Brexit Talks Are About To Begin

Anyone who thought that with the election result it meant that Brexit was going to “get done” by January 31st, must, by now, have realised that they were badly misled. For all intents and purposes, Britain remains in the EU, with the only difference being, as one of the more astute BP MEP's recently realised, that it no longer has any MEP's, members of the Council of Ministers, or Commission, and so no say in EU rules and regulations, and their impact on Britain. Its as though they had closed ears, as well as closed minds, during the referendum debates. Talks on Britain's relationship with the EU, are only now about to get underway, and those that expected that Brexit was going to “get done” will again be badly disappointed. 

In the talks over Brexit that are set to start next month, between Britain and the EU, the true nature of Britain's subordinate position will quickly become apparent. Tory MP's and Tory media pundits continue the ridiculous posture that, because Boris Johnson won a clear majority for his Brexit position, that in some way puts him in a more powerful position as against the EU. Total nonsense. It may give him a clearer mandate for the demands he puts to the EU, but it makes not one scrap of difference to whether the EU agrees to any of those demands! Its true that if, for example, a union holds a ballot of its members, and gets a large majority for the pay claim it puts to the employer, it gives them a stronger mandate in those negotiations, but it in no way means that the employer's response to those demands is changed. That depends on quite different factors, i.e. what is the power relation between the two. 

If an employer is faced with a small, unskilled workforce, for example, that can easily be replaced, they can simply turn to the union, and reject their demands, saying they will sack the workers, and get new ones. If the company is already working on tight profit margins, and conceding to the pay claim would mean it makes losses, its unlikely to concede to the demands, because to do so, would mean committing commercial suicide. If, however, the employer is making large profits, has a large, skilled workforce that cannot easily be replaced, they are far more likely to concede a pay rise. And this, essentially, is the problem that Britain faces in its relations with the EU. 

Because Britain has decided to leave the EU, and now set itself up in opposition to it, there is absolutely no reason why the EU will pay any attention to votes in the UK parliament, in determining its own actions, because it will, instead, respond to the views of EU citizens, and, increasingly, those views will represent interests that are contradictory to the interests of Britain, and its citizens. Its one reason that socialists oppose Brexit, because it inevitably creates such borders and divisions between workers. So, whatever demands Britain puts to the EU, the EU's response to them will be determined by EU interests. The question then is, in these negotiations, what are the power relations, and so who has the upper hand. Its only necessary to ask the question to know the answer. Its the EU by a country mile. 

The EU is a $14 trillion economy, whereas the UK is a minnow by comparison, at just $2 trillion. The EU is an economy with 450 million people, whereas the UK is an economy of just over 60 million people. The UK has been in relative decline for more than a century, as it was surpassed by Germany and the US, and then by Japan. Its relative decline, which became manifest in the 1970's, as a new global period of crisis began, was itself one reason that it sought sanctuary and salvation by joining the EU, so as to mitigate the problems that its relative smallness, compared to larger countries and economic blocs, presented. Even with that mitigation, the relative decline continued, as other large economies, and economic blocs surpassed it. China overtook Britain; more recently India overtook Britain; in the near future, other countries, such as Mexico, South Korea, and Brazil, look set to overtake Britain, and Brexit is likely to accelerate that relative decline, as the stagnation now affecting the UK economy illustrates. 

The Brexiters often claim that Britain's actual weakness is a source of strength. So, they say the EU will want to do a good deal with Britain, because we have a large visible trade deficit with the EU. In other words, they sell us a lot more stuff than we sell them. But, the EU could put tariffs on UK goods and services, or other forms of non-tariff barrier that would not change that, and would, in fact, work even more in the EU's favour. If the EU puts 10% tariffs on a range of UK goods, it will make it more difficult for the UK to sell those goods in Europe. Those worst affected, such as big car makers, may then decide to simply shift their production into the EU to avoid the tariffs. It means that the UK jobs go, and additional EU jobs are created, strengthening the EU economy, and weakening further the UK economy. All of the wages, profits, rent and interest go directly into the EU economy, and then putting money into the pockets of EU shopkeepers, window cleaners, gardeners and so on, and taking it out of the pockets of similar people in Britain. 

