This is Cfdtrade fundraising week. 1220 donors have already invested in our efforts to combat corruption and predatory conduct, particularly in the financial realm. Please join us and participate via our donation page, which shows how to give via check, credit card, debit card, or PayPal. Read about why we’re doing this fundraiser,what we’ve accomplished in the last year and our current goal, burnout prevention.
As the Tory party descends into open warfare, Theresa May is attempting to pull off a bizarre face saving exercise. In a speech scheduled for 3:30 PM today, the Prime Minister will attempt to shift blame in advance of the widely anticipated refusal of the EU to approve having Brexit negotiations start to address trade-related matters. In Brexit-speak, that phase is referred to as “the future relationship”.
Why is it so important to May to try to get control of media spin? Aside from the fact that she’s been unable to tamp down infighting (more on that shortly), this week Brexit negotiations resume, with the EU to decide formally whether enough progress has been made for them to move on the “future relationship”. Recall that this was an ambitious timetable given the complexity of the issues already at hand, assuming something resembling actual negotiations were actually happening. Press reports suggest that the only topic on which meaningful headway has been made is on the legal transition issues, such as the role ECJ decisions will play post Brexit.
May’s speechwriters have grabbed onto a fetching cliche, which many of the press barons have dutifully picked up: that the ball is (supposedly) in the EU’s court.
The reality, as anyone who has dimly paid attention knows, is that the Tories have lost the ball and are too busy squabbling even to go looking for it.
The intensified bickering, and the continued lack of agreement as to what sort of Brexit even the Tories want, gives vivid confirmation to a major EU complaint: they have no one to negotiate with.
Worse, May’s team is flogging a new canard: that the Brits are making realistic plans for Brexit. This is laughable, but even worse, the Government may actually believe this new garbage barge they are trying to foist on the soon-to-be-suffering public (save the top rich and technocrats, who will find a way to save their hides and maybe even prosper). :
In the meantime, Dominic Raab, a minister at the Department of Justice, claimed that the UK was making more extensive plans than previously understood to prepare for the possibility it might leave the EU in March 2019 without agreement on a future relationship.
Such an outcome could require the country to set up customs posts, air traffic control systems and other new, independent institutions far more quickly than if a deal is reached for an orderly transition.
A full year ago, we caught the significance of how the UK looked to be in trouble regarding an overdue, major upgrade of its Customs system. It would be daunting to get the project done in 2019 even in a no-Brexit scenario, and getting the needed coding done for vastly increased border requirements is an impossible task. Nothing has changed since then to ameliorate the situation. Indeed, a full nine months after we flagged the issue, the National Audit Office was making the same warnings. From our October 2016 post:
The UK’s present system for handling non-EU-related trade is almost 25 years old and was set for replacement. The new system, called CDS for Customs Declaration System, to be ready by 2018 and to have the capacity to handle 100 million transactions,. At double the current level of 50 million, that would have seemed to be ample headroom.
Reading between the lines of the Financial Time story, there seems to be some doubt as to whether the original spec could have been pulled off in time. But now with Brexit, the project suddenly has a major spec change: it has to handle 350 million transactions.
And what the story does not mention, but seems likely to be the case, is that there are tons of other spec changes that have yet to be identified and documented related to EU and UK tariffs on specific goods. And if the system tracks things like port of embarkation and disembarkation, more data fields need to be added for all the EU ports and air cargo locations. And of course, the Euro currency data field needs to go in too.
In addition, since the negotiations will be in progress, the levels, and potentially even some of the categories are likely to be in flux. Given that olives are a very important export good for the EU, how will olives be treated versus olive oil versus products made from olives, like olive paste? Will green olives be treated differently than ripe ones? How all this sorts out affects the coding.
Recall that Lambert broke the story of the Obamacare exchange systems disaster by noticing that spec changes were being made six months prior to launch (the reality turned out to be even worse, changes were being made weeks before the start date). He recognized how disastrous that was for a systems rollout. And these were modifications to what was presumably an otherwise largely settled development plan. If my surmise about how many things will be up for grabs in a Brexit negotiation (start with will they try to negotiate a WTO and an EU deal in parallel, since there’s no assurance the UK will get timely approval from either set of counterparties), it’s hard to see how any meaningful coding on the EU system can get rolling.
And this is only one of a myriad of hard Brexit tasks the UK needs to be able to manage, and looks utterly incapable of pulling off.1
At least there was some good gallows humor in the Financial Times’ comment section, such as:
May to Europe: “better start negotiating, or we’ll ship you more jobs.”
