK used to have with other member states and EU officials. It may well also become the body through which the UK and EU manage new treaties on global co-operation and security, as well as any future trade agreement.
P. Preparing for Brexit. The Ready for Brexit team has over 250 years’ combined experience of importing and exporting, and we wanted to share this knowledge. Ready for Brexit is a subscription-based ‘one-stop shop’. It provides a curated Directory to the key areas associated with Brexit – Customs and Tariffs, Finance, Legal, Services and Employment, and Supply Chain. It includes Brexit Checklists; a BrexSure self-audit tool to highlight key risks; a Brexit Negotiation Update section linking to all the key official UK and EU websites; a Brexplainer video on WTO Rules; plus news and interviews with companies about their preparations for Brexit.
R. Regulations are usually a much greater barrier to trade than tariffs, as they set out the rules that apply when products and services are sold in an individual country. The EU never aimed to harmonise regulations across its member countries, as that would be an impossible task. Instead, it has focused on creating a Single Market via mutual recognition of each other’s standards, along with harmonised rules on cross-border areas, such as safety, health, and the environment. Regulations are particularly important in the financial services industry, and many businesses have already relocated relevant parts of their operations into the EU27 so that they can remain authorised to trade.
S. The Single Market seeks to guarantee the free movement of goods, services, people and money across the EU without any internal borders or other regulatory obstacles. It includes a Customs Union, as this short BBC video explains, which seeks to ensure that there are no Customs checks or charges when goods move across individual country borders. With a No-Deal Brexit, however, the UK will become a Third Country and no longer benefit from these arrangements.
T. The Transition period began after the UK left on 31 January 2020. It allows the UK to operate as if it were still in the EU until 31 December 2020 (or possibly December 2022 if the UK government requests an extension by the end of June 2020). The aim is to give negotiators more time to agree how future EU-UK trade in goods and services will operate, and provide guidance for businesses on how the new deal(s) will operate. But major trade deals are very hard to do and generally take at least 5-7 years.
U. Unblocked, or frictionless trade, is a key aim of the negotiators. But the government has already accepted that the UK may well go back to the pre-1993 world, before the Single Market arrived, when vast numbers of forms had to be filled in and lorries/ships sometimes stopped for hours for border checks. As Honda explained in June 2018 (see chart) it could easily take between 2-9 days to move goods between the EU27 and UK without a Customs Union, compared to between 5-24 hours today. The cost in terms of time and money would be enormous given that, as Eurotunnel told the Commons Treasury Committee in the month, ‘Over the past 20 years, warehouses have become trucks rolling on the road’.
V. Ursula von der Leyen has taken over from Jean-Claude Juncker as EU Commission President. Her priorities are naturally different from his, with her key focus being to deliver the EU Green Deal. On Brexit, she noted last month in London that “The truth is that our partnership cannot and will not be the same as before. And it cannot and will not be as close as before – because with every choice comes a consequence. With every decision comes a trade-off. Without the free movement of people, you cannot have the free movement of capital, goods and services. Without a level playing field on environment, labour, taxation and state aid, you cannot have the highest quality access to the world’s largest single market. The more divergence there is, the more distant the partnership has to be.
W. WTO Terms are not actually “terms of trade” at all, but simply a reference to the basic rules set out by the World Trade Organisation. As our Brexplainer video explains, they mean that a tax, called “Tariffs”, would be reintroduced for trade in goods between the UK and the EU27. Services, including financial services, could also be impacted by restrictions on market access. Border controls and customs checks could add time to shipments and impact supply chains. This could be particularly important for highly regulated sectors such as chemicals. Documentation and paperwork will increase, as businesses will need to be able to prove the nature and origin of their goods, especially if they use parts or components from several different countries. As a result, no country currently trades on WTO terms, as this briefing from the independent academic group, The UK in a Changing Europe, explains.
Z. Zig-zag perhaps best describes the process that has led us to this point. It began long ago when Margaret Thatcher resigned in 1990, as the catalyst was partly her hostility to European Monetary Union. Fast forward through many zigs and zags by both main political parties, and we finally reached June 2016 and the Brexit referendum – and then, in turn, last month’s UK’s exit from the EU.

