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FT Brexit Denoument

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Jan 23rd, 2021
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  1. The Brexit denouement had finally arrived. As the year drew to a close, Boris Johnson stood triumphant in the House of Commons and proclaimed the rebirth of Britain as “an independent nation” on the brink of a free-trading future.
  2.  
  3. “We are going to open a new chapter in our national story,” he declared on December 30, as MPs approved his EU trade deal, secured on ­Christmas Eve after months of painful negotiations with Brussels.
  4.  
  5. But as his bright new dawn for Britain broke in 2021, the impact of Johnson’s deal was already being felt in the real world. David Howson, president of Cboe Europe, one of London’s biggest exchanges, sat at his computer and watched stunned as €6bn of EU share dealing shifted away from the City to facilities in European capitals. “Having been in this industry for over 20 years, I’ve never seen a ‘Big Bang’ liquidity transition of this type before in share trading and I hope it’s not something I have to experience again,” he says.
  6.  
  7. Meanwhile, at Aston Chemicals in Aylesbury, the doors slammed shut on its final shipment to the EU. After more than 30 years of exporting to the European cosmetics industry, the bureaucracy introduced by the Brexit trade deal had rendered the trade uneconomic. “It was emotional but we had no choice,” says Aston’s managing director Dani Loughran, after packing off the last driver with a box of Tunnock’s tea cakes. The company will now serve its EU ­customers from Poland.
  8.  
  9. Almost 200 miles away at Brixham on the Devon coast, Ian Perkes contemplated the possible collapse of his venerable fish and shellfish exporting business. Where once there was an open border to his main market in the EU, Perkes now sees only obstacles. Like his furious counterparts in Scotland, he has had to halt exports because of the complexity of securing the right paperwork — he discovered he needs to hire a French accountancy firm — and delays at the border. “This time last year we had £85,000 of export sales in the first days of January,” he says from his office overlooking the harbour. “This year — zero.”
  10.  
  11. “There will be no non-tariff barriers to trade,” declared Johnson on Christmas Eve. But that was not accurate, nor was it ever going to be. As Pascal Lamy, former head of the World Trade Organization, noted last year: “This will be the first negotiation in history where both parties started off with free trade and discussed what barriers to erect.”
  12.  
  13. The bill for Johnson’s relentless focus on sovereignty is now due. The government’s deal does allow for the continuation of tariff-free trade for goods that qualify as British- or EU-made. However, Britain’s exit from the customs union and single market on January 1 created a thicket of customs declarations, health checks and other barriers to trade. Services, which make up 80 per cent of the British economy including its crown jewel — the City of London — barely get a look-in.
  14.  
  15. Michel Barnier, the EU’s chief Brexit negotiator, recently told reporters that Britain had simply got what Johnson asked for. “There are mechanical, obvious, inevitable consequences when you leave the single market and that’s what the British wished to do,” he said.
  16.  
  17. Johnson insists that by breaking out of the “orbit” of the EU regulatory system he can build a new, agile British economy, developing rules to allow the UK to become a centre for industrial sectors such as robotics, artificial intelligence and biotech, while igniting a second “Big Bang” for the City of London, beyond the dead hand of Brussels. “We will be free of EU state aid rules, we will be able to decide where and how we level up across our country,” he told MPs on December 30.
  18.  
  19. Johnson had delivered the pure form of Brexit he promised Leave voters. MPs approved the deal by 521 to 73, with most Labour MPs viewing a “thin” trade deal as better than none. Even the most Eurosceptic Tories were buoyant. “We finally have a deal which facilitates tariff-free, quota-free UK/EU trade to our mutual economic advantage,” says Mark Francois, chair of the Tory Eurosceptic European Research Group.
  20.  
  21. For now though, the images of Boris Johnson’s Brexit are just as likely to be those of Scottish fishing boats lying idle, unable to export their catch; British rock stars claiming European tours could be wrecked by post-Brexit visa rules; or a British driver in a viral video clip, pleading with Dutch customs officers not to impound his ham sandwich. “Welcome to the Brexit,” smiles the officer.