In this movie the EU is the cop sent to talk the U.K. jumper down from the roof….
While British readers can fill in more details, the short version of the leadership catfight is that after May got shellacked in her misguided snap election, Treasury Secretary Phillip Hammond, who is a proponent of a soft Brexit, was on his way to steering the direction of the Brexit talks.
Even though the snap election results were widely seen as a repudiation of the hard Brexit camp, that wing of the Tories has refused to cede ground. Boris Johnson continues to issue leadership challenges to May and she is too damaged to put them completely to rest. And now the hard Brexiters are having a go at Hammond. :
Philip Hammond’s Treasury has come under fire from a leading Conservative leave campaigner, who said that the gloomy outlook and “Brexit in name only” approach of the department risked scuppering the UK’s EU exit.
Bernard Jenkin’s highly critical intervention came while other Tory MPs urged Theresa May to sack the chancellor, as those on the right of the party flexed their muscles following days of criticism of Boris Johnson and speculation about an autumn cabinet reshuffle.
Even wilder, as May has allegedly quietly threatening to depose Boris Johnson as Foreign Secretary, Johnson is saying he won’t go. The run at Hammond, even though the Guardian later effectively reports in the story quoted above, that the attack on Hammond is more backbencher kvetching than a serious threat, is clearly timed to make Johnson’s threat look serious. First from the Independent, :
The Foreign Secretary will apparently just refuse any attempts by the Prime Minister to demote him, who indicated that he could be moved into another Cabinet role in a reshuffle.
Allies of Mr Johnson have warned that doing so would undermine Brexit and destabilise the Government…
Ms May has been adamant that she will not “hide from a challenge” when dealing with the former Mayor of London, according to the Sunday Times.
The remarks led to one Tory minister saying there was a “stench of death” coming from Downing Street and that Ms May lacks the authority to demote Mr Johnson.
While it is not unreasonable to point out that Cabinet changes would be yet another political fracas and would divert attention from Brexit, I gasped out loud when May appointed Johnson as Foreign Secretary. That in and of itself was clearly a poke in the EU’s eye. It is hard to see how the UK can negotiate, as opposed to posture, with Johnson in his current post.
For what it is worth, New Statesman argues that May can indeed demote or oust Johnson, :
“A change of nuisance,” David Lloyd George once quipped, “is as good as a vacation”. Theresa May might be inclined to agree. The collapse of Grant Shapps’ plot to remove her has strengthened her hand as she contemplates a reshuffle….
The thing about sacking Johnson is that it only makes sense if the PM plans to use it to inject a note of sense into the Brexit talks, perhaps by reminding the frothier members of her parliamentary party that removing oneself from a four-decade membership of a trade bloc is difficult regardless of whether or not Treasury mandarins break into a rendition of “Everything is Awesome” every morning at 8am sharp. Or if, instead of pledging money to prepare for “no deal”, concede that “no deal” is a fantasy that can’t be achieved.
That, as the Times reports, she is instead planning to tell the EU27 that the ball is in their court shows that regardless of whom she sacks, come the crunch, the PM will always side with the loudest voices in her party – that is to say, she will always opt for a Brexit as hard and as damaging as possible.
And while May has looked like a dead woman walking since her snap election backfire, it’s hard to see the party lining up between Johnson or any of the other leadership contenders. So as much as I thought she’d be gone quickly, her coalition with the DUP, as tenuous a hold on power as it represents, has enabled her to stay in place, in large measure due to the lack of any viable successor. At this rate, predictions that she’ll be gone by Christmas may prove to be premature.
As Richard Smith put it, the issue isn’t that May is a dead woman walking, it is that the Tories are a dead party walking. Ironically, May is the least crippled leadership candidate they have. So she may hang on until the coalition with the DUP cracks up.
The other possible force that may change the game board is businesses showing they are serious about moving operations. However, it’s surprising that they haven’t already applied more pressure to the leaders of both major parties, as well as doing a better job of getting press coverage. So it may not be until first or second quarter 2018, when more and more production shifts and job relocation are announced, that enough reality penetrates the Brexit bubble to shift the political dynamic. That is an awfully long way away.
Having said all of this, :
Even as government infighting risks disconcerting EU negotiators, there are signs May might be able to deliver some progress: EU diplomats say leaders may be forced to give ground to the U.K. before the end of the year to prevent splits opening up between the other 27 governments.
