Media  Global Economy  2018.12.28

What is the only solution to the Brexit problem? - UK parliament whining to the EU. This is the only escape route remaining to Prime Minister May

The article was originally posted on Webronza on December 14, 2018

British Prime Minister Theresa May insisted that the UK parliament would vote on the draft withdrawal agreement that had been reached between her and other EU leaders on December 11 as planned and unchanged. She was, however, forced to postpone it because it became clear that the majority including the members from the governing party would be opposed to the agreement. It has not been announced when the next vote will be held.

Although Mrs. May says that she will negotiate with other EU leaders such as German chancellor Merkel, the EU has insisted that the draft agreement is the final and best deal and it will not be renegotiated.

It has become evident what is at issue

In the UK parliament, the majority are opposed to May's draft agreement. Although they agree that they are opposed to the agreement, they are divided into different groups including Brexiteers who support the UK withdrawing from the EU altogether, pro-Remain members, and those in between these groups. They are in disarray.

Under these circumstances, it has become evident what is at issue with regard to the draft withdrawal agreement.

The issue is how to deal with the backstop arrangement. If the UK and the EU fail to reach an agreement concerning their future relationship during the transition period that will follow the UK's withdrawal from the EU, the backstop arrangement will be invoked (see "For those who want to understand Brexit".)

In brief, under the backstop arrangement: (1) Northern Ireland will remain in the EU's Customs Union and single market (subject to the rules and regulations of the EU) so that no hard border will return between Northern Ireland, which is a part of the UK, and the Republic of Ireland, and (2) while Great Britain (the British Isles) will remain in the EU's Customs Union, it will not be required to adopt and apply EU rules and regulations as required for the member states in the single market (although its own regulations must be harmonized with them.)

One of the reasons why people are opposed to the backstop arrangement is that given the fact that Northern Ireland and Great Britain will constitute different markets, a mechanism similar to border controls will be required to judge whether goods moving to the other market are compatible with the standards of that market. To begin with, they argue that the UK's sovereignty and economic integrity and continuity will be violated by applying different economic regulations to Northern Ireland and Great Britain, which consist of the same country. In other words, it will be like drawing an economic border between Northern Ireland and Great Britain, which will divide the country economically.

In addition, Brexiteers are opposed to the arrangement because it will likely bind the UK with EU economic regulations, etc. in the future, despite the former's attempt to recover its sovereign rights by leaving the EU. In particular, as the UK will remain in the EU's Customs Union, it is the EU, not the UK government, that will have authority to decide on tariffs. As a result, the UK will be unable to negotiate bilateral free trade agreements (FTAs) with other counties (see "For those who want to understand Brexit".) This is the reason why Brexiteers criticize the arrangement for damaging "independent UK trade policies."

To make matters worse, since abolition of the backstop arrangement will require the EU's approval, they argue that the arrangement will be not a temporary measure but rather a permanent one.

Brussels' cold stare

From Brussels' point of view, the root causes of the problem lie in the UK. First, it is the UK's self-centered demand to leave the EU. Second, it is the UK that wants to prevent strict border controls from being imposed between Northern Ireland and the Republic of Ireland after leaving the EU so that the free movement of people and goods will not be blocked and the Northern Ireland conflict will not re-erupt.

As a matter of fact, these two are contradictory. If the UK leaves the EU altogether, it will form an independent economic territory in which strict border controls must be imposed (as Japan does with other countries.) On the other hand, if the UK wishes to maintain an open border, it must remain in the EU's Customs Union and single market to stay in the same economic territory as the EU. This means that the UK needs to give up the idea of leaving the EU altogether.

EU leaders must wonder what the UK really wants. In response to the UK's self-centered demand to leave the EU, the EU has spent time and effort on finalizing the draft withdrawal agreement by negotiating with the UK, taking into account the UK's concern over the Irish border issue. Despite that, members of the UK parliament (MPs) are making a big fuss that they don't like the deal. It is as if one were insisting "Divorce me. In addition, you need to agree to my selfish and self-interested demands," while the other says he/she does not want to divorce.

EU negotiators might regard MPs as whining children who are threatening to cry unless they are taken to an amusement park and allowed to eat as much ice cream as they want. It is no wonder that they are refusing to renegotiate the draft agreement.

Furthermore, if the UK decides to give up on the backstop arrangement as demanded by Brexiteers in parliament, the Republic of Ireland may see a re-eruption of the old conflict, resulting from a revival of the hard border with Northern Ireland. The EU will never make any concessions on this because it will put the Irish minority government into crisis, which has already been unstable.