UK election offers voters no middle ground in December

Pity the poor UK voters as they prepare to vote in probably the most critical election of their lives.

As they battle the wind and rain to vote in the first December election for 100 years, they already know there are only 3 likely outcomes:

  • Tory majority, Brexit by end-January, EU trade deal uncertain
  • Labour majority, Brexit postponed, hard socialist agenda
  • Another minority government, outcome uncertain

The first option is less likely than the polls suggest, for the simple reason that Johnson will lose probably 40+ seats in Remain areas – to the LibDems in the South/London, and to the SNP in Scotland. To win, he therefore has to persuade large numbers of traditionally Labour Leave voters in the North/Midlands to vote Tory, for the first time in their family’s history.

President Trump’s proposed solution – an alliance with the Brexit Party – would avoid splitting the Leave vote and might gain the Brexit Party some Labour seats. But Trump’s personal unpopularity with most UK voters means his intervention on Friday is unlikely to help. Britons, like Americans, don’t like foreigners interfering in their domestic elections.

And then, of course, there are the dark arts of social media. Johnson’s chief of staff, Dominic Cummings, pioneered the UK’s use of these when running the Leave campaign.  Who knows what lies and half-truths will be circulated this time, and what impact they might have?

The second option depends critically on whether Labour can neutralise the Brexit issue by saying they will ‘trust the people’ with a second vote in a summer referendum – and not go into detail about the question that would be asked.

If they can, then their leader, Jeremy Corbyn, has a perfect opening for the old-fashioned campaigning at which he excels. He can simply attack the Tory record of the past 10 years and focus on issues such as the economy, climate change, the NHS and education, which are natural vote winners for Labour.

In normal circumstances, Labour would then be odds-on favourites to win.  But their leader, Jeremy Corbyn, has the lowest favourability ratings of any recent Opposition leader. He seen as an hard-line socialist and as weak on tackling anti-semitism in the party. As a result, the party struggles in the polls.

The 3rd option of another minority government includes a wide range of outcomes.  It could put the UK back in the chaos of the past 3 years, with nobody able to agree anything. Or, it could mean a second referendum on both Brexit and Scottish independence.

The key will be the level of LibDem support. Can they get to 75+ seats, and become ‘kingmakers’ along with the SNP and the other smaller parties?

Both Tories and Labour are vulnerable to them in Remain seats, due to their clear anti-Brexit policy.

Their focus on the characters of the Tory and Labour leaders is also a likely vote-winner.  But their problem is the UK’s ‘first-past-the-post’ electoral system, which usually means they win a lot of votes, but relatively few seats.

THE MAIN UK PARTIES HAVE ABANDONED THE MIDDLE GROUND
The problem for most voters is that there is no middle ground for them to choose, as in the past:

  • The Tory Party has swung to the right and is promoting English nationalism to avoid losing votes to the Brexit Party
  • The Labour Party has swung to the left and wants to overturn capitalism and adopt 1970s-style socialism
  • The LibDems and SNP agree on Remain, but the SNP also wants to break-up the UK

Johnson’s gamble depends on him winning a large number of seats from Labour to compensate for his losses in Remain areas.

Despite today’s poll ratings, Labour could therefore well take power as a minority government if they campaign effectively. The reason is that it is easier for them to do a deal with the other parties – by offering a referendum with a Remain option to the LibDems, and one on Scottish independence to the SNP.

Pity, therefore, the traditional middle-of-the-road Tory, Labour and LibDem voters,. They need to choose their ‘least worst option’ if they want to affect the result – Brexit, socialism or possible UK break-up. This would not be a great choice for a G7 country at the best of times. It would be even worse today, as an increasingly protectionist world slides into recession,

 

UK, EU27 and EEA businesses need to start planning for a No Deal Brexit on 31 October

New UK premier, Boris Johnson, said last week that the UK must leave the EU by 31 October, “do or die, come what may”.