And, some of those cars and so on, would themselves have been sold in Britain. Instead, now, they will be produced in Europe, and exported to Britain, so that the result is actually that the UK's visible trade deficit with the EU would rise, rather than fall. Its a win-win for the EU, and lose-lose for Britain. Now, of course, the UK could say that it would impose 10% tariffs on EU exports to Britain, but this is precisely where the much larger economy of the EU, compared to Britain, comes in. Its worth car makers moving to the EU if it imposes tariffs, because they want to continue to sell into its 450 million strong market, not to mention the global market that opens up to them, as a result of all of the trade deals that the EU has already negotiated with around 40 other countries and trading blocs. But, its not worth them moving to the UK, so as to avoid tariffs imposed by the UK, just so as to sell into the much smaller UK market. 

The only people who would suffer from that are UK car buyers, who would see the price of cars rise by 10%, or whatever the tariff was that was imposed. Something similar has been seen in the US, with Trump's imposition of tariffs on China, and the EU, and that is even given the much larger size of the US economy. Prices of cars, for EU citizens, would not rise, because the car production would simply shift to the EU from Britain. But, if Britain, under WTO rules, imposed tariffs on EU cars, it would have to impose the same tariffs on cars from everywhere else, unless it had specific trade deals with those other countries. The fact is that Britain would continue to import cars from pretty much the same places it does now. It would just increase the cost of cars in Britain, to the detriment of British consumers. 

The other argument that is put that tries to turn UK economic weakness into a strength is that a falling Pound means that any tariffs imposed by the EU, would be cancelled out by this lower value of the Pound. But, this is a kind of magic money tree argument. The relative values of currencies fall mainly due to economic weakness, and particularly differences in productivity. A falling Pound means that an hour of labour in Britain now creates less new value than an hour of labour somewhere else. So, yes, it might mean that British cars become cheaper in Euros, but it means that you then get fewer of those Euros for every car you sell. At the same time, you need those Euros to buy French Wine, or Spanish fruit and vegetables, and now you have fewer of them to be able to buy these imports. The price of all those things, in Pounds, in the UK market, then goes up, so that again, the cost of living for UK workers goes up. In order to keep the same standard of living, because the value of an hour of UK labour has fallen, compared to an hour of EU labour, it means that UK workers have to work longer hours. 

But, there are many things that the UK imports solely as components of other goods it then produces. Because it then has to pay more for all those things due to the falling Pound, a large part of any competitive advantage it might have had from a declining currency is itself lost. Things like food and energy will continue to be imported, but, then, at a higher cost, leading to higher levels of inflation. Inevitably, the Bank of England would have to step in to raise official interest rates, and reverse some of the massive money printing that has left a sea of liquidity ready to begin to inflate prices. Already, the global economy had started to resume growth following the initial effects of Trump's trade war. It has again temporarily been slowed due to the moral panic over coronavirus, but in a few weeks time that will have disappeared from the news, and there will be a surge to catch up on the trade that has been lost. A pick up in economic activity will more than likely begin to see global interest rates rise again, and Britain will again be badly hit by that, given its continued dependence on financial services, and speculation, as rising interest rates cause asset prices to fall. Brexit will simply amplify the effects of that. 

But, also, Britain is tied to the EU simply because of proximity. Krugman won his 2008 Nobel Prize for his theory explaining trade patterns, and the location of production on precisely this basis. If you are BMW, or Toyota building cars in Britain, your Just In Time production and stock control is based around bringing in components every 20 minutes, and those components come from close by. It depends on components moving backwards and forwards across borders many, many times. But a central aspect of the profitability of modern companies is a high rate of turnover of capital. Thousands of components, produced in a short amount of time, can be bulk shipped in a similarly short period of time, within the EU. But, that cannot happen if, instead, they have to be shipped back and forth across the Atlantic to the US, or across the Pacific to India, China, or Japan etc. As Krugman showed, even shipping the end product these large distances is not economically efficient, which is why producers tend to site their production close to the large markets for their output. But end products are larger in unit value, and only make a single journey, components are small in individual value, and move repeatedly across borders, before the end product is completed. The idea that the UK could sustain Just In Time production relations with the US, China or Japan, rather than with the EU, is therefore, just ridiculous, and a large part of UK trade, is, in fact, involved in these kinds of trade flows rather than the sale and purchase of end products. 