  22.  
  23. As the dust settles on Johnson’s long-awaited deal, two questions stand out: how did we get here and what happens next?
  24.  
  25. "Give Us Canada"
  26.  
  27. No moment better sums up the cultural gulf between Johnson and the EU than a crucial dinner on December 9 at European Commission headquarters: the prime minister rammed home his determination to reclaim sovereignty for Britain at all costs, even if that meant walking away from trade negotiations without any deal at all.
  28.  
  29. British officials say the Berlaymont event between a typically dishevelled Johnson and the immaculately tailored European Commission president, Ursula von der Leyen, was “a disaster”. The venue itself was an awkward reminder of Johnson’s reputation in EU circles as an untrustworthy wrecker; as a journalist in Brussels in the 1990s, he had “revealed” non-existent plans to dynamite the Berlaymont, in spite of the potential risk of blasting asbestos across the city.
  30.  
  31. Johnson’s attempts to break the deadlock over a menu of scallops and turbot — supposedly a humorous nod by von der Leyen to stalled talks on fishing quotas — were greeted with icy silence. “At one point, the whole EU side were sitting with their arms folded, saying nothing,” says one. The encounter started with von der Leyen telling Johnson to put on his Covid-19 mask and deteriorated from there. One UK negotiator said: “We all got back to the ambassador’s residence afterwards and looked at each thinking: ‘Oh my god.’”
  32.  
  33. Shortly afterwards, the prime minister called von der Leyen to try to patch things up. “We need to defibrillate the talks,” he said. “A bit like that scene in Pulp Fiction with Uma Thurman.” The commission president was nonplussed by the reference to Thurman’s character getting an adrenaline shot. “Be careful Boris,” she replied. “You’re talking to a medical doctor.”
  34.  
  35. At the heart of the disagreement was the EU’s insistence that if Britain wanted tariff-free access to its single market of almost 450 million people, it could not be allowed to dramatically undercut the European economic model, with its tough standards on workers’ rights, climate change and subsidies. If Britain did significantly undermine the “level playing field”, its market access should be curtailed. After almost 50 years of membership of the European club, Johnson wanted sovereignty, pure and simple.
  36.  
  37. This single-minded focus should not have come as a surprise to EU negotiators. While the former Tory prime minister Theresa May saw Brexit as a problem to be managed — she unsuccessfully proposed a plan to stick to some EU rules in exchange for less border friction — Johnson insisted throughout that sovereignty was paramount, even if the economy took a hit.
  38.  
  39. In the 2016 referendum, Vote Leave had ­campaigned under a “take back control” banner and Johnson won the December 2019 election with a pledge to pursue a hard — or pure — form of Brexit. “Ideally, we believed we could have autonomy and access to the EU market — but if there was a conflict, it was clear which was our priority,” says one member of the UK negotiating team.
  40.  
  41. David Frost, Britain’s chief negotiator, explicitly set out the position in a lecture in Brussels last February. “Some argue that sovereignty is a meaningless construct in the modern world, that what matters is sharing it to gain more influence over others,” he said. “We take the opposite view. We believe sovereignty is meaningful and what it enables us to do is to set our rules for our own benefit.”
  42.  
  43. Each of the 100 officials recruited by Frost was told that Johnson was serious. “It was rammed home at every meeting,” says one, as the team was prepared for a gruelling negotiation that lasted from March until Christmas Eve, split between London and Brussels, in the middle of a pandemic. He adds: “It was a very big philosophical principle we wanted to prove: that it was possible to have a free trade agreement without having to accept EU law. That was how we would be judged as negotiators.”
  44.  
  45. In January 2020, Whitehall government departments were ordered to radically strip back their ambitions for the deal. According to those directly involved, Frost conducted a series of “Star Chamber” interrogations of government proposals to weed out anything that could enable Brussels to justify its demands for ongoing regulatory alignment with the EU.
  46.  
  47. In practice, this meant ruling out almost all market-access requests that did not have a precedent in existing EU free trade deals of the kind signed with Canada, Japan or South Korea.