This means UK, EU27 and EEA companies now have less than 100 days to prepare for a UK No Deal Brexit. That’s less than 70 working days – and even less if you plan to take a holiday over the summer.

If the UK leaves without a deal, it will also leave the Single Market and the Customs Union. So everything will change overnight – 400 million Customs Declarations will likely be needed each year, plus compliance with Rules of Origin and thousands of other major/minor regulatory changes.

Of course, it is still just possible that the UK might change its mind. Or that the new UK government might persuade the EU27 to give up the so-called “Irish backstop”. This aims to avoid the need for border controls between Northern Ireland and the Republic of Ireland.

But neither outcome looks very likely today.

THE AUTO INDUSTRY IS ALREADY WARNING OF THE RISKS AHEAD 
Businesses therefore now need to prepare for a No Deal Brexit on 31 October.

What does this mean?  It means that companies have to assume there will be no transition period. Instead, the UK will operate under WTO rules.   The UK car industry has highlighted the risks this creates in a letter to the new premier:

“We are highly integrated with Europe, and a no-deal Brexit would result in huge tariff costs and disruption that would threaten production, as well as further undermining international investors’ confidence in the UK. We need a deal with the EU that secures frictionless and tariff free trade.

“A no-deal Brexit presents an existential threat to our industry.  Above all, we must ensure the sector continues to enjoy — without interruption — preferential trade with critical markets around the world, including the EU”.

The chart above highlights the potential impact on the Nissan car factory in NE England.

THE NEW UK GOVERNMENT IS NOW PREPARING A MAJOR COMMUNICATIONS CAMPAIGN

Cabinet Office minister, Michael Gove, has been put in charge of No Deal preparations. And the aim is to quickly launch a major communications campaign to help the public and businesses get ready for leaving the EU without an agreement. As Boris Johnson said last week:

“What we will do, is we will encourage people in a very positive way. From the get-go, we start saying, ‘Look, what do you need, what help do you need, what reassurances do you need?’”

This will add to the information already available by clicking on the Gov.uk website:

READY FOR BREXIT PROVIDES PLANNING AND AUDIT TOOLS, PLUS DETAILED LINKS  

A No Deal Brexit will impact companies and supply chains.  This is why I co-founded Ready for Brexit a year ago, with a number of highly-experienced industry colleagues. It is subscription-based, and features detailed Brexit checklists, a No Deal Brexit planning tool and a BrexSure audit tool to check your suppliers and customers are also fully prepared.

It focuses on the key areas for business, as our Brexit Directory above shows:

  • Customs & Tariffs: Export/Import Registration, Labelling, Testing, VAT
  • Finance: Payment Terms, Tax & VAT, Transfer Pricing
  • Legal: Contracts, Free Trade Agreements, Intellectual Property
  • Services & Employment: Banking, Insurance, Investment, Property
  • Supply Chain: Documentation, Regulation, Transport

We can all hope that Johnson’s renegotiation with the EU27 is successful. But hope is not a strategy.

With the new government committed to the 31 October deadline, businesses really are taking an enormous risk if they don’t focus all their energies on planning for ‘No Deal’.

Your ‘A-Z Guide’ to the Brexit Negotiations

The UK is now facing a national crisis”, according to Margaret Thatcher’s former Defence Secretary, Michael Portillo, speaking to a dinner in London on Thursday night.  Brexit continues to tear the UK apart, and places the economy at greater and greater risk.

On Thursday, premier Theresa May had unveiled her draft Withdrawal Agreement with the EU27.  Within a few hours, another 5 Ministers had resigned including her Brexit Secretary.  Over the summer, she had already lost her previous Brexit Secretary and her Foreign Secretary, plus other Ministers.  And 5 Ministers – including Michael Gove and Trade Secretary Liam Fox – are now planning to produce their own revised deal on the Irish question, in opposition to the draft agreement

Businesses are far too complacent about the risks of a No Deal Brexit, as I told BBC News on Thursday:

