If there is no deal between the EU and the UK because of fundamental differences of principle on a level play field, that’s not a ‘failure’ of the talks as such © Luke MacGregor/Bloomberg

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Well, that got your attention. Hello from Brussels. Obviously, it’s wildly reckless for us to write about Brexit with the talks as finely poised as a Bolshoi ballerina, and Boris Johnson and Ursula von der Leyen due to meet in Brussels in the next few days. This newsletter could become outdated between us hitting send and it landing in your inboxes. But before we’re overtaken by events we thought we’d lay out how a no-deal finale might be an entirely logical outcome rather than a result of miscommunication, negotiating mistakes or bad luck with Covid-19 disruptions. Meanwhile, talking of dislocations to EU trade, today’s Tit for Tat is with Anna Stellinger of the Confederation of Swedish Enterprise on how the talk of reshoring because of the pandemic has turned out, so far, to be just talk, while our chart of the day looks at the Brexit negotiations’ effect on sterling.

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Method in the no-deal madness

OK, bear with us. When we say rational, we don’t mean sane. To us, it’s clearly bonkers for two advanced economies to throw up tariff walls because of a bunch of narky fishing folk and some disputed room for manoeuvre on “level playing field” (LPF) issues that Britain probably won’t use anyway.

But it still might be collectively in both sides’ interests — or at least in their governments’ interests, the relevant metric — for the talks to collapse. As one of Trade Secrets’ favourite economic historians pointed out the other day, if there is no deal because of fundamental differences of principle on LPF, that’s not a “failure” of the talks as such.

Today’s Trade Secrets author himself spent far too much time reporting on two high-profile trade negotiations which, entirely rationally, “failed”. One was the EU-US Transatlantic Trade and Investment Partnership (TTIP). Talks were launched in 2013 despite known deal-breakers (GMOs and chemical-washed chicken for the EU, meaningful financial services liberalisation for the US) firmly in place. Supposed to get airborne and find a landing zone on “one tank of gas”. Never left the runway. Sold for scrap. Good riddance. Total waste of time.

Going further back, and on a bigger scale, was the multilateral Doha round, which crashed in 2008. A round focused heavily on agriculture, politically sensitive even in rich countries such as the US, was always going to struggle. But it’s not just that. One of the key participants was India, which didn’t just reject the emerging deal: in our view, it wanted any remotely feasible deal to fail. 

The issue on which India mobilised allies to block the talks was unexpected and quite obscure — a “special safeguard mechanism” allowing developing countries to restrict sudden surges of agricultural imports. This has led some wistful folk to say that maybe the talks could have succeeded if only that bit had been handled better, or the personnel had been different. Our view: nonsense. If it hadn’t been the SSM it would have been something else. Trade deals — whatever the content — are political poison in India, which is why Delhi pulled out of even the shallow Regional Comprehensive Economic Partnership (RCEP). Kamal Nath, the cheerfully cynical Indian trade minister in 2008, used to say that if he was personally blamed for Doha failing, he would be such a political hero back home he could be re-elected in his district without bothering to campaign.

Trade deals — whatever the content — are political poison in India. Delhi pulled out of even the shallow Regional Comprehensive Economic Partnership © Dibyangshu Sarkar/AFP/Getty

So, to Brexit. Let’s be clear: it’s less obvious than for TTIP or Doha that a no-deal Brexit would be rational, because in Brexit both sides have much less information.

In TTIP and Doha, the counterfactual to a deal was known with certainty: it was the status quo. The counterfactual to agreement in the Brexit talks is a crash of unknown magnitude. It’s going to be ugly, though given the inevitable border frictions, the trading system even with a deal isn’t going to take up a swimsuit-modelling career either. If Britain in particular underestimates the pain of no deal it could return to the negotiating table next year, but that humiliation would exact a big political price.

Second, neither side — and particularly not the UK — has ever negotiated a deal quite like this. Unlike TTIP, where the red lines were clear, it’s much harder to know if the other one is bluffing. It’s quite possible tactical misjudgement will sabotage a viable agreement. The French, for example, are huffing and puffing. But then the French always huff and puff: it’s their thing, it’s part of the game. Are they serious about vetoing this time or not?

Indeed, it’s not necessarily obvious to each side, particularly the Brits, where their own red lines are. Johnson doesn’t know how his headbanging Brexiter backbenchers or the Labour opposition will react to one deal or another.

But the point about rational failure still stands. Johnson might genuinely believe the LPF provisions are unconscionable vassalage, or that a nation stands or falls by the size of its herring fleet. Or he might be channelling some weird hybrid of Kamal Nath and Winston Churchill and has made the political calculation he would prefer to stand defiantly alone and doesn’t want a deal at all. If the EU-UK talks genuinely do break down over fish quotas, or because Johnson actively wants to crash out, it will tell us a lot about dysfunctional trade preferences. But it won’t necessarily mean that the negotiators are ignorant or inept.

If we had to guess, we’d still say a deal is likely. But if talks collapse, it’s entirely possible that that’s the rational thing to happen. Terrifying, isn’t it?

Charted waters

Sterling lost more than 1 per cent against both the euro and dollar on Monday, on track for its worst one-day performance since September, with UK-EU trade talks on a “knife-edge”. Micheál Martin, Ireland’s prime minister, told Irish broadcaster RTE: “My gut instinct is that it’s 50-50 right now and I don’t think one can be overly optimistic about a resolution emerging.”

Column chart of one-day change (%) showing pound on track for biggest fall against euro since September

Tit for tat

Anna Stellinger, director of international and EU affairs at the Confederation of Swedish Enterprise, answers three key questions

In Sweden, have you seen the reshoring or diversification of production that many people were predicting and calling for early in the pandemic?

Well, as you hint, there have been calls for reshoring, bringing home production and even deglobalisation during Covid. Sweden is not an exception, even if those calls have been less loud here. What is worrying, though, is that it generally seems to be mostly a political or ideological debate, with a lot of discussions and opinions about companies’ value chains but less discussion with companies. That’s why we just undertook a major survey asking Swedish firms about supply-chain problems during Covid and their preferred solutions. Only 2 per cent of the almost 2,000 companies that responded claim that they plan to reshore production. Firms prefer either stockpiling or diversification in order to build resilient supply chains.

Are you concerned about the direction of EU trade policy?

I would not say I am concerned. I am more cautious about the hugely important balancing act the EU has to do. We will have to firmly stand up for traditional free trade and market access but at the same time fully embrace the sustainability agenda, as well as finding ways to deal with countries around the world that do not abide by the rules. The endgame must be a reinforced multilateral trading system. Trade is, unfortunately, not just about trade any more: it’s security, geopolitics, it’s linked to integrity and level playing fields. In this context, the EU should stand up and be the leading global actor. 

What do you think are the major worries of your companies about the international economy at the moment?

We see, more and more, a real asymmetry in how Covid is affecting companies. Some sectors, and generally the larger companies, are more or less out of the crisis. The latter also have the muscles to tackle disruptions like Brexit. But on the other hand, we see how other sectors and mainly SMEs are still struggling to survive, day by day. It makes it more difficult to formulate efficient policy. The major concern is of course how to get the global economy back on track, to get trade flows running smoothly again, to reduce geopolitical tensions, remove obstacles to trade introduced during Covid, and restore understanding of how important trade — and the companies which trade — are to the economy, jobs and welfare.

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