Why our Brexit pain may be just beginning

Brexit is not an event but a long process and the economic fallout could last for 10 years or more, writes Colm McCarthy

AVOIDANCE of a crashout and retention of the Northern Ireland backstop is not the end of Ireland’s Brexit woes and not all preparations for a no-deal crash-out will have been wasted if Mrs May’s deal goes through.

There will eventually be border controls on Ireland’s trade with Great Britain unless the UK negotiates an ultimate form of Brexit very close to a continuation of membership.

This looks unlikely even if there is a sudden conversion of MPs sufficient to approve the withdrawal agreement. The Irish Government’s Brexit preparations, such as border inspection capacity at seaports, will not all be redundant even if a deal goes through and the crash-out is avoided.

The immediate concern is the threat of no-deal. When the draft agreement is again considered in the House of Commons, a made-for-TV period drama whose next episode hits your screens on Wednesday, the expectation is that Mrs May will once more fail to secure its passage.

No-deal is the default option, and becomes more likely by the day, since the UK’s resignation letter takes effect five weeks hence unless evasive action is taken.

To avoid no-deal, MPs may insist that the March 29 exit date be deferred, and the Westminster sitcom’s run will be extended to the end of June. But it must then end in either an orderly exit, with a transition period, or a crash- out. This could happen at the end of March or at the end of June, and the European Council could even agree a deferral beyond that date, but unless Brexit is abandoned, there must eventually be a deal or a crash-out.

Opposition to Mrs May’s deal is not confined to the ultra-Brexiteers and the DUP. The 230-vote margin of defeat last time round comprised a sizeable contingent of Tory members who deem it a poor deal for the UK and would prefer a softer version of Brexit or none.

The Irish Government has chosen to support ratification of the deal since it ensures a transition period up to the end of 2020 and includes a Northern Ireland backstop.

When the European Council meets on March 21 (no fewer than 1,000 days on from the referendum on June 23, 2016) they will either have received an extension request from the UK or will be awaiting the European Parliament’s approval, the Westminster spectacular having concluded.

The extra days, whether 90 or a greater figure, could prove no more productive than the 1,000 which have already been devoured, so that the extension becomes a crisis deferred and the TV entertainment continues. But if the deal goes through in its present form, the ultimate outcome for the UK’s trading relationship with the EU-27 could see an unwelcome payback on the Irish Government’s no-deal investment.

The reason is that the UK will immediately embark on negotiating the long-term relationship envisaged in the political declaration and will almost certainly fail to secure the ‘frictionless’ trade to which Mrs May aspires.

Existing trading arrangements will survive only until the end of 2020 (there is a possibility of extending the transition period), at which point the UK becomes definitively a third country, fully outside the EU’s internal market. Northern Ireland will likely still be inside for practical purposes, but Great Britain will not.

The draft withdrawal agreement meets Irish concerns about the protection of the Northern Ireland peace process, but the political declaration is a minefield in that it sets the scene for trade barriers with Britain.

Because the EU is a uniquely deep internal market (barriers to trade and commerce are in some respects lower than they are between the 50 states of the USA), the distinction between members and non-members is binary.

A free trade agreement with no import quotas and zero tariffs does not guarantee the absence of border controls. No non-member, not Norway with its single market access, nor Turkey with its close customs union deal, is free of border controls.

Unless the UK negotiates an agreement which keeps Great Britain effectively inside both the single market and customs union, and inside the VAT and various other regulatory and dispute resolution arrangements, there will be border controls. That means border controls between Ireland and Great Britain, but also between Great Britain and France, Belgium, the Netherlands and its other EU neighbours. Securing the backstop and ratification of the withdrawal agreement would be a great deal for Northern Ireland but could turn out poorly for the Republic.

In evidence to the Westminster Brexit committee last Wednesday, the former UK ambassador to the EU, Ivan Rogers, warned that the negotiations for a long-term trade settlement, even with a no-change transition secured and immediate chaos averted, will be fractious.

The time available is too short for what would be the most complex and all-embracing free trade agreement ever attempted. The UK’s ultra-Brexiteers would seek release from the all-UK customs backstop, the better to pursue improbable trade deals outside Europe.

British industry would take the opposite view on the customs union, while the important services export businesses would seek continuing single market access. The deal envisaged by Mrs May and reflected in the political declaration would end freedom of movement and hence end an essential framework for the services export trade in which the UK excels.

Rogers believes that Brexit is not an event, it is a process, a lengthy and difficult one for the UK. Bluntly, the Brits could get screwed by the EU in the negotiations for a longterm trade deal, even in the more cordial atmosphere that would follow a withdrawal agreement.

Economists have been stressing that the balance of advantage invariably lies with the biggest economy in bilateral trade negotiations, and the UK’s economy is outgunned six to one. Rogers stresses the unique character of this negotiation — it is about limiting the damage from regulatory divergence. Since the dismantling of tariffs and non-tariff barriers commenced after World War II, the opening gambit is always “we will cut our tariffs and ease trade barriers in the following fashion — what will you offer in return?”

This time the Brits must open the discussion by saying “we will impose new barriers as follows — would you be so kind as to retaliate as little as possible?” This is a negative-sum game by design, between unequal parties.

Outside Europe, the UK could find itself seeking new deals with countries already being courted by the EU, another unequal contest. Mrs May’s hostility to the single market, born of her hostility to free movement, is a threat of divergent standards and hence non-tariff barriers in the UK market.

This will be reciprocated with glee by continental countries in which the instinct to protectionism has not been extinguished.

Unless there is an abandonment of British government antipathy to the single market, shared at least in part by the Labour opposition, the seeds have been sown for a decade of contention and mutual economic damage.

With no deal, the atmosphere will be poisonous and the economic damage even worse. Interests diverge within the EU-27 and solidarity will evaporate.

The conclusion of a withdrawal agreement with a credible backstop will be welcomed in Ireland as potential disaster avoided. But it is only the end of the beginning.

‘The seeds have been sown for a decade of contention and economic damage’