“If the deal went through Parliament, then we could be reassured that we had until the end of 2020 before anything happened. But looking at what’s happened this morning, it seems less likely that’s going to happen, and therefore the default position is that we leave without a deal on 29 March.  And that, I think, panics SMEs, small businesses, because if you don’t know what’s happening that’s worse than almost anything else. “

If you, or a colleague, now need to get up to speed with Brexit developments – and what they may mean for your business and your investments, here is my ‘A – Z Guide to the Brexit Negotiations’:

Article 50 of the Lisbon Treaty sets out the rules for leaving the European Union.  As with most negotiations, it assumed the leaving country would present its proposals for the post-withdrawal period – which would then be finalised with the other members.  But the UK Cabinet was split on the key issues, and so the 2 year’s notice was given on 29 March 2017 without any firm proposals being made for the future UK-EU27 relationship beyond 7 “negotiating principles and “the desire for a “close partnership”.

Brexit means Brexit“, has been the UK’s core statement since Article 50 was tabled.  But as I noted back in September 2016, Brexit can actually mean a variety of different outcomes – and they have very different implications as the chart shows.  At one extreme, the ‘Norway model’ is very similar to full EU membership, but with no say on EU decisions.  Whereas the ‘Canada model’ is simply a free trade agreement offering some access to the Single Market (qv) for goods, but less access for services (which are 80% of the UK economy).  A ‘No Deal Brexit’ (qv) means working under WTO rules with arbitrary tariffs and regulations.

The European Commission manages the day-to-day business of the European Union (qv) on behalf of the European Council, and is effectively its civil service.  Its president is Jean-Claude Juncker and he appointed Michel Barnier to lead the Brexit negotiations.   Barnier’s first step, as mandated by the Council, was to agree within the EU 27 “the overall positions and principles that the EU will pursue“.  He understood that in any negotiation, the team that writes the drafts and controls the timescale usually has the upper hand. The UK’s failure to finalise its own detailed objectives before tabling Article 50 meant it gave up this critical advantage.

The Default date for Brexit is 29 March 2019.  It has also been agreed that if a Withdrawal Agreement (qv) is finalised, then a Transition Agreement (qv) could operate until 31 December 2020.  Unfortunately, many people have therefore assumed they can wait until 2020 before starting to plan for Brexit.  But as the Commission warned in its ‘Guidelines for Brexit Negotiations on 29 April 2017, “nothing is agreed until everything is agreed“. So No Deal also means no Transition Agreement.

The European Union is a treaty-based organisation of 28 countries.  As its website notes, it was “set up with the aim of ending the frequent and bloody wars between neighbours, which culminated in the Second World War“.  The UK joined the original 6 members (Belgium, France, Germany, Italy, Luxembourg and the Netherlands) in 1973, along with Ireland (qv) and Denmark. Further expansions took place, especially after the end of the Cold War between the West and Russia.  At the suggestion of then UK premier Margaret Thatcher, it was agreed to establish a Single Market (qv) and Customs Union based on 4 key freedoms – free movement of goods, services, people and money – and this transformed trading relationships across the continent.

The Financial Settlement or ‘divorce bill’ covers the costs of the programmes that the UK agreed to support during the period of its EU membership.  Like most organisations, the EU operates on a pay-as-you-go basis and only charges member countries as and when bills actually come due.  The UK calculates this to be between £36bn – £39bn (€40bn – €44bn), depending on the assumptions used.

The Labour Party want a General Election if the government fails to get Parliament’s approval for its proposed Withdrawal Agreement.  But there is considerable uncertainty about what might happen next, if Labour won the election.  Some suggest Labour could renegotiate the deal, others that there could be a second referendum. Either option would mean a new government asking the EU to ‘stop the clock’ on Article 50. As a result, support is rising for the idea of a ‘People’s Vote’, or second referendum, as this might be more able to achieve all-party support. The European Parliament elections in May also complicate the picture as a referendum would apparently take 22 weeks to organise.