Unfortunately for the UK, this may mean less than it appears to. The UK has very few allies in the EU, with the biggest begin Poland. EU rules require unanimous approval of a Brexit.
An immediate jogjam is over the refusal of the UK to discuss the so-called Brexit tab, which is actually a settlement of outstanding obligations. The EU has floated its highest estimates, presumably to condition the UK to see something much lower as a deal. And the EU has already come up with a framework, which presumably is also open for discussion, as to the firmness of the UK’s various treaty obligations. So the negotiations would presumably start with the framework and then the items with the framework, which would largely determine the total figure. Note that quite a few are expected to be conditional on future events. Then the two sides would wrangle over how much over time the UK could stretch the non-conditional amounts due.
Recall that as of the end of last week, the Financial Times reported, , that Germany, with some unnamed countries backing it, as well as France, were not budging on the UK settling its departure bill before talking trade.
As we pointed out, when Germany and France agree on anything, the rest of the EU falls into line. Moreover, even with Merkel damaged at the polls, German industry is backing her tough stand on Brexit. So Merkel has no domestic incentives to give way. Smaller countries could be muscled into line, but not Germany. Admittedly, Article 50 does not require unanimity but a “qualified majority”. But a few countries objecting isn’t enough to impact the negotiations.
So even if there is some grumbling in the EU ranks, I’d need more evidence than this outlier Bloomberg report, which contradicts the results coming out of a major policy debate, to think that the EU will do more than make conciliatory gestures that make only a marginal difference in substance, like this crumb described by the pink paper:
As a gesture to recognise progress, the EU is considering starting an internal “scoping” exercise on a transition deal, where the EU27 would prepare for talks with the UK at a later stage. While an advance of sorts, this falls well short of London’s hopes that talks would begin after the summit in October.
Another major stumbling block is what to do over the Irish border, where there does not appear to be any clever solution. So again, it’s hard to see meaningful concessions coming from the EU in the absence of any UK progress by as soon as year end.
I really wish there was a way to envision less than disastrous scenarios for the UK. But I’m at a loss to come up with any, and the threadbare PR coming from Government leaders only confirms how bad bad might wind up being.
1 And I will still claim that tariffs are the easy bit. The hard bit (and your customs IT system needs to deal with that, and a lot of complexity comes from that) is the NTBs. I keep saying Mutual Recognition Agreements (MRA) over and over – but it really is important, and even a number of Brexiters (the ones not blinded by power, history, or whatever) even reconigsed it and were saying as easly as Feb this year WTO is not an option (even assuming can opener – i.e. full and proper WTO membership on day one).
The country of origin rules are massively complex, and what Yves describe (tarrifs based on that) is one potential. What happens is that the tarifs are based on the “last substantial value add”. So if you import chinese stuff, and just package it and sell to EU, the tariffs will be the same as if it come straight from China.
On the other hand, if you incorporate a part into a whole that is substantially more valuable (and how do you decided that is part of the fun) than the other parts, the tariffs are now based on the country where that last ad-valorem happened.
There are other rules, but I’m not going to turn this into a specialist post (especially since I haven’t read the WTO rules in full yet) – but you get the idea.
Now though, it get even more complicated. On the top of being able to determine whether or not a tariffs applies, any goods imported must meet the standards of the importing country. And EU has lots of them (even if it DOES NOT have a standard for how curved bananas shoud be, as the british press told us).
This can be fundamentally met only in two ways. Either via MRA (where you recongise each others standards setting bodies, standards, rules and regulations etc.. Remember – this is not just a snapshot in time, but also takes into account that the bodies/standards etc. evolve with time, so extra layer of complexity there).
Or, that you take a sample from each shippment, and test it. Of course, the owner of the samples (importer) pays the cost of the testing, and it also pays the cost of storing the freight while it’s being tested. So it costs the importer time and money.
TBH, I can’t see how could you possibly trade something complex like cars or plane parts (where safety is involved) w/o an MRA.
And your customs IT system has to support all of that!
Oh, but you say “well, let’s set tariffs to zero for everything!”. Well, that may sort out your customs IT problems – around the tariffs. Unless you want to throw out of the window all YOUR standards, that means you still need to establish the compliance. And I can assure you that if you do throw out all your standards, getting an MRA with somoene else is going to be a nightmare.
So your exporters rather get going on implementing the MRA-less trading processes right now, and hope to get there in time. A friend of mine runs a small caliber ammo manufacturer (very highly policed stuff), and based on what I heard, I doubt he would be able to get their processes and systems in place in two years, and that’s knowing what needs to be done and how.