UK - A government on tenterhooks

UK - A government on tenterhooks

by Pininvest Analysis

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Pin-insights

As flies to wanton boys are we to the gods;

they kill us for their sport

(Gloucester in King Lear, Act IV)

 

The government of Mr. Johnson, the UK's Prime Minister, is confronting a near-impossible task as the Coronavirus alert eases

The expectations of the Tory (conservative) constituencies are vastly different and the 'Brexit' glue, holding together left-leaning disaffected Northern voters, fishermen determined to protect 'their' rights and traditional Conservative retirees, is brittle...

National symbols of sovereignty and independence, paraded imprudently in the limelight of divisive causes, come back to bind their proponents hand and foot

The gods Gloucester bitterly calls upon himself may be faceless with unwielding names - such as global trading blocks and rule makers   - but they are no less lethal for politicians 

 

***

 

Politics of un-compromise

Little needs to be said about large political majorities, rooted in incompatible and over-hyped expectations before and after the 2016 Brexit vote

Building on the nationalist anxiety of a country uncertain of its future, and of its identity in a globalized world, the planners of the UK's departure from the European Union resurrected a mythical 'sovereignty' (which, genuinely, was never in doubt) and a restored 'independence' to regain shimmering riches withheld from their rightful contenders (as enticing as a dream and as improbable)

Commitments to achieve the impossible have become shrill as the sheer impossibility to reinvent a down-to-earth reality from the gloss of a 'promised land' is dawning

It is not for want of trying...but, not unlike the flies invoked by Gloucester,  UK politicians may be caught in a deadly web of inconsistencies

 

Chasing the foreigners from our British seas

Absurdly irrelevant to the high-stakes game playing out with the European Union, at an estimated 0.6% of GDP, British fishermen have become a symbol bar none for the maritime island the UK has never ceased to be in the nation's collective mind

Symbols matter but over-hyped symbols become principled roadblocks - depriving the politicians who fanned the flames of any margin of compromise

However obtuse the British position will appear to EU negotiators, Mr. Johnson's government has locked itself in a corner with no wiggle room

The final word of wisdom may well come from a level-headed Dutchman,  whose family name Visser fated him to the direction of the Dutch fishing industry VisNed Union - from 1'30"" in the dw.org video

Mr. Pim Visser observed that Brexit is all about 'emotion' and if the British want to keep all the fishing rights to themselves...well, let them eat their own fish too (most of the British catch is exported to European markets today)

Entertaining a symbol without exit strategy, and without a happy outcome for its standard bearers, might be political suicide 

And the gods kill us for their sport...

 

Regaining independence

Within the EU, the sovereign rights of Great Britain have only been shared on a limited basis, in the name of a European common good, and transfers have been willfully supported by British governmental majorities

Free-trade minded Britain's reluctance to align with a number of EU rulings and policies led to multiple opt-outs, on the euro, on Schengen, on special justice and home affairs arrangements, as well as to rebates on EU budget contributions

The UK's preferential status within the Union corroborated the weight of the country's political influence and the negotiating talent of its civil servants

Rather than a 'loss' of sovereignty, British standing and influence around the world, backed by the European trading block, has proven to be the opposite

It is all the more unfortunate that powerful words have taken on a reality of their own, with a density looming over the British negotiators' every move

Compromise and balance in seeking agreements with the EU are bound to dent the 'shining city on the hill' - exposing the hollowness of illusionary promises

Even the premise of one-to-one trade talks initiated by the UK around the world, freely and 'independently' negotiated,  confidently announced and mostly delayed or shelved, has been a damp squib...

And the gods kill us for their sport...

 

Fracturing a global world

If British policians can be faulted in their grandstanding promise of trade deals made all over the world in the interest of the home country, it is because trade treaties require a level of expertise - and negotiating tactics - of which the UK, after 30 years of European trade agreements, was utterly devoid

The build-up of the International Trade Department’s Trade Policy Group, under Crawford Falconer, from 45 in 2016 to 723 in July 2020, signals the country's sizable ambition

Even so, the 'Global Britania' narrative was brought down to earth even before taken flight by no fault of UK's politicians, unless ill-timing can be counted against them...

 

Growth of  international trade faltered around the 2008 crisis, flattening around 60% of world GDP (after excluding trade with emerging markets). Listed in a briefing by the Economist (Jan. 2019), the factors measuring cross-border trade - in % of GDP in trade, profits of multinationals, foreign direct investments and the like - have all been flagging for years, in line with the collapse of cross-border bank loans and gross capital flows

Even before the U.S. engaged in conflicted trade relations with China, the three large blocks, pulling close trading partners in their wake, America, China and the European Union, have become more defensive and the largest outsiders, foremost India and Brazil, more cautious of any engagement

The EU trade agreement with Canada was more than  5 years in the making (2009-2014) and another 2 years for Parliamentary approval (2015-2017) ...with multiple protests in Europe to boot...

While drawing  little notice  in spite of its economic significance, involving 635 million people and covering more than a third of global trade, the trade agreement with Japan has been speedier and its formal signature, alongside a Strategic Partnership between Japan and the European bloc in 2018, but had also much to do with the U.S. withdrawal from the - for Japan all-important - Trans-Pacific Partnership, leaving the country isolated

The UK-Japan Trade Agreement, announced in early September, is based on the 2019 EU-Japan agreement and, while announced with great fanfare in Great Britain, any trade with the UK, in the Japanese perspective, builds on the trilateral relation between the UK, Japan and the EU

Because many Japanese are engaged in global supply chains  and regional supply chains in Europe, Great Britain's EU membership had positioned the country with success as a gateway to the European Continent. EU border controls and tarifs would impact the Japanese manufacturers significantly, voiding any UK-Japan agreement of its attraction

Any agreement with the UK today is essentially a Japanese bid to keep the supply chains in and out of Europe up and running...

