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The Brexit cliff edge - By Ian Dunt

Extracted from Brexit: What the Hell Happens Now? by Ian Dunt (Canbury Press, £7.99), available from Waterstones, independent bookshops or direct from the publishers with an Open Britain discount of 20%. At checkout use voucher code OPEN (valid until 15th December 2016)

The Brexit cliff edge

31 March 2019

Big Ben strikes midnight and Britain is out of the European Union. The talks have fallen apart in mutual acrimony. The UK has not secured continued membership of the single market. It doesn’t even have access. It is out of the treaty that waives tax on imports and exports. It has no trade deals with Europe or anyone else. It is on its own.

In the early morning, a lorry is loaded in Glasgow with radio equipment bound for the Czech Republic. When the lorry arrives at Calais, it is stopped by a customs official. Until today, Britain has enjoyed a seamless trading relationship with Europe. It means that European Union countries recognise UK standards and paperwork and vice-versa, allowing goods to be transported over borders without additional checks. Now the paperwork is worthless. Everything has to be checked.

The lorry is stopped and detained. Inspectors come on board and take samples to send off for testing. Everything will have to be assessed, from the information on the packaging to the environmental impact of the components. This will take several days, during which the lorry is barred from entering the European market.

Behind the Glasgow lorry, several other vehicles are taken to one side. By sunset, the bottleneck on the French side means that lorries can no longer drive onto Calais-bound ferries at Dover. They queue on the slow lane of the A2. Within a few days, the tailback stretches back to London.

For exporters of animal products, like meat or eggs, the problems are more severe. They are only allowed into the EU through specially designated entry inspection posts, but it has been so long since the UK needed them for trade with Europe that none exist. British exports of salmon, beef, and lamb collapse overnight. In Westminster, ministers demand the inspection posts be established immediately, but they have limited leverage with their European partners. A key export industry starts to rot.

The problems aren’t restricted to goods heading to the Continent. The EU has mutual recognition agreements with Australia, Canada, China, Israel, Japan, New Zealand and the United States, mimicking the bureaucracy-free trade on the Continent. British goods for the US had been verified by virtue of their EU accreditation. Now they also need to be checked. Shipments heading for America’s west coast are stopped at customs, detained and sent off for inspection.

In the complex world of freight, with one shipment arriving as the other leaves, the effect is devastating. Brexit detonates like a bomb across the world’s trade networks.

Thousands of large businesses start haemorrhaging cash, but the effect is not limited to goods going out – it hits those coming in, too. Laptop computers from China and Japan are stopped, alongside jeans from the US, French cheese and wine and chocolates from Belgium. Gaps start to appear on shop shelves.

Other bureaucratic requirements re-emerge from the past like zombies. One of them is proof of ‘country of origin’. Products entering the European Customs Union, which waives import and export duty, must be checked to ensure that they are paying the right tariffs. This is incredibly detailed and laborious. Each stage in a global manufacturing process must be accounted for. Firms need to present paperwork detailing the origin of every component part of their products.

Her Majesty’s Revenue and Customs hires an army of inspectors to speed up the process, but they are trying to learn on the go. Many products don’t receive their papers in time and don’t make it to the border. They sit in the stockroom. In the first year alone, the country of origin requirement costs Britain £25 billion. By 2030  it has led to a 4.5% reduction in GDP.

Products which do make it past border control have tariffs slapped on them. For decades they had been traded freely in the single market, but those days are over. Cars heading from Britain to Europe – almost half the vehicles made in the UK – are hit by a 10% tariff. Electronic goods are badly affected, as are warships and commercial liners. British-made cigarettes, most of which head to Europe, are hit by crippling 57% tariffs.

Britain’s aerospace industry, the second largest in the world, is damaged. The rates of the tariff themselves are fairly modest, hovering between 2.7% and 7.7%, but they are being put not just on the finished product when it is sent to Europe. They are also applied to the components shipped from Europe to the UK to make the product. Shares in BAE Systems, Rolls Royce and Airbus  plummet. These businesses’ costs have rocketed, and their product has shot up in price, without any of the additional revenue flowing to them.

Multiple parts of the British economy, from space stations to cakes, suffer a sudden hit. Companies that still make tangible physical products in Britain – Unilever, Imperial and Penguin among them – are the first to feel the pain.

