On to the morrow

6 February,

I know it’s vieux jeux by now, but last Friday night I hosted a supper for Leavers and Remainers, a metropolitan mélange of nationalities and sentiments, nonetheless themed for the occasion, with Scotch eggs and piccalilli, smoked salmon mousse, Beef Wellington and sticky toffee pudding, set off (in the most British way) with French cheeses and wines. At eleven we paused to bong, á la Big Ben rather than Big Lebowski. We never quite got round to the Brexit beer. Now to the morrow. Formal departure from the EU enables three things: the instigation of negotiations as to future relations with the EU; similarly with third parties; and the formation of tax and regulatory arrangements which suit our book, rather than a composite of our neighbours. Let’s take them in order.

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Relations with the EU  On Monday morning, Boris Johnson’s Greenwich speech confirmed that the UK seeks a settlement which reflects low alignment with the EU, maximising domestic sovereignty. This smacks of deja vu all over again, with (for example) the usual ungracious blow-back from Taoiseach Varadkar. At present, he may be behind in his election campaign, but his contenders are also all about risk-reduction, so I’d not be looking for much of a different tune from Dublin. Barnier has laid the ground for the brief emerging from his principals: access tied to alignment. This talks past HMG’s opening position, that the UK is perfectly happy to do without the former to avoid being saddled with the latter. Possibly Barnier is hoping that Boris will be undermined by the usual domestic suspects, the car industry and the City, both of whom have already raised their voices. We turn to them below. Otherwise, we can say little more than that the most likely outcome is a bare-bones deal.

Relations with third parties  The government has leaked that it is looking for deals embracing eighty percent of foreign trade within three years. We may take it that this embraces the EU itself (far from a certainty), plus Australia, Canada, Japan and the US. Tactics are labyrinthine, as well as driven by the forthcoming ministerial reshuffle and the diaries of others. Today, Raab is in Canberra, testing and developing talking points for Boris’ visit to the US, for which no date has been set, and which, when it comes, is in turn intended to open up options with the EU. It’s worth recognising that a bare-bones deal with the EU doesn’t necessarily imply more elsewhere. The classic deal is said to be UK service exports for imports of agriculture, but it is not clear that our service exporters need concessions. China is not on the list. This is not so much the fallout from Huawei (let alone the unfathomable complications of coronavirus), as the chronic opacity of Chinese industrial, political and legal processes.

Regulatory divergence  Sajid Javid is to use his budget to relaunch his “come-all-ye”, inviting proposals to abolish unnecessary red-tape. This makes sense, though his officials will be alert to rent-seeking by incumbents. We know all about the grievances of the much-abused fishing, port and sugar industries; there are, moreover, the interests of intruders, such as fintech. We do wonder if Javid will have the kishkes to break open the market potential of sectors masked by their public status, eg, broadcasting, healthcare and education. Then there are the time-hallowed worries of the plane and car manufacturers, chemicals and pharma, financial services and (to an extent) farmers. The Government’s approach is nuanced. Let’s take cars and finance. Brexit offers the former opportunities as well as challenges, as attested by leaks of Nissan’s contingency planning (since denied by the company) to close in Europe and concentrate on the UK. Meanwhile climate change undercuts legacy business models based on the internal combustion engine, with the UK’s accelerated targets for decarbonisation creating an early-adopter market on a national scale for battery or hydrogen technology. As to financial services, even Mark Carney has stressed the need for the UK’s regulatory autonomy. At the same time, Britain’s capital adequacy regime is being re-examined in a fashion which cements the position of the largely US bulge bracket. This maintains London’s position, while hurting European participants, as the UK authorities are revisiting the flattery of the zero load on capital attaching to their holdings of domestic sovereign debt.

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These first days of February - the morrow of our departure from the EU - have been full of events. They promise much, but in the nature of things come too early to resolve uncertainty. We begin to discern a combo of robustness and tactical guile in overseas dealings; and of toughness and nuance in domestic politics. By and large, I’d say this is encouraging. But it’s early days yet.