EU-UK divorce settlement proves major headache

By Robert Griffiths
0 Comment(s)Print E-mail China.org.cn, July 5, 2020
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EU and UK flags are waved by a protester outside the Houses of Parliament in London, Britain, on Jan. 15. 2019. [File photo]

Two deadlines have recently come and gone indicating the difficulties that lie ahead in determining future economic relations between the Britain and the EU.

Although the U.K. formally left the EU last January 31, there is a "transition period" until December 31 before the final break. In effect, the U.K. continues to be part of the Single European Market (SEM) free trade zone, subject to its neoliberal competition and public procurement rules and subject to the jurisdiction of the European Court of Justice (ECJ).

During this "cooling-off" period, British government negotiators and EU representatives have been trying to reach a wide-ranging tariff-free trade agreement as a final divorce arrangement.

The 2019 Withdrawal Agreement they reached would have permitted an extension into next year, as long as a new firm date for severance was decided by July 1 – which, of course, has already gone. However, the EU now accepts no extension which is desired by the British side.

On June 29, a month of "intensified" discussions got underway in hope of reaching a post-transition trade deal. If they cannot agree one by October, the EU claims this will make its introduction impossible on January 1, as the U.K. desires. 

Such a "no deal" scenario would normally mean that trade between the two would thereafter be conducted under World Trade Organization rules. Either side would be permitted to impose non-discriminatory tariffs and quotas on imports, or even exclude products not complying with environmental, labor and safety standards.

Boris Johnson's government is under considerable pressure from large sections of big business – main source of funds for his ruling Conservative Party – to avoid this possibility. At the moment, the EU buys 43% of Britain's exports and supplies 52% of its imports – although both figures have fallen in recent decades. 

British importers do not want to pay higher prices for tariffed goods from the EU; nor do British exporters want to raise their prices or cut their profit margins on their tariffed goods to the EU.

The British government could, of course, compensate both groups of traders with tax relief or grants funded from new tariff revenues. It has also declared its readiness not to carry out border checks on imports from the EU for the first six months of 2021, giving British importers more time to adjust to new market conditions.

There are, however, obstacles. Firstly, the EU has insisted that Britain must continue to abide by SEM rules in all product sectors, including severe limits on State aid (subsidies) to key industries or enterprises in need of public money to modernize or survive. Nor must there be discrimination in favor of local bidders for public sector contracts, nor any cost-cutting deviation from labor-market or environmental standards that would give market advantage to British producers.

However, some of the more doctrinaire "free marketeers" in the Tory Party and government do not agree with any form of State intervention in the capitalist economy.

Facing a major economic recession and mass unemployment due to the COVID-19 pandemic, Johnson and his cohorts may want to retain the option of State aid and even temporary nationalization in order to secure public support, especially with English local and Scottish and Welsh parliamentary elections looming in May 2021. 

Some compromise may be possible. Within the general framework of a comprehensive tariff-free trade agreement, Britain might be allowed to depart from some EU rules and standards, perhaps for a fixed period, but at the price of tariffs or quotas being placed on the offending British exports. 

The second major obstacle in negotiations so far has been the EU demand to maintain existing levels of access to U.K. fishing waters. Currently, EU boats are allocated almost two-thirds of the total landing quotas set by the Common Fisheries Policy for U.K. waters, forcing British boats to go further afield to catch an equivalent load. 

There are signs the EU might accept lower quotas in future, although its demand for a long-term settlement would be difficult for the British government to accept without losing face at home.

The second recently missed deadline could present the biggest problem of all for the Johnson administration. The City of London comprises the dominant core of monopoly capitalism in Britain. In 2018, it had a £20 billion surplus in financial services trade with the EU, in contrast to a goods deficit of £48 billion (in 2019). British and EU teams were due to have completed assessments of each other's post-Brexit regulatory regimes by June 30, hopefully finding enough "equivalence" to allow the single European market in financial services to continue after the transition period. They failed and each side is now blaming the other. 

The European Commission and European Central Bank have long been concerned that an alleged lack of rigorous oversight in the City of London has given U.K. banks, hedge funds and other financial institutions an advantage over their European competitors. Moreover, the EU is keen to concentrate Eurobond trading in Frankfurt and Paris, with as little access as possible allowed to British and London-based American traders.

Ominously, the European Commission continues to believe that progress on a trade agreement should be linked to progress on financial services.

This is the Brexit time-bomb ticking under Boris Johnson's Cabinet table. Most of his party's corporate paymasters want a tariff-free trade deal and a financial agreement, while the banks and hedge funds in particular also want to retain a regulatory regime in the City of London which is even more ineffective than that in Frankfurt and Paris.

Robert Griffiths is a former Senior Lecturer in Political Economy and History at the University of Wales and currently the General Secretary of the Communist Party of Britain.

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