Real risks, real choices and a thought experiment from an exasperated Mrs May
It feels like a last roll of the dice: after 10 days in which Britain’s Brexit plans have been in “complete free fall”, in the words of one senior ministerial aide, Theresa May has hit upon a plan to resolve the impasse. Exasperated with the posturing and the feuding, she has asked leading ministers to enter into a thought experiment this weekend in an attempt to force hard and soft Brexiteers to engage constructively with their rivals’ plans.
“The question is being framed deliberately positively,” says a source involved in the process. “The teams are being asked: ‘how would you make this work?’ The PM is saying ‘I don’t just want prejudice and obstacles. You say you don’t like this or that option, so work together to fix it’.”
The “teams of rivals” will debate the two models for Britain’s trade relationship with the EU after Brexit. Details aside, these are themselves proxies for a hard or soft Brexit.
In the first team, Brexiteers Liam Fox and Michael Gove will work with David Lidington, a former Europe minister and Remain voter, to analyse the “New Customs Partnership”, which Boris Johnson this week described as “crazy” and unworkable.
In a second, Remainers Greg Clark, the Business Secretary, and Northern Ireland Secretary Karen Bradley will chew over the “Maximum Facilitation” option with David Davis, the Brexit Secretary, who threatened to resign if the Customs Partnership wins.
Given that the Government published its position-paper on the options last August no one seriously expects them to find solutions in a weekend. Instead, the real game, say aides, is to try to confront ministers with the trade-offs that are to be made.
“These guys are 20-20 specialists, not Test players,” says another aide, using a cricketing metaphor. “For them it’s just ‘hit and hope’ when advice conflicts with what they want to hear. So this is ultimately a clever bit of political thinking.”
The Max Fac debate
So, first the Brexiteers’ preferred Maximum Facilitation or “Max Fac” option, which uses technology to try to reduce the frictions caused by leaving the customs union and single market, while striking a zero-tariff free trade deal (FTA) with the EU. As Ms Bradley will surely point out, this scheme, which will see the UK diverge from the EU, makes it impossible to avoid either a “hard border” in Northern Ireland (which both sides have ruled out) or a goods border in the Irish Sea.
Mr Davis will equally surely disagree, arguing technology and a bit of EU flexibility can fix the problem, perhaps citing this week’s Policy Exchange report, with a foreword by Lord Trimble, saying it is possible if Dublin would only be less strident.
The problem is that for Max Fac to work, the EU must accept the UK’S idea of exempting 80 per cent of trade across the border, but they will not. The alternative is cameras and infrastructure on the border that even the Policy Exchange admits will make it “almost inevitable” that dissident republicans would attack them. Given the UK’S clear commitment to not putting “any” infrastructure on the border, there will then have to be discussion about the question of a border for goods in the Irish Sea. If all goods were checked on the way into the island of Ireland, there would be no need for a north-south border.
This crosses a DUP red line, but – as Michel Barnier recently pointed out – this is not a border for people but goods, and it partially already exists for animal health checks, some timber products and fertiliser.
Mr Davis has ruled out such a border, but Whitehall officials are already quietly pondering how this might be finessed. Perhaps, then, Northern Ireland could stay in the UK customs territory (not the EU customs territory as the EU “backstop” currently suggests), but the UK agrees to “reassurance checks” to ensure that goods which do not comply with EU standards are checked in the Irish Sea.
Maybe. But Mrs Bradley could legitimately warn that, even couched in these terms, the DUP will face such fury from this “betrayal” of the Union, they will be forced further Rightwards, polarising Northern Ireland to the point where politics becomes unworkable. Middle-of-theroad Northern Ireland voters might then decide it is easier to have the border poll which would reunite Ireland and join them with the EU.
So can the DUP be kept on side? How would Scotland – which voted 62-38 Remain – react to Northern Ireland getting a frictionless Brexit? Will an Irish Sea goods border precipitate the UK’S dismemberment?
These are real risks, real choices.
The New Customs Partnership debate
But what about the “New Customs Partnership” (NCP) in which the UK collects tariffs on behalf of the EU for goods going into Europe? This is a complex system that theoretically allows the UK to strike independent trade deals and then claim a rebate on any difference in tariffs on goods not destined for the EU.