  48.  
  49. The instruction from the centre [of government] was ‘Give us Canada,’” says one involved. “The process just wasn’t driven by thinking about what the UK really wanted from a deal, but to justify the claims to sovereignty. It was quite ­astonishing.” The fear in Number 10 was that the more Britain asked for, the closer it would be bound into EU rules.
  50.  
  51. Two of the biggest casualties were the food and drink industry and haulage and logistics operators. Both warned that imposing a panoply of border checks on the 10,000 trucks that came across the “short straits” between Dover and Calais each day would create immense costs and frictions on the just-in-time supply chains that had emerged organically during 30 years of EU ­single-market membership.
  52.  
  53. But in his speech in Brussels, Frost made clear that the Johnson government did not share those concerns, asserting his belief that studies on the impact of non-tariff barriers to trade “exaggerate customs costs, in some cases by orders of magnitude”.
  54.  
  55. During this Star Chamber process, Frost also overruled the entreaties of Defra, the department responsible for agriculture, to seek equivalence from day one with the EU’s sanitary and phytosanitary (SPS) rules.
  56.  
  57. These — as UK food and fish exporters are now discovering — impose heavy burdens on traders. “We are stuffed,” says Perkes, who is grappling with the new red tape. On January 18, a fleet of Scottish seafood trucks converged on Westminster in protest, one emblazoned with the message “Incompetent government destroying the shellfish industry”. Johnson has set up a £23m compensation fund to help the fishing industry with what Downing Street claimed were “temporary” problems.
  58.  
  59. Number 10’s focus on the “only Canada” rationale also applied to the decision not to seek a waiver that would have enabled hauliers to avoid completing safety and security declarations with every consignment shipped to the EU. A person familiar with the internal battle said that calculations by the Treasury found the additional declarations — now mandatory for those in the industry — would cost £3bn a year, as businesses completed 29 fields for exports and 41 fields for imports at a cost of £23 per declaration.
  60.  
  61. Pleading from exposed industries — food and drink, logistics, pharmaceuticals, chemicals, automotive and aerospace — was batted away with apparent disdain. “We are expecting the heaviest lobbying from industries that are in secular decline,” said one senior minister in early January last year, setting the tone for the negotiations.
  62.  
  63. For Richard Burnett, chief executive of the Road Haulage Association, “They were talking a hard line, warning ‘This is going to happen, you need to start preparing yourselves and get yourselves ready.’ The message was clear but, as ever, there was no substance about what, exactly, to ­prepare for.”
  64.  
  65. Three people actively involved in lobbying ­government on behalf of industry told the Financial Times that chief executives who confronted ministers too overtly found that they were dropped off future conference calls. Shane Brennan, chief executive of the Cold Chain Federation, which ­represents the temperature-controlled haulage and logistics industry, says: “It was pretty clear we had to be complicit in the fallacy that these things could just work, or risk losing any influence we might have.”
  66.  
  67. Johnson did not like to dwell on the economics of the “skinny” tariff-free goods deal he was seeking, not least because it would clearly favour manufacturers in the EU — which had a £97bn ­surplus in goods trade with Britain in 2019 — but would barely cover services, where Britain had an £18bn surplus.
  68.  
  69. A study by May’s government had suggested a Canada-style deal would leave Britain’s gross domestic product almost 5 per cent lower over 15 years than if the UK had stayed in the EU. According to government officials, successive chancellors Sajid Javid and Rishi Sunak stopped officials carrying out a new analysis of the proposed deal, which would have come to the awkward conclusion that Britain would be left worse off. As one official recalls, “Someone would occasionally propose doing the work and everyone would say: ‘No.’”
  70.  
  71. Shouting At Each Other"
  72.  
