Untangling Brexit

Dennis Snower, Rolf Langhammer 07 January 2019

Tiocfaidh ár lá 1916/flickr

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This article has two purposes. The first is to dispel some common myths regarding the Brexit negotiations – the myth that the UK is seeking to cherry pick its future ties to the EU and the myth of the EU’s inseparable ‘four freedoms’. Acknowledging these two myths opens up new negotiation opportunities. The second purpose is to outline a proposal for a second referendum that addresses all major objections to such a referendum and avoids the dreaded fallback option of a ‘no-deal Brexit’, in the event that there is no majority in favour of any of the policy options. 

Two myths regarding the Brexit negotiations and the negotiation opportunities thereby uncovered

The EU’s conventional wisdom on the Brexit negotiations – that the UK is seeking to ‘cherry pick’ its future ties to the EU, which must be stopped in order to prevent other EU members from pursuing a similar objective – is wrong. The reason why this plain fact has been overlooked is that the Brexit negotiations have become victim to political mirages – ideas that ignite voter passions and thereby come to life in the minds of politicians and their electorates, though utterly divorced from reality. In the Brexit referendum, the argument of Leave’ supporters of ‘taking back control’ of one’s borders – in an era of global supply chains that make countries economically interdependent in their production of goods and services – was such a political mirage. Now, in the Brexit negotiations, ‘cherry picking’ is another. 

Puzzles of the Brexit negotiations

To see why, we need to understand the simple political logic that drives the negotiations – a logic that neither of the negotiating partners can reveal publicly, but one which explains the UK’s strange negotiating position and the EU’s strange response. What is puzzling about the UK’s negotiating position is that it has offered free trade in goods, under EU  technical standards for goods – even though the UK imports far more goods from the EU than it exports to the EU and even though Theresa May’s government sees sovereignty on trade policy under a hard Brexit as an asset to improve the competitive position of UK exporters in the world. Why should this sovereignty be given up against its most important export market, the EU27? To make matters even more puzzling, Britain seeks no general free trade deal with the EU in services, even though its exports are clearly services-oriented and though new EU barriers against UK services will be the logical consequence of the UK’s demand for “regulatory flexibility” in service trade, as it is labelled in the Chequers proposals. Is Britain acting against its own economic interests? 

What is puzzling about the EU’s negotiating position is that if any other country of the world – say, the US or Japan – were to make such an offer (free trade in goods under EU technical standards), the EU would be falling over itself to accept. Why is the EU rejecting the offer when it comes from Britain? But why did chief EU negotiator Michel Barnier nevertheless demand free goods trade between Northern Ireland and the Republic of Ireland?  

Hostage to the two Irelands 

The trick to understanding the political logic that drives the Brexit negotiations is to grasp the answer to these questions. The answer is simple, but largely ignored in the public debate: both sides are held hostage to one of the two Irelands – the EU to the Republic of Ireland and the UK government to Northern Ireland The Brexit outcome must not destroy the Good Friday Agreement, which eliminated the borders between Northern Ireland, the Republic of Ireland and the rest of the UK. From the EU perspective, there must be no physical border between Northern Ireland and the Republic of Ireland, since the latter (as EU member state) would veto any Brexit outcome that creates such a border. From the UK perspective, there must be no border between Northern Ireland and the rest of the UK, since that would be unacceptable to Northern Ireland (whose DUP is in the ruling coalition with Britain’s Conservative Party). Michel Barnier suggested Northern Ireland to stay in the customs union to secure free goods trade between Northern Ireland and the Republic of Ireland because it would prevent checks on goods at the border between these two entities. Theresa May strictly rejected the special customs status for Northern Ireland. Nevertheless she offered the EU free goods trade under EU standards plus a complex ‘Facilitated Customs Arrangement’ (FCA) with ‘behind border’ mutual tariff collection and reimbursement, because the absence of such free trade would require the such checks at borders between the Republic Ireland and the UK including Northern Ireland. The FCA would enable the UK to impose tariffs on imports from non-EU sources different from those imposed by the EU as each side would collect the relevant tariff of the other side at the first port of entry and transfer the revenues to the ultimate country of destination. It is evident that the FAC requires clear rules of origin and clear ex ante information about the country destination.

Accepting the EU standards will be an indispensable prerequisite for borderless goods trade on the Irish isle. To put it differently, the price of the UK’s sovereignty on its trade policy with third countries will be the loss of sovereignty in determining its own technical standards for goods traded between the EU and the UK.  