“Theoretically” being the operative word, Dr Fox is sure to say, arguing that such a cumbersome policy will put a massive burden on business and, in practice, make it incredibly hard for him to strike trade deals.
Exporters to the UK wanting to take advantage of lower tariffs would often have to first pay EU duties and then claim rebates if they could show it went to a UK end-user. Their incentive to cut deals would be hugely reduced.
In any event, European Commission negotiators have already ruled out Mrs May’s preferred Customs Partnership as “magical thinking”.
But not so fast, Mr Lidington might argue, citing remarks this week by Leo Varadkar, the Irish taoiseach, saying the NCP was a “welcome suggestion” and, while the EU has been clear that it “isn’t workable in its current form”, it is something that perhaps “we could make workable”.
How so? Back in April, when it rejected the NCP, the EU posted five questions to the British, asking them to clarify. Sources say these were: 1. How the UK could legally act as customs agent for the EU? 2. How the rebate mechanism would work?
3. How VAT and excise duties would be handled? 4. How the model would deal with “rules of origin” questions and
5. If the EU would have to mirror the expensive UK scheme at its own ports? Mr Lidington, the de facto deputy prime minister and a key link with the Irish government, will argue that Whitehall has the answers – if only they could get political permission to test them on EU negotiators.
Put another way, says another senior source, the NCP might indeed be “magical” – but “not in an eyerolling, derogatory sort of way. Perhaps, after all, it really is magical – and no sleight intended.”
Even so, with both sides now so deeply entrenched and Brexiteers threatening leadership challenges if Mrs May pushes ahead with the idea, the sudden EU softening towards a Customs Partnership looks suspiciously like a rearguard action.
And even if it was to work in the fullness of time – experts do not expect the technology to be ready until at least 2023 – the reality is that to work and solve the Ireland border issues requires levels of ultra-high (perhaps even complete) regulatory alignment that are unacceptable to Brexiteers.
“If the EU had taken that approach at the outset, perhaps it might have worked,” says one official ruefully. “But the risk is that they have realised too late that the NCP was actually the pathway to the kind of closely aligned Brexit they were really seeking.”
This might be true, but it doesn’t magic away the problems with Max Fac – the need for an Irish Sea border, massive infrastructure and technology investment, and the certain cost and frictions to business weighed against highly uncertain trade deals returns. These are the real risks, real choices.
And the consequence is?
That’s the hard part: given what is at stake it is hard to see either side capitulating. There is no obvious compromise in which all sides emerge as winners. This perhaps explains why some Brexiteers, reportedly led by Michael Gove, are talking about creative ways to delay the reckoning. One solution analysts say might be acceptable to the EU is for the UK to stay in the customs union for an extended period – say five years, to allow technology to develop – keeping Northern Ireland aligned with the EU until a new relationship is established. To soften this, the EU would agree to continue to discuss evolving customs policy – even to enable the UK to adopt its rebate system if Dr Fox was able to strike a deal in that time – for the duration of this interim period.
But ultimately for the “Future Partnership” the UK would be committed to a Canada-style FTA and the Max Fac solution – although mindful that the EU and UK’S joint commitment to avoiding a hard border is legally enshrined and inviolable.
Such a fix is the kind of diplomatic chimera in which the European Commission specialises. It would essentially require Remainers to sign over the future of Brexit to the other side; but equally it requires Brexiteers to live on a promise; also a big step.
In a world of hard choices, ministers must consider the alternative. The two-year Article 50 timetable gives the EU the whip-hand. As Mr Barnier never tires of saying, the clock is ticking. The next hurdle is the June 2829 European Council. As Irish foreign minister Simon Coveney has warned, failure to break the political deadlock risks provoking a “serious” crisis.
In this scenario British officials fear the EU will simply refuse to further discuss the future relationship, or even worse, withdraw the offer of a transition deal, forcing the British to come to terms – or perhaps crash out with no deal at all. These are the real risks, real choices.
‘Mr Davis will equally surely disagree, arguing technology and a bit of EU flexibility can fix the problem’