  73. By the end of negotiations, 437 British officials from 25 government departments and agencies would take part in about 1,000 negotiating sessions. But the first few trade negotiating rounds in the spring and early summer of 2020 were largely sterile. “We were essentially shouting at each other,” says one British official. The ambitions expressed in a joint 2019 “political declaration” of future relations were watered down by London as the prime minister focused on breaking free of the EU’s orbit. But despite the UK officially pursuing an “only Canada” agenda, Brussels became frustrated that the country was still trying to preserve some benefits of the single market under the guise of seeking a basic trade agreement.
  74.  
  75. Barnier took aim at examples of what he saw as UK “cherry picking”, such as Britain’s ambitions for service providers including lawyers and architects to retain rights to operate across the single market. Other targets were the UK’s efforts to safeguard its position as a manufacturing hub for the EU, with goods assembled using components from all over the world, as well as its goal to secure stable market-access rights for the City of London.
  76.  
  77. The Covid-19 pandemic made the negotiations even more stilted, with both sides’ chief negotiators laid low by the virus soon after talks started. The endless online sessions, sometimes punctuated by the sound of crying children in the background, meant that officials saw far more of their opposite numbers’ personal lives than they expected or even wanted, ranging from a room of strange hats and a bird cage to an impressive array of kitchen knives.
  78.  
  79. The repeated incantations from the UK of the two sides’ need to respect each other as “sovereign equals” began to grate on the EU, says one official, commenting that “you could have played bingo” listening for the catchphrase. For its part, the EU was anxious not to create overly generous precedents that would open the door to calls for renegotiation by other trading partners. There was also a need to demonstrate to member states that leaving the bloc carried a price. “There was a difference between being inside and outside the EU. The idea was never to be punitive to show that, but we couldn’t give something that contradicted that,” says one senior EU diplomat.
  80.  
  81. As Frost instructed his own team on the art of doing a deal, he resorted to eccentric analogies such as a grid of four types of negotiator: teenager, tank, mouse and leader. The EU, he avowed, tended toward the first two, whereas the UK was too often a mouse. His negotiators were exhorted to be the leader in the room.
  82.  
  83. To while away the tedious hours in Brussels, Frost and his exhausted team would sip whisky at the UK ambassador’s ­residence. “There was one night we were discussing our favourite Batman — Frosty could only think of Adam West,” says one British official.
  84.  
  85. The lack of progress exacted a toll, leaving little time to negotiate beyond a bare-bones accord. As Covid-19 ravaged the world economy, many EU officials became convinced that Johnson would seek an extension to the UK’s post-Brexit transition period, which elapsed at the end of 2020. Top officials thought that London would at least ask for a conditional prolongation of six or 12 months; many British business leaders also pleaded for more time.
  86.  
  87. But Johnson insisted on a firm year-end ­deadline, a position he vigorously defended even when recuperating from a life-threatening bout of coronavirus at his country retreat. “He was texting from Chequers saying we would not extend,” says one of his allies.
  88.  
  89. "The EU Wanted to Kick the City"
  90.  
  91. The summer came and went. Barnier tried to unblock the talks by offering to remove any role for the European Court of Justice in the future relationship. This was a bête noire for Conservatives, but he felt he got little in return. British officials say his frustrations often showed: “It was a fairly frequent event for him to shout, ‘I am calm!’ at us.” There were more amicable moments, however, such as when Frost and Barnier dined at the wartime residence of General Charles de Gaulle at Carlton Gardens in London.
  92.  
  93. People close to the talks on the EU side see the summer as the moment when Britain made a crucial mistake by wedding itself to a strategy of trying to separate the issue of post-Brexit fishing rights in UK waters from the wider talks. The idea was that it would be the last open issue and the EU would have to give ground.
  94.  
  95. “The thought that in the end we would concede on fisheries to get the economic partnership was not realistic,” says one person involved. British officials privately admit that they had not realised quite how hard the fisheries issue would be to crack. Johnson, meanwhile, was distracted by Covid-19 and largely allowed Frost to get on with the negotiations.
  96.  
  97. By late summer, it was clear that Britain was heading for a very basic trade deal and that the City of London, worth £132bn to the country’s economy, would miss out. Brussels, along with EU leaders such as France’s Emmanuel Macron, rejected UK efforts to secure market-access permissions for the City and to enshrine future co-operation on financial rules in the agreement.
