The Brexit divorce has left both sides worse off

Hello from Brussels. The biggest story in town continues to be the vaccine patent kerfuffle, with the EU deciding what to say at a big health summit in Rome at the end of next week. More on this next week ahead of the meeting.

Today’s main piece asks whether, with the UK unveiling some of what it intends to do with its Brexit freedom, its departure from the EU will lead to better trade policy on either side of the Channel.

Chartered Waters breaks down where all those semiconductor chips, in such short supply right now, end up.

The lost creative tension of Britain’s EU membership

“Good riddance” was a common mutual reaction in both the UK and EU when Brexit finally happened in January. To be fair, there are areas where you can legitimately argue Brexit created opportunities — the UK’s somewhat nimbler vaccination programme, or the EU pooling more fiscal authority, a move Britain generally opposed as a member state.

But in trade? No. To our mind if you think that either the EU or the UK has a better trade or regulatory policy as a result of Brexit, you’re being disingenuous, ignorant or protectionist. Let us explain.

From the UK’s point of view, it’s now spent this year and many months beforehand flailing about trying to pretend that a “Global Britain” trade policy means something, despite most evidence to the contrary.

As for regulatory freedom, the government’s plans set forth in the Queen’s Speech this week bigged-up new, looser regimes for public procurement and state aid, presumably so the UK can repeat its roaring triumph in buying personal protective equipment for the pandemic. But our bet is that in the end, being constrained by World Trade Organization commitments on procurement and the trade and co-operation agreement with the EU on subsidies, not much will change. And, despite constant repetition, it’s still nonsense that the UK couldn’t have created a freeport programme inside the EU.

The UK government’s plaintive requests to industry and farmers about what EU regulations they want scrapped has generally been answered “not much”. Businesses want continuity, not revolution. Companies are asking for lighter-touch chemicals regulation, but that seems to be mainly about the higher bureaucratic cost of running a separate regulatory regime, not radical rule-busting. Ministers are mulishly refusing to agree even a temporary and easily revocable deal to adopt EU sanitary and phytosanitary standards in order to ease border frictions across the Irish Sea, despite no sign of serious resistance to such a pact from British consumers, farmers or businesses. (See Trade Links for how the UK and EU might more constructively manage their post-Brexit relationship.) 

There was brief excitement in January when the government temporarily authorised neonicotinoids, the allegedly bee-killing pesticides banned under EU rules. But as it happens they weren’t needed for their intended task of killing aphids on sugar beet: this year’s sharp frosts did the job. In any case, France also got emergency neonicotinoid authorisation from the EU.

The one area signalling future substantive divergence is, predictably, financial services, where differing philosophies of regulation may push rules apart over time. However, it should be noted that one of the UK’s first departures was to tighten bank capital rules, not loosen them.

OK, but surely EU trade policymaking is free of an awkward member state? Yes, but one that we think generally nudged things in the right direction. The EU has lost a big free-trade heavyweight, and the direction of policy is now often about turning inwards, leavened only by the crude industrial mercantilism that has got it into a mess with the China investment deal. The Netherlands claimed for a while it would take up the liberal mantle, but domestic political resistance to trade agreements soon had it issuing joint papers with the French about putting up new hurdles to EU markets.

At the margin, Britain’s departure might make it easier for the EU to agree a trade deal with India, given how big a problem spirits tariffs created with Scotch whisky producers in the past. But any substantive deal with India has a low probability anyway: we’re not cancelling holidays in case we miss the signing ceremony. And if the EU is serious about having a broad spectrum trade-and-security-and-geopolitics-and-digital-and-infrastructure relationship with New Delhi, the UK’s defence and intelligence capability and its more enlightened views on data governance would have come in handy. Britain’s own ambitions for an India deal will suffer from having a relatively small market to offer as incentive.

Nor do we think that having parallel EU and UK negotiations with Australia and New Zealand for bilateral deals will improve the quality of either set of agreements. It’s more likely to mean sacrificing depth for speed so that one of UK trade secretary Liz Truss’s pliant British newspapers can run another of their increasingly hilarious “Brexit superwoman Truss ready to strong-arm China into deal”-type stories. (An actual headline, by the way).

Absence of conflict doesn’t mean an improvement in policy. We’d strongly contend that one of the best combinations of architects ever for the EU was one that ended in mutual loathing, British prime minister Margaret Thatcher and French European Commission president Jacques Delors, who together and apart created the single market and the social provisions that ran alongside it. Paul Simon and Art Garfunkel increasingly couldn’t stand each other either, but their work together beat the hell out of their solo efforts.

Why is Trade Secrets wittering on wistfully about a non-Brexit counterfactual, you may ask, and it’s a reasonable question. The answer: from the UK’s point of view it can tell us interesting things about the limitations of sovereignty in a world where regulatory regimes have network effects and powerful gravitational pull. From the EU’s, it’s a reminder that good trade policy often involves accommodating internal objections from spiky free traders, not wishing they would go away.

We’ll be watching with a fair and balanced eye for any sign that Brexit isn’t a negative sum game that, at least from a free trader’s point of view, is hurting both sides. But, so far, we’ve seen very little to suggest we’re wrong.

Charted waters

There’s been plenty of coverage of the car industry’s semiconductor shortage blues. Indeed, Nikkei Asia has an interesting piece this morning on Chinese manufacturer BYD planning to list ($, requires subscription) its semiconductor subsidiary. But how much of the devices actually end up in the world’s automobiles? According to Semiconductor Industry Association, just over 10 per cent.

That’s a significant amount, yet it’s dwarfed by the proportion of the devices that end up in laptops and mobile phones. Which perhaps explains why TSMC prioritised orders for the likes of Apple during the pandemic. Claire Jones

Trade links

More developments on the vaccine intellectual property story: a Canadian company has applied for a rarely used mechanism in WTO rules to override patents in order to manufacture vaccines for export to a developing country, in this case Bolivia. We’ll follow the story as it unfolds. Spain’s prime minister Pedro Sánchez hasn’t followed the lead set by Paris and Berlin, with Madrid instead backing US trade representative Katherine Tai’s temporary waiver. And today a spicy intervention from the chief executive of the Swiss pharma company Roche, who calmly and with no sense of hyperbole equates the overriding of patents with Communist East Germany nationalising drugmakers.

Two of the more constructive European business associations in trade in recent years, the UK’s Institute of Directors and the Confederation of Swedish Enterprise, have got together and done some thinking on making the post-Brexit UK-EU (and specifically UK-Sweden) relationship work. To our mind, it’s a lot more constructive than most of what we’ve seen out of the EU and UK authorities. Have a read here.

More bad news for Tesla (and indeed other foreign car manufacturers) in China. The country’s cyber space administration has published (Nikkei, $) a draft rule to sharply restrict the types of automotive data that companies can take beyond its borders. If passed, that would mean Beijing exercising greater control over a crucial factor in the competitiveness of foreign rivals. 

Martin Arnold and Valentina Romei have an interesting read looking into how, tariff-free or not, post-Brexit trade in goods between the UK and Germany is hurting business’s bottom line.

We’re late to this, but this London Review of Books piece on container shipping, courtesy of John Lanchester, is a ripping yarn. ($)
Alan Beattie and Claire Jones

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