What is the EU's real intention?

The EU's intention is probably as follows.

If the UK insists on recovering sovereignty not only politically but also economically, it needs to leave the EU without the consent of other EU members by revoking the draft withdrawal agreement. The EU would like to avoid the UK's withdrawal from the EU with the Irish border problem unsettled, but ultimately the EU will have no choice but to accept it.

In exchange for recovering its sovereign rights, the UK will leave the Customs Union and the single market. The UK will have no other choice but to impose strong border controls between Northern Ireland and the Republic of Ireland, which is an EU member state. If not, the EU customs arrangement would collapse. For instance, if the UK concludes an FTA with the US, the US will export cheap agricultural products to the UK without tariffs. If the products are reexported to EU member states including the Republic of Ireland without going through any border controls, farmers in the EU will not be protected by tariffs. Northern Ireland issues are basically problems to be solved not by the EU but the UK.

The situation will be the same if the UK and the EU conclude an FTA after the UK's withdrawal from the EU. To prevent the flow of commodities originating from other countries into EU territory with zero or lower tariffs via the UK, the EU will be required to check at borders if products which are claimed to originate from the UK appropriately adhere to the rules of origin. Conversely, products exported from the EU to the UK with zero or lower tariffs under an FTA should be certified as EU products under the rules of origin. Therefore, border controls must be imposed.

The Japanese auto industry in the UK currently procures parts from continental Europe for production, being free of border controls. After the UK leaves the EU's Customs Union and single market, even if the UK concludes an FTA with the EU and, as a result, no tariffs are imposed, the industry will incur a huge time loss because of border controls required for proof of origin. It may be necessary for the industry to consider moving factories from the UK to continental Europe in future. This is one of the economic losses that the UK will suffer due to Brexit.

If the UK wishes to leave the EU but refuses to impose strong border controls between Northern Ireland and the Republic of Ireland, the UK government must accept the current draft withdrawal agreement. To begin with, the EU does not desire the UK's withdrawal from the EU. Nevertheless, the EU managed to finalize the draft agreement by patiently negotiating with the UK, which has been making self-centered claims. If the UK does not like the draft agreement, it should leave the EU without any deal.

Brexiteers in the UK argue that the country's sovereignty will be violated. It is true that EU regulations, etc. will apply to the U.K. because of issues associated with the single market. However, the UK will be free to introduce any laws and regulations for any other issues including those relating to immigrants without any restrictions from the EU. The UK will be able to freely decide on any policies other than those related to trade. Besides, the UK will be able to access the EU market as it is now. The UK will be in a better position compared to other EU member states. It is childish behavior to be dissatisfied unless one gets everything one wants.

What is the escape route left to Prime Minister Theresa May?

It is absolutely acceptable if the UK rescinds Brexit.

The European Commission, an administrative body of the EU, had considered that the UK would not be able to revoke Brexit unilaterally without approval of the other member states. But the European Court of Justice has made a flexible and generous decision that Brexit can be cancelled by the UK's unilateral decision to do so. The court decision has made it easy for the UK to rescind Brexit.

The outcome of the national referendum over whether the UK should remain in or leave the EU was won by a narrow margin; 52% against 48%. At that time, few expected that the Irish border question would be at issue in the future. If the UK is going to leave the EU with an agreement concluded, it needs to accept the current draft agreement. Even if Brexiteers form the government and negotiate with the EU, they will not reach any agreement other than the current one. On the other hand, if the UK leaves the EU without any agreement, it will suffer a huge economic blow even if an FTA is concluded with the EU in future.

Mrs. May has insisted that there will not be a second national referendum. Public opinion polls, however, show different results from the outcome of the national referendum. It will be worthwhile to ask people's opinions again by presenting issues which were unforeseeable then but have been emerging recently, as well as the outcomes of negotiations with the EU. The UK government should apply "clausula rebus sic stantibus," which is the legal principle that agreements are revised or become non-binding if there is a major change of circumstances that were preconditions of the agreement.

Mrs. May has been changing her statements as circumstances change. Now is the time when she should behave flexibly and hold a second national referendum by presenting three options: withdrawal without any deal, withdrawal bound by the draft agreement with the EU, or remain in the EU, with pros and cons of each option. I believe it would be the only escape route available from the current mess.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on December 14, 2018.)