The big banks in the City of London had been dreading this day. They did what they could to prepare, sacking thousands of middle and low income workers and moving their jobs to EU states. They are desperate to maintain their ‘passports’, a legal mechanism which allows them to sell financial products across Europe, but to do so they must prove to European regulators that they have a significant presence on the Continent. So they take the cheaper, back-office admin roles and move them. Anything else would be a waste of a crisis. This way they can kill two birds with one stone: minimising salary costs by transferring the jobs to countries with lower incomes and reducing the damage done by Brexit. They pack off a few high-level bankers and an executive or two to go with them.

If they are lucky, firms transferred enough functions in time for the 31 March deadline. But others got caught up in another bottleneck – this time of financial authorities. The sleepy, understaffed regulators in Paris, Warsaw, Frankfurt and Luxembourg couldn’t handle the demand for recognition from City firms. Many companies cannot now sell financial products to customers on the mainland. They lose tens of millions of pounds of sales as customers drift off to competitors.

The transfers cut the capacity of London’s financial services sector by 10%. Within a year, the City has lost 100,000 jobs and £12 billion in revenue.

The pound plunges again. The price of British government bonds rises. Foreign direct investment falls further. The deficit begins to look unsustainable.

Ironically, immigration starts to decline. Not just from Europe, where immigration controls have been introduced, but from across the world. The economy is tanking and Britain is no longer a country of opportunity.

Years pass, but 2019 comes to be seen as the start of a significant downsizing in the power of the City. Financial services don’t have a heart attack. They bleed out.

European regulators start making increased demands on the investment banks with branches in their cities. It starts with requests for more staff but soon includes additional requirements on risk management and capital investment. Firms have to divert more resources to the Continent, but gradually a political dimension develops too. If Europe is where the regulatory decisions are made, perhaps that is where they need to focus their efforts. What began as a technical requirement starts to change into a general financial migration. More and more functions are transferred to the Continent. Less and less money flows into the UK Treasury.

Nissan’s car plant in Sunderland is able to survive due to a deal with the government, in which it was offered relief for any losses it would suffer from Brexit. A deal is also offered to BMW. The symbolic effect of Minis with Union Jack roofs being produced in the Czech Republic would have been too much for ministers to bear. Jaguar Land Rover considers the location of its assembly plants in Birmingham, Halewood and Solihull and its three research and development facilities around Warwick. It’s not so much the 10% increase in the price of cars, but future regulation that is the worry. Cars are changing. Driverless technology is turning what used to be a lump of metal around some tech into a tech product with a metal shell. Regulations established now will be with producers for years and they are being made in Brussels, not London. Jaguar Land Rover needs to be whispering into the right person’s ear, but British ministers no longer have a seat at the table.

Other less prominent industries warn that they are about to go into a tailspin. Aerospace firms producing commercial and fighter planes in places like Yeovil, Bristol, Stevenage and Portsmouth start laying off workers.

UK negotiators head to the World Trade Organisation (WTO) where Brexit campaigners have long insisted they can fall back onto standard-issue trading rules. But there are no rules governing what Britain has done. They go into a meeting with WTO legal advisers who are divided on how Britain should proceed.

The UK has been trading under an EU umbrella for decades. Now it tries to extract its tariff and subsidy arrangements from the EU and lay them before the rest of the WTO. In response, the EU initiates a formal dispute. That starts an avalanche. WTO rules allow any country that feels it has been unfairly treated to trigger a dispute. Suddenly Britain’s fall-back insurance policy looks like a nightmare scenario, with 163 countries able to raise disputes against it on any aspect of its trading arrangements. Some disputes are legitimate. Others, like that made by Argentina, appear to be a way to leverage British vulnerability to regain control of the Falklands. Russia watches from the sidelines, calculating how it might benefit.

Britain argues that it is still party to an EU arrangement preventing the sale of cheap Chinese steel in Europe. Once those floodgates open, the UK knows domestic steel will be unable to compete. China reacts furiously, demanding that Britain demonstrate domestic injury and unfair trade. But the UK doesn’t have an investigating authority capable of undertaking trade remedy investigations. It cannot fight back because it doesn’t have the regulatory infrastructure. Workers in factories like Port Talbot start to fear for their livelihoods.

The WTO disputes mount up, all demanding high degrees of technical expertise and negotiating experience. British teams do their best, but they are beset by problems from every angle.

