www.politics.co.uk/blogs/2020/01/23/brexit-2020-everything-you-need-to-know-about-johnson-s-trad
Cool, so everything's sorted right? Brexit is getting done, everything's going back to normal and I never have to talk about trade again.
Oh yeah, no sorry. That's all a lie. We are about to enter the most perilous system-level recalibration of an advanced economy in trading history.
What.
Yeah, all that nightmare of the last four years was the easy part. Now we have to figure out our future trading relationship with the EU.
I saw Boris Johnson on the telly the other day.
Really? That never happens anymore.
No, it was crazy. He just popped up. It was like a Big Foot sighting. Anyway, he seemed to suggest it was all really easy. We'd get it done in a year and then be free to do whatever we want.
Yeah, that's the official narrative. But the reality is very different.
Are you suggesting that the government is making a sustained attempt to deceive the public in order to hide the fact that they have an impossible set of negotiating goals and no competence to deliver them?
Yes, I know. It's hard to believe.
I know what happens now. You start talking about fisheries and regulatory alignment and customs procedures and then I gradually lose the will to live and have to order extremely expensive whisky.
That's right, that's how this works. So here's the thing. The government wants to get the Brexit deal negotiated, ratified and implemented in eleven months, before December 31st. They were entitled to an extension but have decided not to take it. That means the deal is going to have to be proper bare-bones - a completely stripped-down set of negotiating goals.
Like what?
Tariffs, basically. Nothing else. Just eliminate the tariffs.
What are tariffs again?
They're taxes on goods crossing borders. The thing is, most tariffs are already very low. Decades of worldwide tariff-reduction rounds have hammered them down in pretty much every area but agriculture. So it's a very modest bar to set. It also means that services - which are kind of key to our economy - are completely forgotten about. And it does nothing about the real problem areas of trade - alignment, customs checks and rules of origin.
Yeah, that's it. That's where I switch off. I swear these words are like hypnotic suggestions to close down brain function.
Bear with me, they're all pretty simple when you break them down. And the implications of them can smash local economies, which then has a massive political impact. Will people blame Brexit? The government? Or the EU? Remainers? Immigrants? The knock-on effect of these decisions will define our politics for years to come. Which is troubling, because it's not clear the government has any idea what it's doing.
How so?
Take the distinction between goods and services. Sounds simple right? Goods are things and services are, well, services - legal, financial, hairdressing, whatever. But actually that's a crude distinction that doesn't reflect the reality of how businesses work. Car companies, for instance, sell cars. But many of them also often offer the financing for the car, which allows the person buying it to pay in monthly installments. So in that capacity they're actually functioning as a mini-bank. And banking is…
A service.
Exactly. The same is true for loads of companies, like IBM, say, or Hewlett Packard. They sell things. But they also sell services. So even at this very basic level, going for a goods-only deal already has a massive knock-on effect on businesses. If they want to keep on selling the services in Europe, they have to internally restructure to get into the right regulatory regime. Sometimes that'll be big news - they'll close an office or factory. Sometimes it'll be a case of moving staff around or bulking up whatever office they have on the continent to get recognition there, and it'll slip under the radar. But the long-term danger is that all the high-knowledge, proper value-added activity goes to Europe.
Grim.
Yep. And things get uglier when you look at regulations.
Yeah I heard about this. What are they exactly?
Regulations are one of the key aspects of international trade. Countries have different regulatory regimes. So when they trade, people have to show that they are satisfying the requirements of the country the good ends up in. That entails a lot of time and paperwork. Until now, Britain has been part of Europe's regulations regime. Now it wants to completely detach itself. But we're so deeply ingrained in continental trading networks that we can't afford either time or paperwork.
How come?
Basically because of our reliance on a manufacturing system called Just-In-Time. Manufacturing depends on this to keep costs down. It means that you avoid holding a lot of stock. Instead, you get the parts you need, literally, just in time. And we are absolutely locked into this. So for instance BMW makes the engines for its Mini model at Hams Hall just outside Birmingham. But the engine blocks come from France to the UK, where they're drilled and processed, then go to Cologne in Germany for more engineering, then back to the UK for final assembly. GKN in Birmingham also makes the drive line for many cars - this is what transmits power from the engine to the wheels. But it uses components from Spain, Italy, France, Germany and the UK. Millions of components come across the Channel every day to arrive just as they're needed.
