It has been a wild week in British politics. Please join us for a discussion on the latest developments and how Brexit is likely to be effected.
HILLMAN: Welcome. And thank you, everyone, for joining this Council on Foreign Relations Conference Call. I am Jennifer Hillman, a senior fellow for trade and international political economy at the Council.
We are pleased this morning to have CFR’s Sebastian Mallaby and Matthias Matthijs joining us to discuss recent developments in the U.K. with respect to Brexit.
As many of you know, Sebastian Mallaby is the Paul Volcker senior fellow for international economics at the Council on Foreign Relations and author of the book The Man Who Knew: The Life and Times of Alan Greenspan. He is also a contributing columnist for the Washington Post and is joining us from London.
Matthias Matthijs is a senior fellow for Europe at the Council on Foreign Relations and assistant professor of international political economy at Johns Hopkins University’s School of Advanced International Studies. He is an award-winning author and teacher, and an expert on the European political economy.
At the start I’d like to remind the audience that this call is on the record. I will plan on posing some questions to Sebastian and Matthias for the next twenty or twenty-five minutes or so and then open up the conversation to those on the line, so please do have your questions ready.
Just to start, this past week has been a rollercoaster for the fate of Brexit and of the U.K.’s new prime minister, Boris Johnson, with the U.K. Parliament voting to block a no-deal exit from the European Union while also voting twice against the prime minister’s desire for a new election, with all of this taking place in the few days and hours before the Parliament was shut down for the next five weeks. Matthias, if I can start with you, where do things stand right now with respect to Brexit?
MATTHIJS: Yeah. Thanks, Jennifer. That’s a very good question and it does feel distinctly like the beginning of the endgame on Brexit has started, right?
I think—two assumptions that I think most of us or at least, you know, most of senior analysts and newspaper columnists held was that, one, the European Union would always extend if Britain asked for an extension; and on the European Union side, they’ve always assumed that Parliament would take care of—will do whatever it can to block a kind of no-deal Brexit. And I think where we are now is that those two assumptions are a lot weaker that they—that they were, right? I mean, Boris Johnson, his prorogation of Parliament and his coming to power really is a gamechanger in the sense that he is serious about leaving on October 31 and repeats this ad nauseum every day. So far that’s still the default outcome, right? He’s lost his majority in Parliament, but Parliament doesn’t want to give him early elections.
And so for the next five weeks now we’re in this strange situation where there’s going to be party conferences—the party conference season kicks off in a few weeks in the U.K., so the Tories, Labour, Scottish National Party, the Liberal Democrats will all have their conference and set out their kind of views on Brexit while the clock is ticking towards October 31. And I think Boris Johnson now has made it very clear, at least to the British public, that he is serious about leaving do or die, or you know, come what may on October 31. And he will—he will be able to shape the agenda in the next five weeks, to which all the other parties and party leaders will have to respond to.
In the meantime, I guess the rest of Europe is sort of watching this horror show—(laughs)—that’s going on, the kind of—what they admired in British democracy and all their assumptions about this kind of pragmatic British establishment, and see this—see this fall apart. So that’s kind of where we are in a very—moment of very high kind of political risk and uncertainty.
HILLMAN: Sebastian, if I can turn to you, I mean, part of this five weeks, why we’re sitting with five weeks without the U.K. Parliament in place, is because of this effort of Boris Johnson to shut off—to shut down the Parliament, to prorogue the Parliament, with a decision coming just this week by the courts in Scotland indicating that he does not have the authority to do that, and/or that he in some way may have duped the queen into going along with it. You have a very insightful piece in this morning’s Washington Post noting the unprecedented strain on the Westminster system from this whole prorogue, shut down the Parliament effort. What do you make of the prime minister’s tactics? And where are we in terms of a potential constitutional crisis within the U.K.?
MALLABY: Well, the big picture here, Jennifer, is that the U.K. system, parliamentary system, is not really set up to deal well when the executive is not the same as the majority in the legislature. In other words, the kind of classic American check and balance is not the norm in Britain. Indeed, you become prime minister by commanding a majority in the legislature. So by definition, those two bodies are acting in union normally.
And what’s happened during this Brexit fight is that both Theresa May before and Boris Johnson now have been trying to push through some sort of resolution to the Brexit question without the support of Parliament, and Parliament has been resisting. And in that faceoff between the executive and the legislature, various novel constitutional tricks have been tried. So one is, as you say, the proroguing—in other words, the suspension—of Parliament for five weeks, which Boris Johnson announced just around Labor Day. And that is unprecedented, and the question is whether it’s also illegal. Now, the highest court in Scotland says it is illegal. The equivalent court in England has ruled in the opposite way, saying that this is a political question and that it cannot pronounce on whether Boris Johnson had the right to suspend Parliament. And it will now go next week on Tuesday to the Supreme Court of the United Kingdom, which will rule one way or the other.