Britain will need to retain frictionless trade with the EU in order to sustain these Just In Time systems, and without those systems, UK industry would quickly become totally uncompetitive and suffer a rapid decline. And, so, of course, Boris Johnson and his government proclaim that they do, indeed, want such frictionless trade, in the form of a Canada style free trade agreement. And, the EU says they will grant that wish, on condition that the UK essentially remains inside the EU, but without its former political involvement. In other words, it has stated what was obvious from the beginning. Precisely because of Britain's proximity to the EU, the only basis on which the EU can give such a deal to the UK is if the UK continues to accept the rules of the single market, and customs union. That also means accepting continued free movement, and jurisdiction of the ECJ. 

Britain, can, of course, proclaim its independence, and say that it will not accept such terms. But, then, it will be in a similar position that the Grunwick workers found themselves in in the 1970's, or that the Silentnight workers found themselves in in the 1980's, or indeed that the Miners found themselves in 1984-5. In all those cases, other workers came to the assistance of their comrades, and yet we still lost, because the balance of power was against us. Boris Johnson might hope that Donald Trump will come to his assistance in such a situation, in the same way that in 1974, workers came to the aid of striking miners to shut the gates at the Saltley coke depot, but, if Johnson is sensible, he will not rely on such support coming his way, or in it being effective even if it did. 

There is a lot of nonsense being talked about Boris Johnson looking for an excuse for a No-Deal Brexit. He wants no such thing, certainly not one that involves a crash-out. If that is what he wanted, he would not have capitulated in October last year, and agreed to write the letter to ask for an extension of Article 50. He would, instead have done as promised, and died in a ditch, or at least faked such a death, whilst resigning from office, and forcing an election. And, having obtained the extension, he would not have again capitulated to the EU, by going back to the deal that the EU had proposed to Theresa May, and which Johnson had originally opposed, whereby a border was put down the Irish Sea. Indeed, in Johnson's version of that deal Northern Ireland is incorporated in perpetuity in the Irish economy with an inevitable dynamic established for a rapid unification of Ireland. 

Johnson has two options. Either he gets a Canada style free trade agreement, in the next few months, which means accepting the rules of the single market and customs union, essentially remaining in the EEA, which is what the Faragists always originally claimed was what they wanted, or else he attempts to negotiate a “managed No Deal”. The latter would mean establishing a deal that avoids all of the chaos that would ensue from a crash out. It would mean agreeing to remain within various EU institutions, such as on air safety, medicines, and so on. But, remaining in all these bodies on an ad hoc basis, membership of which is automatic for all EU members, would be costly, as Britain would be charged a subscription for each. Nor would Britain have any political input into the decision making of these organisations. 

But, negotiating such a deal, even on a bare bones basis, is not going to be possible by June. If no deal is achieved by June, then Britain would have to apply for an extension of the transition period. The EU would almost certainly demand that any such extension be for as long as possible. The fact is that Johnson and his government are on the hook. They cannot go for a No Deal Crash Out, because the consequences, now, as they always have been, would be disastrous for Britain. They would be damaging for the EU too, but only to a small fraction of the extent of the effect on Britain. For Northern Ireland, it would be particularly disastrous, leading almost certainly to the demand for a Border Poll, and a United Ireland. For Scotland, it would put rockets under the demand for independence, and it may even have similar consequences in Wales, as well as provoking a political reaction in London and other large metropolitan centres. 

Johnson cannot countenance a crash out, because the chaos would destroy him and his government, and the EU must know that. The most likely outcome is that Johnson will have to bluff and bluster, before capitulating once again to the EU, and agreeing a deal that involves a treaty obligation to abide by single market and customs union rules and regulations. It will involve a similar war inside the Tory Party as in 1848 over Repeal of the Corn Laws. For all of the sound and fury, in order to win a parliamentary majority, he will have to rely on votes from the SNP, Liberals and Labour to avoid a crash out, and to essentially keep the UK within the framework of the EU.