The four freedoms

It should be clear from the British offer – a trade deal in goods, where the UK is a net importer, but no trade deal in services, where the UK is a net exporter – that Britain is in a much weaker bargaining position than the EU. Why, then, has the EU ceased to negotiate further, accusing Britain of ‘cherry picking’? The answer lies in a peculiarly European political mirage, the mirage of the inseparable ‘four freedoms’ – the freedom of movement of goods, services, capital and labour in the EU – as the cornerstone of the single market.. 

This is a mirage for many reasons as EU experience shows many examples of violations of the Four Freedoms principle. Though there is freedom of movement in goods, there is still no complete single European market in services (there is no digital single market, for example ). Also, the single capital market is infringed; for instance, not every EU citizen can buy land in all partner countries (not in Denmark, for example). The freedom of movement of labour – the right to cross borders in Schengen countries without controls, to live, work and receive social welfare services in the EU – is frequently restricted and undermined in the EU, and likely to run into far greater difficulties in connection with immigrant work permits, granted in some EU member states but not in others. The right of EU citizens to reside in any EU member state is constrained by the requirement that people not become an “unreasonable burden on social assistance”, which gives much latitude for interpretation, as many recent legal decisions illustrate. In short, the four freedoms – and particularly the one regarding movement of labour – should be seen as an EU aspiration, still well removed from current political reality.

The EU obviously does not insist on the four freedoms when negotiating trade agreements with other countries. Then why does it insist that the UK observes the Four Freedoms once it has exited from the EU? As noted, the EU would naturally be delighted to enter into agreements that deliver free trade in goods under standards and regulations determined unilaterally by the EU, with no other strings attached. Then why does it reject such an agreement when it comes from the UK? In short, why is there no consistency in the ways the EU treats other trading partners and the UK?

The standard argument in defence of this inconsistency is that if the UK were offered the same terms as other countries, then other EU member states would seek to withdraw from the EU under the same terms. But surely this argument is absurd. If EU membership were of such little worth that other EU states found it worthwhile to exit the EU in favour of a free goods trade agreement under EU rules, then these states should have the opportunity to do so. If all that keeps the EU together is the threat of punishment upon exit, rather than the promise of reward from membership, then the EU has no future. There is no reason to believe that the EU is in this position, as support for the EU among its member states has risen steadily since the Brexit referendum and the mandate for Michel Barnier to insist that the UK accepts the red lines of the four freedoms has been unanimously agreed upon by all 27 member states. The EU provides a wide variety of public goods to its members that are more than sufficient to assure its members continued allegiance. 

New negotiation opportunities

Taking this argument seriously opens up new negotiation opportunities. In the future, there are mutually beneficial agreements to be made on trade in services, but it would be unwise to address them in advance of the withdrawal agreement. 

Such negotiation opportunities must be understood against the fall-back alternative of ‘no deal’, the disastrous implications of which are also not widely understood, on account of two issues. 

First, trade between the UK and the EU under ‘no deal’ would require a vast inspection and regulatory system to assess whether divergent technical standards are met, VAT is levied, and tariffs are imposed on goods originating outside the free trade area. These interventions demand physical and human capital that would require at least five years to build, by most reliable estimates. In the absence of this system, trade could not take place. Thus the immediate consequence of a ‘no-deal’ fall-back is not trade with tariffs, but no trade at all. 

Second, just-in-time production reliant on cross-channel supply chains in the production of cars and other complex goods is so extensive that decoupling of these chains would require industrial agglomerations many times larger than anything currently in existence in either the EU or the UK. Building such production megacities would require at least five years as well. Thus ‘no deal’ would call into question the viability of just-in-time production. The resulting disruption of trade in intermediate goods across the channel, and thus the need to raise the local content rapidly, would massively magnify the uncertainty created by current trade conflict between China and the US, since the total trade flows between the UK and the EU are larger than those between the former giants. 

In short, it is high time that the EU and the UK focus on exploiting the existing opportunities in goods trade, already offered by the UK. The EU can rest assured that the UK is not cherry-picking. Britain can rest assured that it has dealt with the Irish border problem. The EU can continue to view its four freedoms as an aspiration to strive for. Britain can take control over the movement of people across its borders. If both sides take leave of their political mirages, they will have averted the huge, largely unrecognised dangers of ‘no deal’.