  98.  
  99. Johnson has admitted that the EU deal does “not go as far as we would like” for financial services, which employ more than one million people and account for about 7 per cent of British GDP. Indeed, many City of London executives say it is effectively a “no deal” Brexit for them — a widely anticipated problem that has seen businesses shift staff and capital out of London to EU centres over the past few years to maintain access to European markets.
  100.  
  101. One senior City executive says: “The Conservative party is controlled by ideologues who were allowed to define what Brexit meant. It came to mean a purist view of sovereignty at the expense of the economy.” “We rank lower than fish and we know it,” says another leading bank executive. “It’s a fact of life.”
  102.  
  103. In a political declaration on future relations made in October 2019, the UK and EU agreed that by June 2020 they should conclude a new basis for financial services trade — based on assessing the “equivalence” of each other’s regulations. British officials insist they did try to get a better deal but the EU left Britain hanging.
  104.  
  105. In October 2020, Brussels said it needed more clarity on the UK’s regulatory intentions, despite the government having already provided 2,500 pages of answers. “It became clear in June or July they were just going to ignore the equivalence process,” says one UK official involved in the talks. “They wanted to kick the City around a bit.”
  106.  
  107. By January 2021, arrangements to make it easier for UK and EU financial services companies to operate in each other’s markets were still not in place, and some business — as predicted by Macron — started to leach out of London, as David Howson saw first hand on his return to work after the new year. Ivan Rogers, Britain’s former EU ambassador, describes the deal as “a major disappointment”, which would hit smaller companies harder than multinationals. “Larger firms will find it easier to rely on or set up a commercial presence in whichever markets they want,” he says.
  108.  
  109. It is revealing that, in the 1,246-page “trade and co-operation” agreement, the word “fish” appears 368 times, compared with 90 references to financial services. Yet fishing accounts for 0.1 per cent of the UK economy and the sector still ended up claiming it had been “betrayed” by Johnson.
  110.  
  111. "Deal or No Deal"
  112.  
  113. Over the autumn, Johnson deployed what aides called a “madman” strategy to jolt the talks back to life, threatening to break international law in relation to the Brexit withdrawal treaty’s Northern Ireland protocol and suggesting he could walk away from the talks altogether.
  114.  
  115. “I don’t think the madman strategy was a guarantee of success,” says one EU official. “I never felt people trembling or impressed.” The view during a discussion among EU leaders in October, he adds, was “if it has to be no deal, then no deal it will be”.
  116.  
  117. As the talks edged closer to the deadline, Britain was moving towards what Rogers called “the elephant trap”, where Brussels would extract concessions as the clock ticked down to no deal — an outcome that would be more painful for Britain than the EU.
  118.  
  119. The main outstanding issues were fish — where Britain ultimately offered the EU a much more generous settlement than it had intended — and the rules to maintain a “level playing field” for fair business competition.
  120.  
  121. EU diplomats note that by waiting so long to give ground to the EU on the bloc’s core interests, Britain pushed Brussels into a hawkish stance on market access — trust was damaged by Johnson’s threat to break international law. In the end, the UK agreed to include the idea of “rebalancing measures” in the deal so that, if either side diverged significantly from the other’s rules, they could be hit by penalties in the form of tariffs.
  122.  
  123. The design of the mechanism was intensely fought over. Johnson dubbed the final version a “freedom clause” — since it allowed Britain to diverge on regulations at a price — but he did not like it. “It’s obvious to me that if the UK had been in a position to accept a level playing field [that endured] over time, the EU could have given a lot more . . . The pressure would have been totally different,” says one senior EU diplomat of the early months. “It would have been another negotiation, but they were stuck on this sovereignty issue.”
  124.  
  125. The mood appeared to lift palpably once ­negotiating teams re-engaged in Brussels in December, even if the atmosphere in the EU’s Borschette building was described by one UK official as “like negotiating in a 1970s car park”. The London venue for the talks — a grim subterranean conference centre in the basement of the Department for Business — was even worse. “There was no light, it was disorienting,” says one negotiator.