In European cities across the Continent, British professionals find they are unable to practise because their qualifications are no longer recognised. Insurance firms, veterinary clinics, lawyers, medical professionals, architects and countless others find they have to shut down their company and return to the UK.

No deal has been put in place for legal rulings, so countries across Europe stop recognising court decisions on divorce and child maintenance and other issues made in London. Unseen and mostly unreported, hundreds of single mothers in the UK go without payments from their former partners. A British man who divorced his wife and married again in Italy suddenly finds that the papers are no longer recognised. He is in a state of marital limbo. A hefty chunk of the work done by London’s once-thriving lawyers vanishes.

Regulation fails. Britain did not have time to set up all the authorities required to manage industries ranging from patents to medicine. Pharmaceutical firms are thrown into chaos. British regulators are unable to take on the full workload of the European Medicines Agency, so cannot authorise the sale of anti-inflammatory pills, eczema lotions and other treatments to UK patients. British pharmaceutical development slumps into a state of regulatory bafflement.

Regulations across society are in flux. Emergency provisions are made for Single European Sky — which ensures jets fly safely and efficiently — to maintain regulatory authority over UK airspace. But other areas fall into disrepair, causing uncertainty across production lines to complement the chaos in the trading networks.

Against this backdrop, Britain seeks trade deals with its closest allies: Australia and the US. Both countries are wary of talking to the UK without knowing its final status with Europe or the WTO, but they agree to open initial negotiations.

Ahead of talks, the UK prime minister and the US president hold a joint press conference. Theresa May says it shows countries are still keen to trade with the UK, while her American counterpart confirms the US commitment to the special relationship. Then the doors of the negotiating room close and the two leaders are replaced by grim-faced trade experts.

Britain had a chronic shortage of negotiators during the EU talks and the situation has not improved. The ones facing the American team are those who are not required to fight the fires at the WTO. Many are civil servants who have had to read up on trade in the years since Brexit. They face highly specialised trade experts who have been doing this their entire careers.

The public rhetoric disappears. It is replaced by hard-headed demands. US trade officials inform their British counterparts of the reality of the situation. The UK is in a position of unique and historic vulnerability. Investor confidence has dissolved. Its economy is facing its most significant shock since the Second World War. It has no time. It has no negotiating capacity. But Washington wants to help. It is prepared to rush a trade deal through Congress. It could take less than two years. But for this to be achievable, the UK needs to accept all of its demands. The Americans slide a piece of paper across the desk. The British team read the demands: they are horrendous. Consumer protections are reduced across the board, along with environmental regulations and safeguards for the NHS.

UK civil servants have little option but to capitulate. The only way to protect what remains of the British economy is to sell off British sovereignty. The control wrestled from Brussels is now sold off to the highest bidder, behind closed doors, in a conference room in Washington.

What was that?

That was the worst case scenario. It is also Britain’s current destination.

It does not need to happen, even now. These are not the consequences of Brexit itself. They are the consequences of a chaotic, hard Brexit. They are what happens when there is insufficient planning, insufficient thinking and a preference for emotion over reason.

Britain can prevent this from happening. All it requires is an intelligent ministerial team, a workable timetable, hundreds of trade experts, a restrained political debate and economic calm.

Britain currently has none of these things.

How did we get here? How did one of the world’s most sophisticated political and economic powers find itself driving towards a cliff edge? How did the UK become so lost in rhetoric that this scenario would even be conceivable?

At the core of Britain’s current dilemma is a refusal to engage with objective fact. The debate about Brexit was lost, almost as soon as it began, in a tribal and emotional dogfight which bore little relation to reality. That approach continued when the Conservative Party fell apart after the vote and was put back together by Theresa May.

The leading figures in the ministerial team handling Brexit do not seem to understand the obstacles they must overcome, or the profound consequences of failure. They have misunderstood the EU, misunderstood Article 50, misunderstood the WTO, misunderstood the economy and misunderstood the legal framework in which they must now operate.

This book is an attempt to address that. Based on extensive research and discussions with leading experts in politics, the law, markets and Europe, it maps the road ahead, with its many hazards and dangers. It is a short, readable guide to the biggest story of the decade.

The first step towards preventing a catastrophe is understanding that one is looming.

Extracted from Brexit: What the Hell Happens Now? by Ian Dunt (Canbury Press, £7.99), available from Waterstones, independent bookshops or direct from the publishers with an Open Britain discount of 20%. At checkout use voucher code OPEN (valid until 15th December 2016)




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