A virtually foolproof proposal for a second referendum

In the absence of further negotiations, the UK and the EU face a terrible danger. At present, the UK has three policy options: (1) the proposed Withdrawal Agreement and Political Declaration on the future relationship between the UK and EU, (2) a second referendum on whether to remain in the EU, and (3) a no-deal Brexit. As explained above, a no-deal Brexit has potentially disastrous economic consequences for both the UK and EU, possibly with similarly disastrous social and political consequences to follow. Though some Brexiters favour no deal over the other two options, they may be a small minority, relative to the minorities favouring the other two options. The problem ahead, however, is that in the absence of a positive agreement on one of the other options, no deal is the default. At present, there is in fact no majority in favour of any option, and so the UK is hurtling inexorably towards an option that may well be the one that a majority of voters wish to avoid. 

What is to be done? We need to address the issue that all three options appear unappealing to British voters, meaning that a majority of voters is against each of the options. If the largest majority of voters is against no deal, how can we prevent this outcome from materialising by default?

Since the Withdrawal Agreement and no deal are both given, the only option that can currently be amended is a second referendum. It is commonly believed that this option would just involve a vote between remaining in the EU and the Withdrawal Agreement (or some alternative to this agreement that might be subsequently negotiated). This proposal is countered by the Leavers’ argument, often repeated by Theresa May, that the British people have already spoken and their decision was to leave the EU. This ‘will of the people’ must now be respected. Hence the option of remaining in the EU should not be on the table, making a second referendum unnecessary. A further argument, usually made implicitly in the current debate, is that the Leave voters would be more upset by a Remain outcome than Remain voters would be with regard to a Leave outcome. Consequently, it is claimed, Leave voters would prefer no deal to ‘Remain’, whereas Remain voters would prefer the Withdrawal Agreement to no deal. In short, voters’ second preferences matter. 

On the other side of the debate, the Remainers argue that, at the time of the first referendum, the British people could not have anticipated the alternatives that they would be facing now. Thus, it is claimed, the democratic process requires them to vote once the policy alternatives are clear. 

The UK is stuck in a political deadlock between these two arguments. The conventional conception of a second referendum, along the lines above, permits no escape from this deadlock. 

Consequently, the question we should be asking is whether the second referendum option can be changed so as to address both sets of deadlocked objections. Once we pose this question, it becomes obvious that this is not the first time in history that this problem has been faced and, in fact, this problem has already been solved. 

Not only has it been solved, but the solution is already being implemented in a variety of countries for a variety of political purposes. The solution is called ‘single transferable vote’.1 Voters are asked to rank the outcomes; the outcome with the lowest number of votes is eliminated and these votes are distributed to the voters’ second choices. This ranked voting method is used, for example, for elections in the Northern Ireland Assembly, Australian upper-house legislative elections, presidential elections in Sri Lanka, among others. 

Applying this proposal to a second referendum, the proposal involves a ballot covering the three options – Withdrawal Agreement (or its successor), Remain and no deal – for which voters would be asked to specify their first and second choices: 

  1. Specify your first choice, by writing “1” beside the most preferred option. 
  2. Specify your second choice, by writing “2” beside the second-most preferred option. 

(No further options are necessary, because once the voters have specified their first two choices, their third choice is the one that remains.)

Since this proposal takes second preferences into account, it enables voters to avoid the outcome that most of them are against.  If it turns out that the Leavers are correct in their belief that British voters wish to avoid remaining in the EU at all costs, then the Remain option would attract fewest votes and these votes would be distributed among withdrawal and no deal. On the other hand, if the Remainers are correct in expecting that voters wish to avoid no deal at all costs, then the no deal option will be least popular and its votes will be distributed among Withdrawal and Remain. 

Needless to say, there will inevitably be those opposed even to this sort of second referendum. But they are the ones who wish to avoid a Remain outcome independently of the preferences of the voting majority. These are the people who can be justifiably be ignored.  

It is that simple. So simple, that it is hard to understand why we hadn’t considered this possibility all along.

Endnotes

[1] This proposal is simpler than the recent proposal of by Chris Gilles, advocating the Condorcet Method (https://www.youtube.com/watch?v=saL6VVtcZOU). The latter can lead to indeterminate (or internally inconsistent) outcomes, which the proposal here avoids. 

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Topics:  EU policies Europe's nations and regions

Tags:  Brexit, EU referendum, four freedoms, second referendum

President of Kiel Institute for World Economics and CEPR Research Fellow

Professor of Economics, Kiel Institute for the World Economy

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