A Hostile No-Deal would be the worst of all possible outcomes. But Theresa May has warned Parliament that “without a deal the position changes” on the £39bn Financial Settlement, contradicting her Chancellor, Philip Hammond.  We do not know what would happen if the UK refused to pay, but one fears it could lead to a Hostile No-Deal if the EU then reacted very negatively in terms of future co-operation.

Ireland has proved to be a key sticking-point in the negotiations, as nobody wants to disturb the peace created by the Good Friday Agreement in 1998.  The issue is the potential need to reintroduce a border between Ireland and the North to secure the Single Market.  The draft Withdrawal Agreement devotes a full section to this issue, which remains a potential deal-breaker due to Brexiter concerns about N Ireland remaining in the Single Market and the UK remaining in the Customs Union. This expert Explainer from the impartial Institute for Government highlights the key issues.

June 2016 was the date of the referendum that voted to take the UK out of the EU.

Keeping the UK in “a single customs territory” with the EU after Brexit is a key feature of the so-called “temporary backstop arrangement” designed to avoid a hard border with Ireland.  It is intended to operate until a full free trade agreement is finalised between the UK and EU.  It was the most difficult part of the negotiations, and has provoked the most resistance from Brexiters.

Legal issues are, of course, a critical area in the negotiations as the UK currently operates under the jurisdiction of the European Court of Justice  (ECJ), and the UK wants to “take back control” to its own courts.  However, the Withdrawal Agreement confirms that the ECJ will have a continuing role under the Transition Agreement and potentially afterwards if the “backstop” is activated.

Tariffs on Materials and goods would be introduced between the UK and EU27 if there is a No-Deal Brexit.  Less well understood is that the UK’s trading terms would also change with countries outside the EU27, as the UK currently operates under more than 750 free trade and trade-related agreements negotiated by the EU – and it is unlikely that the UK could continue to benefit from them.

No Deal means that the UK would have to operate under WTO rules after 29 March.  This short Ready for Brexit video explains the complications this would create.  The WTO has also warned that the number of Technical Barriers to Trade “has grown significantly” in recent years, and these can often severely restrict trading opportunities. And EU laws would still have a role under WTO rules for all UK products sold into the EU27 under No Deal.  The EU Preparedness Notices, for example, also suggest there could be a ban on UK banks providing financial services as well as a whole host of other restrictions including on travel.

Preparing for Brexit.  My colleagues and I have set up Ready for Brexit. This is a subscription-based ‘one-stop shop’ and provides a curated Directory to the key areas associated with Brexit – Customs & Tariffs, Finance, Legal, Services & Employment, Supply Chain.  It includes Brexit Checklists; a BrexSure self-audit tool to highlight key risks; a Brexit Negotiation Update section linking to all the key official UK and EU websites; Brexplainer video on WTO Rules; plus news & interviews with companies about their preparations for Brexit.

Regulations can often be a much greater barrier to trade than tariffs, as they set out the rules that apply when products and services are sold in an individual country.  The EU never aimed to harmonise regulations across its member countries, as that would be an impossible task.  Instead it has focused on creating a Single Market via mutual recognition of each other’s standards, along with harmonised rules on cross-border areas such as safety, health and the environment.  Regulations are particularly important in the financial services industry, and many businesses are now relocating relevant parts of their operations into the EU27 so they can remain authorised to trade.

The Single Market seeks to guarantee the free movement of goods, services, people and money across the EU without any internal borders or other regulatory obstacles.  It includes a Customs Union, as this short BBC video explains, which seeks to ensure that there are no Customs checks or charges when goods move across individual country borders.  With a No-Deal Brexit, however, the UK will become a Third Country and no longer benefit from these arrangements.

The Transition Agreement covers the period after 29 March, and would allow the UK to operate as if it were still in the EU until 31 December 2020.  The aim is to give negotiators more time to agree how future EU-UK trade in goods and services will operate, and provide guidance for businesses on how the new deal(s) will operate.  But 21 months isn’t very long, as trade deals are very hard to do and generally take 5 – 7 years. The problem is that they create Winners and Losers whenever a market (large or small) is opened up to new foreign competition – and the incumbents usually complain.  The Transition Agreement will only operate if there is a Withdrawal Agreement and so would not happen with a No-Deal Brexit.

