foreign interests

Brexit Is Finally Happening on Friday, But the Drama Is Far From Over

Photo: WIktor Szymanowicz/NurPhoto via Getty Images

Three and a half years after U.K. voters narrowly approved a referendum to quit the European Union, Prime Minister Boris Johnson’s Brexit deal cleared its last parliamentary hurdles last week and received royal assent from the Queen to become law. The U.K. is set to leave the bloc at the stroke of midnight on Friday, now that the European Parliament has approved the farewell.

Passing the Brexit deal was an important political victory for Johnson, albeit an expected one after his Conservative Party cleaned up in last month’s national elections. The PM had campaigned on a pledge to “get Brexit done,” which he now ostensibly has. Yet this is by no means the end of the Brexit drama, nor does it entirely avert the threat of a chaotic cliff-edge scenario in which the U.K. crashes out of the European legal framework overnight.
The formal exit at the end of this month will be followed by a transition period, during which the U.K. will continue to abide by European laws and regulations but will no longer be a voting member. U.K. citizens will not perceive many changes in their day-to-day lives, except perhaps the absence of E.U. flags on some government buildings. During the transition, which will end on January 1, 2021, the U.K. and E.U. will continue to negotiate over their future trade relationship.

If 11 months sounds like a very short timeframe for negotiating a free-trade agreement, it is. The transition period was originally agreed to last 21 months, counting from the original Brexit deadline of March 29, 2019. That deadline was extended several times over the past year, but the end of the transition was not. The withdrawal agreement between the U.K. and E.U. allows for that deadline to be extended once for up to two years, but the implementing legislation finalized on Wednesday forbids Johnson’s government from requesting that extension. While the government could get around that self-imposed proscription if necessary, to do so would be politically disastrous for Johnson, who has repeatedly insisted that he can and will reach a trade agreement that benefits the U.K. before the end of the year.

Others, however, are not so sure. Phil Hogan, the new European Commissioner for Trade who will be leading the negotiations for the European side, has said it is “just not possible.” Dutch Prime Minister Mark Rutte told Sky News on Thursday that he put the odds of a deal this year at 50-50 and that if the U.K. refused to seek an extension, the parties could end up going over the dreaded cliff edge next January. Ending the transition period with no deal would mean that the U.K. and E.U. revert to trading under World Trade Organization rules overnight. This would likely be economically damaging but less catastrophic than if the U.K. had hit the Brexit deadline without passing the withdrawal agreement, which at least protects the rights of E.U. citizens living in the U.K. and provides for how the parties will handle the Irish border in the absence of a permanent trade deal.

The main reason to be pessimistic about Johnson’s chances of finalizing a trade deal this year (other than the fact that these agreements usually take many years to work out) is that he and the remaining E.U. leaders have very different ideas of what that future relationship should look like, and the Europeans are in no mood to cut the U.K. any breaks. Johnson’s government expects to get a deal like the one the E.U. finalized with Canada in 2017, with some additional agreements on issues like data sharing and trade in services. The E.U. wants to prevent the U.K. from slashing and burning social and environmental regulations in order to make itself more attractive to businesses than the continent: the Brexiteer fever dream known as “Singapore on the Thames.”

Johnson’s Conservative government has made so much noise about this hyper-competitive deregulatory frenzy that the Europeans have every reason to believe they will go through with it if they can. The European Commission is reportedly warning member states against offering the U.K. a Mutual Recognition Agreement, which would allow British industry bodies to certify that goods conform to E.U. standards. These agreements, which the E.U. has made with other trade partners like Canada and Japan, ease the movement of goods in certain key sectors.

That warning came after U.K. Chancellor of the Exchequer Sajid Javid told the Financial Times that the U.K. would diverge significantly from E.U. regulations after Brexit, even in sectors where British business leaders prefer a closer alignment. “There will not be alignment, we will not be a rule-taker, we will not be in the single market and we will not be in the customs union,” Javid said. Not only did this chest-thumping statement alarm bureaucrats in Brussels, it also ticked off those British business leaders, forcing Javid to walk it back and clarify that the government “won’t diverge just for the sake of it” and would “maintain high standards — not because we are told to, but because we want to.” Good luck getting the Europeans to buy that line.
If Johnson decides to play hardball and rule out the level-playing-field provisions the E.U. will insist upon, he might only manage to get a “skinny” deal that allows for tariff- and duty-free trade in most goods but grants no special arrangements for services, such as “equivalence” for U.K. financial firms. The E.U. grants equivalence to countries with closely aligned financial regulatory regimes, allowing their banks relatively seamless access to the massive European market. Banks in the City of London are being warned to prepare for the likelihood that they won’t get equivalence in the end. A skinny deal would also entail more onerous inspection requirements for U.K. goods entering the E.U. market, creating additional trade friction.

Nonetheless, Johnson intends to plow ahead with an aggressive negotiation with the E.U. while simultaneously seeking a trade deal with the U.S. this year. President Donald Trump and Treasury Secretary Steven Mnuchin have expressed enthusiasm about making a deal with the U.K. on a rapid schedule (Trump would love to make it an election-year feather in his cap), but at the same time, Trump is on the verge of starting yet another trade war with the U.K. in retaliation for its forthcoming tax on digital services, which will hit Silicon Valley tech companies. The Trump administration is threatening to retaliate with an arbitrary tax on British car exports. How they go from this state of affairs to a gangbuster trade deal in less than a year is anyone’s guess.

At the same time as he tries to seal these deals and fulfill his lofty promise to make Brexit economically beneficial to the U.K., Johnson may also have to spend some of his energy this year trying to keep his country from falling apart. While MPs in London passed his Brexit bill, the devolved legislatures of Wales, Scotland, and Northern Ireland all rejected it. Ian Blackford, who leads the Scottish National Party in the House of Commons, accused the government of creating a “constitutional crisis” by enacting a law that affects the devolved powers of the U.K.’s constituent nations without the consent of their independent administrations. The SNP is pushing for a second referendum on Scottish independence, even though Johnson has refused to allow it. Brexit has inflamed nationalist sentiments in Northern Ireland as well, contributing to an increase in paramilitary violence this year.

The prime minister may now be able to boast that he has gotten Brexit done, but the impact of Brexit has not even begun to be felt. As reality sets in and the consequences play out, the crisis that has been tearing the country apart for four years will start to reveal how much damage it has really done.

Brexit Is Finally Happening, But the Drama Is Far From Over