But although we don’t know and I can’t predict which way that will go on Tuesday, what we do know is that this uncertainty around the functioning of the constitution is heightening, or if you like deepening, the dislike of Westminster elites, the cynicism about not just certain political policies but the whole constitutional system. It’s exacerbated by the fact that in addition to this legal question over the suspension of Parliament, Parliament has just recently passed a law saying that Boris Johnson must seek an extension to the October 31 deadline if there is no deal by October the 19th. And yet, Boris Johnson has spent several days saying he is not sure he’s going to abide by that law. So you have the prime minister questioning whether the law really applies to his policy.
So this—we’re in deeply unsettling legal and constitutional territory. And in a country like the United Kingdom, which consists in turn of four sort of sub-nations which might want to go their own way, I think the glue binding together the United Kingdom is under strain.
HILLMAN: And just to follow up a little bit on that, I mean, obviously, you’re right. I mean, Boris Johnson has said that he’d rather be dead in a ditch than seek an extension to the October 31 deadline for leaving the AU—the EU. But presumably that’s exactly what the legislation passed by the Parliament requires him to do if he cannot cut a deal with the European Union. Does he have any legal abilities to get around this legislation passed by the Parliament?
MALLABY: I’ve heard some of his supporters try to make a legal case that the way the law was written requiring him to seek an extension might, you know, offer some loophole, or that the law might be invalidated by the drafting as it were. But these are pretty narrow technical claims. I don’t think they’re given much credence by legal experts. So basically I don’t think Boris Johnson can get out of this parliamentary instruction to him to seek an extension. So therefore I would differ a little bit with Matthias’ opening remark because as I heard him he said, you know, we’ve now gotten beyond the point where we can rely on Parliament to force an extension on the—on the timetable. I think I agree with Matthias that that point is going to come, but I think we’re kind of safe on one more extension unless there is the surprise deal with the European Union by Boris Johnson at the summit of the EU on October 17.
HILLMAN: Well, Matthias, that brings me to the question of sort of what options does Boris Johnson have at this point in terms of dealing with Brexit.
MATTHIJS: Yeah. So here’s the point, right? I agree with Sebastian that he will probably be forced to ask for an extension, but he doesn’t have to do it in good faith, right? I mean, that’s, I think, where the U.K. relies on the goodwill of the rest of the European Union, and I think at this point—and I guess we’ll get to this in a little bit—the question is, is how does the European Union react to all of this? Because they do need unanimity on the European Council to agree with this extension. How long will this extension be, right? Because there is a clause in this law that Parliament passed that forces the prime minister, whoever that may be—Boris Johnson still today—to accept what—no matter what kind of extension that the EU offers him, right? And I think that’s where he has a really hard time. I mean, there’s been all kinds of rumors about him writing two letters asking an extension or not asking an extension. But I mean, he could make it very clear when he arrives in mid-October in Brussels saying that, listen, I don’t want this extension, you don’t want me at this table anymore; we want to be out.
And that’s where I think it’s a lot more unpredictable this time, and that’s where Boris Johnson is fundamentally different from his predecessor, Theresa May. Because Theresa May was very clear that she didn’t want no deal, right, and that she would ask for an extension, and that she would do this in good faith. And so Johnson is kind of playing this kind of brinkmanship a little bit there. But I agree with Sebastian; I mean, the idea that somehow he could not ask for it if they don’t have a—if they don’t get a deal by mid-October, that seems ludicrous and unrealistic to me.
Right now what they are giving the impression, the whole Number 10 and the prime minister’s office and so on, is that, you know, the logical way now for them to get out of this asking for an extension would be to make a deal, right? And there’s been a lot of rumors about a Northern Ireland-only backstop because, you know, he’s lost his parliamentary majority anyway and so he doesn’t rely anymore on the Democratic Unionist Party in Northern Ireland for his—for his prime ministership. But there the question very much is—and I think that’s where we’re going to go next—is, how likely is Boris Johnson to get a deal, right? I mean, we’ve been here for years now, right, and there simply is no majority in this Parliament for any kind of Brexit, for any specific kind of Brexit, let alone Theresa May’s deal that has failed three times.
HILLMAN: Sebastian, from your end of it, how likely are we to see an agreement between the U.K. and the EU? What would it take to get it done? What are the sticking points that you see? If there was a good-faith effort to reach an agreement, what would be in it?
MALLABY: Well, the logical tweak which I think would make the deal both technically better and in some ways politically better too is to do what Matthias was talking about, go from a backstop that would keep all of Britain in the customs union of the European Union—which would preclude Britain from doing its own trade deals and so forth, and there would be no way out of that backstop so that was politically unpopular in London—but instead of that have the same idea but applied only to Northern Ireland. And the logic of that would be that you wouldn’t have a border, then, within the island of Ireland. Goods could move back and forth without checks, so that’s good for Irish peace and it’s good for Irish economic prosperity. And it’s great from the perspective of southern Ireland because, ultimately, they would like to see the unification of the island of Ireland, and this would be a small step in that direction of eliminating any kind of border on the—on the island in a more kind of guaranteed, permanent fashion than exists at the moment.