Unblocked, or frictionless trade, is a key aim of the negotiators.  Nobody really wants to go back to the pre-1993 world, before the Single Market arrived, when vast numbers of forms had to be filled in and lorries/ships sometimes stopped for hours for border checks.  As Honda explained in the summer (see chart) it could easily take between 2 – 9 days to move goods between the EU27 and UK without a Customs Union, compared to between 5 – 24 hours today.  The cost in terms of time and money would be enormous given that, as Eurotunnel told the Commons Treasury Committee in June, “Over the past 20 years, warehouses have become trucks rolling on the road“.

The draft 585-page Withdrawal Agreement was published on Thursday and sets out the basis for the future UK – EU relationship after Brexit.  The impartial Institute for Government has produced a expert summary of its key points.  But as the resignations have shown, the deal is contentious, with observers suggesting that MPs may vote it down in Parliament next month.

Zig-zag perhaps best describes the process that has led us to this point.  It began long ago when Margaret Thatcher resigned in 1990, as the catalyst was her position over European monetary union.  Her supporters ignored the key fact that the party needed a new leader if it was to have a chance of winning the next election,  and instead blamed Europe for their loss – soon styling themselves as Eurosceptics in her honour.  Fast forward through many zigs and zags  and as I warned in March 2016, – “Slowly and surely, a Brexit win is becoming more likely“.  We can doubtless expect many more in coming months and years.

“What could possibly go wrong?”

I well remember the questions a year ago, after I published my annual Budget Outlook, ‘Budgeting for the Great Unknown in 2018 – 2020‘.  Many readers found it difficult to believe that global interest rates could rise significantly, or that China’s economy would slow and that protectionism would rise under the influence of Populist politicians.

MY ANNUAL BUDGET OUTLOOK WILL BE PUBLISHED NEXT WEEK
Next week, I will publish my annual Budget Outlook, covering the 2019-2021 period. The aim, as always, will be to challenge conventional wisdom when this seems to be heading in the wrong direction.

Before publishing the new Outlook each year, I always like to review my previous forecast. Past performance may not be a perfect guide to the future, but it is the best we have:

The 2007 Outlook ‘Budgeting for a Downturn‘, and 2008′s ‘Budgeting for Survival’ meant I was one of the few to forecast the 2008 Crisis.  2009′s ‘Budgeting for a New Normal’ was then more positive than the consensus, suggesting “2010 should be a better year, as demand grows in line with a recovery in global GDP“.  Please click here if you would like to download a free copy of all the Budget Outlooks.

THE 2017 OUTLOOK WARNED OF 4 KEY RISKS
My argument last year was essentially that confidence had given way to complacency, and in some cases to arrogance, when it came to planning for the future.  “What could possibly go wrong?” seemed to be the prevailing mantra.  I therefore suggested that, on the contrary, we were moving into a Great Unknown and highlighted 4 key risks:

  • Rising interest rates would start to spark a debt crisis
  • China would slow as President Xi moved to tackle the lending bubble
  • Protectionism was on the rise around the world
  • Populist appeal was increasing as people lost faith in the elites

A year later, these are now well on the way to becoming consensus views.

  • Debt crises have erupted around the world in G20 countries such as Turkey and Argentina, and are “bubbling under” in a large number of other major economies such as China, Italy, Japan, UK and USA.  Nobody knows how all the debt created over the past 10 years can be repaid.  But the IMF reported earlier this year that total world debt has now reached $164tn – more than twice the size of global GDP
  • China’s economy in Q3 saw its slowest level of GDP growth since Q1 2009 with shadow bank lending down by $557bn in the year to September versus 2017.  Within China, the property bubble has begun to burst, with new home loans in Shanghai down 77% in H1.  And this was before the trade war has really begun, so further slowdown seems inevitable
  • Protectionism is on the rise in countries such as the USA, where it would would have seemed impossible only a few years ago.  Nobody even mentions the Doha trade round any more, and President Trump’s trade deal with Canada and Mexico specifically targets so-called ‘non-market economies’ such as China, with the threat of losing access to US markets if they do deals with China
  • Brexit is worth a separate heading, as it marks the area where consensus thinking has reversed most dramatically over the past year, just as I had forecast in the Outlook:

“At the moment, most companies and investors seem to be ignoring these developments, assuming that in the end, sense will prevail. But what if they are wrong? It seems highly likely, for example, that the UK will end up with a “hard Brexit” in March 2019 with no EU trade deal and no transition period to enable businesses to adjust.