It is really hard to escape the long shadow of a rule maker, backed by one of the 3 largest consumer markets

This is the world in which Great Britain hopes to resurrect the former glory of the Commonwealth - courting India, visiting Hong Kong (well, not anymore) and embracing Australia - promoting the Special Relationship with America (enmeshed in controversy about the Irish border before starting to negotiate) - and still hopeful about China

The headwinds of nationalist interests, blowing from China or from the U.S., may ultimately make the EU's trade power look like a safe haven, a port of call lost for now...

And the gods kill us for their sport...

 

Rule makers and rule takers

'Avoid looking desperate' was the recommendation of Ed Balls, former Shadow Chancellor of the Exchequer (2011-2015) and Peter Sands, former chief executive of Standard Chartered Bank in seeking some balance in trade negotiations with the United States 

The advice appeared no less relevant to set out the future relation with the EU and we suggested a year ago, in September 2019, that a negotiating strategy was required to narrow the options of political arbitrage

Though standing to reason, the analysis was always likely to go unheeded, because, for all the reasons discussed in this note, politics of 'un-compromise' have come to dominate the debate

And, if the UK government follows through on reneging the terms of the Withdrawal Agreement, essential to preserve the Good Friday Agreement, and voted into law last January '20, a framework drafting the future relationship with the EU becomes a lost cause - in September '20, some 100 days from bringing up the drawbridge...

 

Feeling no compunction to quote our own June 2018 note, unfortunately no less true after 26 months - Brexit - Sleepwalking into a major crisis - and to reiterate the warning of Sir Ian Rogers, former Permanent Representative of the UK to the European Union,  which  predicated our analysis...

***

[an excerpt dated June 2018]

We prefer to go directly to the crux of the misunderstanding regarding globalization, the cause of profound unease of some and of outright rejection by many – precisely those voters from ‘somewhere’ who expressed their displeasure by voting to ‘leave’ the European Union

Quoting Sir Rogers on data protection

Since the referendum, the penny has seemingly dropped in Government that autonomy/sovereignty in this domain is, to put it mildly, highly constrained. The reality – not one I welcome, but businesses have to deal with the world as it is, not build castles in the air – is that three discrepant data realms are developing in data protection and privacy – a US one, a Chinese one and an EU one

This is true of privacy regulations – but the comment can, and should, be drawn much further, touching every part of our lives, from the food we eat to the way we transact with one another, to the protection we expect for security and defense and to every aspect of international business as well...

...we rely on a legal framework and this legal system today is a shared endeavour between nations, under the all-encompassing umbrellas of super-organizations. A fact of life, really…whatever one may think of globalization

***

 

The umbrella of the 'rule-making' European Union will keep expanding its grip, Brexit notwithstanding, in every aspect of daily life, from energy delivery and nuclear security to air transportation to safety of pharmaceuticals to financial transactions and, of course, to food quality

Unbridled 'rule making' at supra-national level is encouraged, even demanded by companies on both sides of the English Channel, in their eagerness to secure access to wide markets for global distribution

Consumers, the ultimate beneficiaries of goods and services, are no less anxious to preserve safeguards, identified with the shared interest of close to 500 million Europeans, security in the numbers shielding - to a some extent - self-interested national lobby efforts

And the gods must be smiling...

 

What comes around...

Such is the power of supra-national rules that, quite conceivably, the EU could set the terms of trade with British companies eager to preserve unfettered access to the European markets unilaterally 

As has often been discussed, tarifs under existing WTO rules are hardly an obstacle to trade, while rules and regulations, left to national appraisal, are very much the key issue

It may not be inconceivable to devise a regime of 'equivalence' with EU regulations for the benefit of British firms in compliance,  guaranteeing all-important smooth cross-border supply chains deliveries and simplified controls

...devising quite another set of import regulations for the firms that do not comply...and for firms, benefitting of state aid and subject today of protracted negotiations

...with inevitably more red tape but also strong business support overriding grandstanding politicians...

 

In making EU rulings more pervasive than ever, with vocal support of the British consumers in matters of food safety, the politics of un-compromise will matter only as a prime example of the folly of nations, driven to the brink by a small coterie of politicians 

To the brink... and back if, predictably and after a short period of cooling-off, British technical committees will be invited to participate in technical discussions with the EU on any new rule setting - which involves most things...

As for trade agreements with non-European countries, they can be expected flourish in combination with EU trade regulations to secure access to the wider EU markets, which gives the final say to the EU Trade Commission after all, provided the Japanese model of trilateral arrangements is credible...

 

This is not to suggest that 'rule takers' are pitiful subjects of supra-national powers

Instead of thriving on entertaining narratives about a bright tomorrow, the UK government might engage with the global rule setters to start addressing the structural flaws of the British economy, the mediocre qualification of the workforce and its poor productivity record...complex challenges we hope to discuss shortly

 

The symbols of proud maritime traditions, of a sovereign nation freed from European rulings, of a people deploying its trade acumen the world over, of a country setting its own course - all these symbols will regain their luster by flourishing in the hearts and minds...

As for the shallow proponents of no-compromise policies, they will be left to wither in the crate

Or...

As flies to wanton boys are we to the gods;

they kill us for their sport