Is this primarily a car thing?
No, it goes across the board, in Britain's most successful manufacturing sectors. Take aviation. Nearly 80% of aerospace components manufactured in the UK are exported. And the important part there is in the word 'components'. That's what we do. We don't make the whole plane. As a country, we specialise in wings, landing gear, engines and avionic systems - the electrical equipment in the cockpit. All of that is regulated by the European Aviation Safety Authority (Easa). Everything you see on a plane in Europe, numbering over 5,000 different parts, has been vouched for by them, down to the little trolley serving you drinks when you ask for your fourth rum and Coke and the air steward starts to look at you suspiciously. Oh, and his training is overseen by them too, as is the pilot's, and that of the engineers.
It's the godfather of aviation regulation.
That's right. The industry is clear: it needs to hold Easa tight. And not just Easa. It also wants a close relationship with Reach - Europe's chemical safety regulation system - because they use those chemicals in the manufacturing process. There is zero reason to deviate from this regulatory framework. There are literally no upsides. The UK is not going to start setting international standards for aviation on its own. The trend in the global industry is towards alignment, because everyone wants the same things - a safe product, with fuel efficiency, which is clean and quiet and cheap to run, and which can be traded in a complex supply chain with a minimum of friction.
Can you stay in Easa from outside the EU though?
Sure. It's an EU body, but it has various agreements with non-EU countries. Or you can just align and basically mimic whatever it does. And why not? The industry will make products to those specifications anyway, simply to trade them easily.
So surely that's what we'd do. It sounds insane to do anything else.
Yes it would be insane, wouldn't it? But apparently that's what's going to happen.
You're not serious.
Who knows. Theresa May's administration had pretty much decided to stay in the system. The political declaration for the future relationship she signed with the EU said the UK would "explore the possibility of cooperation" with Easa and then added: "In this context, the United Kingdom will consider aligning with Union rules in relevant areas." But then things got a bit weird. Johnson updated the political declaration when he got his deal and he made some small but quite striking changes.
Like?
Well the line on 'exploring possibilities' stayed, but the following sentence, on alignment, was deleted. That raised a lot of alarm. And then the chancellor, Sajid Javid, told the Financial Times this weekend that "there will not be alignment, we will not be a ruletaker". So right now, if we're to take the government's word for it, no - we're going to pull away, for no reason at all, and at enormous cost. Or they could be lying to sound tough and Brexity. Or they could think it's a negotiating gambit with the EU. Who knows?
OK. So you've now been talking about regulations for what feels like several days. Is that it?
No I'm afraid not. The government also wants out of the customs union. That means it's also a customs problem. Manufacturers will have to fill out two sets of forms - one for regulations, one for customs. In the case of agriculture, they'll also have to satisfy health checks - these are called sanitary and phytosanitary measures. And that takes place on or near the border.
Please tell me this section is over. Hell, please tell me it's all over and the final days are upon us. Anything to escape this relentless carnival of doom.
The worst bit is yet to come, I'm afraid. It's called rules of origin and it is horrible. It's a kind of bureaucracy that kicks in when you have a trade agreement.
How does that make sense? Surely trade agreements are supposed to reduce bureaucracy.
Yep, but they need an insurance policy. So imagine the UK and EU do a trade agreement eliminating tariffs. And then the UK does a separate agreement with the US eliminating tariffs.
Sounds ideal.
Quite. But the EU and US don't have a trade deal eliminating tariffs. So now there is an incentive for the US to ship goods to the UK for entry into the EU as a way of sidestepping the taxes on their exports to Europe, but without having to make any of the concessions a trade deal would involve. Rules of origin checks are how you get around that problem.
How do they work?
The purpose of the rules is to find out where something was made. But the way of doing that changes depending on what kind of good it is. There's different rules in different sectors. Sometimes they measure a country's economic contribution to the product, such as its capital or the labour or intellectual input. There's also different grades of change in the product. You often have to show that the product has transformed from one customs category to another in a substantial way
...