“Today’s Populist politicians don’t seem to care about these risks. For them, the allure of arguing for “no deal”, if they can’t get exactly what they want, is very powerful. So it would seem sensible for executives to spend time understanding exactly how their business might be impacted if today’s global supply chains came to an end.”

  • Populism is starting to dominate the agenda in an increasing number of countries.  A year ago, many assumed that “wiser heads” would restrain President Trump’s Populist agenda, but instead he has surrounded himself with like-minded advisers; Italy now has a Populist government; Germany’s Alternativ für Deutschland made major gains in last year’s election, and in Bavaria last week.

The last 10 years have proved that stimulus programmes cannot substitute for a lack of babies. They generate debt mountains instead of sustainable demand, and so make the problems worse, not better.  As a result, voters start to listen to Populists, who offer seemingly simple solutions to the problems which have been ignored by the elites.

Next week, I will look at what may happen in the 2019 – 2021 period, as we enter the endgame for the policy failures of the past decade.

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Petrochemicals must face up to multiple challenges

Europe’s petrochemical sector must prepare now for the trade war, US start-ups, Brexit and the circular economy, as I discuss in this interview with Will Beacham of ICIS news  at the European Petrochemical Association Conference.

With higher tariff barriers going up between the US and China, the market in Europe is likely to experience an influx of polymers and other chemicals from exporters looking for a new home for their production, International eChem chairman, Paul Hodges said.

Speaking on the sidelines of the European Petrochemical Association’s annual meeting in Vienna, he said: “The thing we have to watch out for is displaced product which can’t go from the US any more to China and therefore will likely come to Europe.

In addition to polyethylene, there is an indirect effect as domestic demand in China is also falling, he said, leaving other Asian producers which usually export there to also seek new markets and targeting Europe.

The US isn’t buying so many consumer goods from China any more – and that seems to be the case because container ships going from China to the US for Thanksgiving and Christmas aren’t full. So NE and SE Asian chemical producers haven’t got the business they expect in China and are exporting to Europe instead.  We don’t know how disruptive this will be but it has quite a lot of potential.”

US polymer start-ups
Hodges believes that the new US polymer capacities will go ahead even if the demand is not there for the product. This is because the ethane feedstocks they use need to be extracted by the producers and sellers of natural gas who must remove ethane from the gas stream to make it safe.

For these producers some of the cost advantages have already disappeared because of rising ethane prices.

The exports of US ethane are adding one or two more crackers to the total. And without sufficient capacity ethane prices have become higher and more volatile.”

Hodges points out that pricing power is being lost as poor demand means producers cannot pass on the effect of rising oil prices. “Margins are being hit with some falling by 50-60%,” he said.

Circular economy
EU targets mean that all plastic packaging must be capable of being recycled, reused or composted in Europe by 2025. For the industry this could be a huge opportunity, but only if it acts fast, said Hodges: “We have to develop the technology that allows that to happen. We will need the [regulatory] approvals and if we don’t get moving in the next 12-18 months we are in trouble.”

Brexit beckons
According to Hodges: “We are in the end game for Brexit. We talk to senior politicians from both sides who don’t think there is a parliamentary majority for any Brexit option.”

He fears that if no deal can be agreed there is a chance the UK will refuse to pay its £39bn divorce bill.

Then what happens to chemical regulation and transport? Although the bigger companies have made preparations, only one in seven in the supply chains are getting prepared,” he added.  This is why we have launched ReadyforBrexit.

You can listen to the full podcast interview by clicking here.

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