  126.  
  127. As Christmas approached, some levity had even entered the chilly relationship between Johnson and von der Leyen. “She was gradually learning to work out when he was joking,” says one British official. At one point, the two leaders were haggling over how big a fish-quota cut should be inflicted on EU boats after Brexit, with von der Leyen offering 22 per cent and Johnson 28 per cent. “How about 45 per cent?” said Johnson. After a moment’s silence, there was laughter in Brussels.
  128.  
  129. In the final call on Christmas Eve to seal the deal, the mood was almost elated. Johnson, speaking to von der Leyen from Downing Street, paid tribute to the exhausted teams led by Barnier and Frost. “Where is David?” he asked. “I’ve got him here,” said von der Leyen, turning the camera to show the UK negotiator. The subsequent picture of an elated Johnson, thumbs aloft — which appeared across the world to indicate the deal was done — was actually the prime minister’s delight at seeing Frost.
  130.  
  131. The Future
  132.  
  133. The deal is far from the finished article: Britain and the EU will carry on talking for months or years to fill in the gaps in the treaty, including on financial services and rules to allow professionals to work across borders. But Johnson emerged claiming to have struck a “cakeist treaty” — a reference to his belief that it was possible to have one’s cake and eat it: sovereignty and EU market access.
  134.  
  135. The red tape and trade bureaucracy that Theresa May had tried to remove with her “bespoke” deal were, however, painfully evident: 215 million import and export forms to be filled in every year, costing business £7.5bn according to HM Revenue & Customs. Barriers were thrown up to trade not just between the UK and the EU but between the mainland and Northern Ireland.
  136.  
  137. “Trading businesses are working through the various stages of grief: some are really angry, other are in denial hoping that the worst barriers can still be bargained away,” says Brennan of the Cold Chain Federation. “The ones that are doing best are those that have accepted that slower, more expensive and less flexible trade is just how it’s going to have to be.”
  138.  
  139. Nor has Johnson yet been able to fully articulate what he intends to do with the sovereignty and regulatory freedom he had secured at such cost. One City bank executive says: “They haven’t got the first clue.” Chancellor Rishi Sunak has talked of a fresh regulatory regime for the City, with new rules to develop innovative markets such as green bonds and to promote tech start-ups. On a January 6 Zoom call, Johnson asked 250 business leaders to suggest ways in which Britain might exploit its newfound freedom.
  140.  
  141. But given Johnson and fellow Brexiters have had almost five years to flesh out such an agenda, the plans remain surprisingly sketchy: the prime minister has now asked Sunak to lead a “better regulation committee” to come up with ideas. Johnson insists Britain can be “nimbler” in regulating new sectors. Ministers claimed that Brexit allowed the UK to approve a Covid vaccine more swiftly than other EU countries — a claim rejected by Britain’s own medical regulator. Free trade deals around the world might offset some of the lost trade with the EU.
  142.  
  143. Gavin Barwell, Theresa May’s former chief of staff, says a deal was possible because it met the objectives of both sides: sovereignty for Johnson and tariff-free access to the UK for the EU while still exacting an economic toll on Britain. “That’s why we ended up with this thin deal,” he says.
  144.  
  145. By contrast, Bill Cash, a Eurosceptic Tory MP jubilantly told the Commons that Johnson was walking in the footsteps of Winston Churchill, Margaret Thatcher and one of the prime minister’s classical heroes: “Like Alexander the Great, Boris has cut the Gordian Knot,” he said.
  146.  
  147. Meanwhile, businesses around Britain are slowly coming to terms with Brexit reality. Ian Perkes, who voted Leave to “take back control” of Britain’s fish stocks, looks out at the quayside at Brixham and contemplates the possible collapse of a fish exporting business that has been running for 44 years. “Boris came down here and promised us free trade — but this isn’t free trade,” he says. “We’re two weeks into the new year and we will go bankrupt.”
  148.  
  149. FIN
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