The drawback of the Northern Ireland-only backstop and the reason why it hasn’t been the policy hitherto is that it implies some sort of checks on ships crossing from Northern Ireland into mainland Britain. And as a technical matter those sorts of checks need not be heavy-handed or intrusive. There already are, if I understand it, (two ?) checks going on on those boats, and to add a few extra checks is as I understand it not very difficult. So you could do it in a kind of light-touch way that would not be disruptive. The problem has been that symbolically the Northern Irish Protestant voice in Parliament expressed by the DUP party has been adamantly opposed to that. And as they used to prop up the Theresa May government, that sort of ended the matter. But they no longer are key in propping up the Conservative government, and therefore they’ve lost their leverage.
HILLMAN: I wonder if we can turn to the issue of what would happen if there was a no-deal Brexit. Obviously, again, coming back to Boris Johnson saying he’d rather be dead in a ditch than seen an extension, that you know, the U.K. is going to leave do or die come October 31. So if nothing else works out, if there is no extension that the EU will agree to, if there is no new agreement with a Northern Ireland-only backstop, and we end up at the place of a no-deal Brexit, what are the implications of that? I mean, Sebastian, you mentioned that there may be a study coming out, last night even, that would give some indication. I mean, what do you see as the implications for the U.K. and for the EU, and ultimately for the rest of the world, if we’re looking at a no-deal Brexit?
MALLABY: I think there are broadly two kinds of implications of no deal.
The first is the one discussed in this government document that was reluctantly released by the government last night, the so-called Yellowhammer document, and it talks, for example, about France potentially imposing mandatory controls on goods coming over into Dover, which would cut, you know, by 40 or 60 percent the flow of trucks going across the Channel. It could cause disruption for up to three months. Trucks waiting to cross might have to wait one-and-a-half to two-and-a-half days. So the sort of initial chaos and, you know, causing panic buying in Britain because people fear that everything from olive oil to medical supplies might be in shortage. And so you get the kind of initial disruption, which might last a month or two.
But I think the underappreciated problem with no deal is that you still have to turn around and negotiate a deal. In other words, you know, Europe would remain the main British trading partner. Britain would need to have some sort of economic relationship with Europe. And you’d have to negotiate everything from rules around the health insurance of British people in Spain to landing rights for aircraft to phytosanitary standards for food and medical regulation for medicines. And all that stuff would have to be talked about. And it’s not like you solve the Brexit issue and move on by crashing out with no deal.
HILLMAN: Matthias, do you see other implications of a no-deal Brexit, either for the EU or for the rest of the world?
MATTHIJS: Yeah, no, I would agree with everything Sebastian has said. But I would stress the one thing, and that seems misunderstood very often especially in financial markets, is that no-deal Brexit is not an outcome, right? It’s a—it’s a very temporary state of affairs of chaos of delays; of a complete legal vacuum; of complete uncertainty of EU citizens who live in the U.K., U.K. citizens who live all over the rest of the European Union. And I mean, I can’t see this last very long. I can only even see it last a few days or maybe a few weeks because after that they’re going to have to go back on the table. And what’s going to be on the table? Citizens’ rights, money that’s owed by the U.K. to the EU, and the Irish backstop, right—(laughs)—because in the case of no deal there will be a border, de facto, in Northern Ireland.
I also think—and this is—Boris Johnson himself said this in Dublin a few days ago when he met with the Irish taoiseach, Leo Varadkar—is that, I mean, it is a failure of statecraft, right, a no-deal Brexit. It is a dramatic failure for the EU. It’s a loss for the EU. It also means that all these things that were negotiated in very good faith are meaningless, right? And then the idea that Britain could just go back to WTO levels, I mean, is problematic in its own right, but also these are much more serious checks and barriers to trade at WTO because it would basically make the U.K. like a third country, right, vis-à-vis the EU. And they couldn’t just give preferential treatment to the EU; if they were to have zero tariffs with the EU, they would have to do this for all WTO members, which is another thing that is often misunderstood.
HILLMAN: I’m wondering if we can think just for a minute about the implications for the EU more broadly. I mean, the U.K. is, on GDP terms, the second-largest member state of the European Union. It has long had a powerful voice within the councils of Europe for free markets and open trade. The U.K. has also been the United States’ closest ally in many of those same councils. What does it mean for the EU, should it lose such a large member state? And what do you think it means for the U.S. not to have the U.K. at the EU table anymore?
Sebastian, do you have thoughts on that?
MALLABY: Well, it’s always been the case that because of the shared language, shared sort of approach to market-based capitalism, and other kind of touchpoints in common, that the U.S.-U.K. relationship has been easier diplomatically than the relationship with other countries. It’s just an easier conversation. And, you know, going back as far back as, you know, President Clinton in ’93, U.S. presidents have come in and said, this is ridiculous. Germany is the country that matters in Europe. We should focus on Germany. But somehow, the ease of doing business with U.K. counterparts has always meant that the natural stepping stone for the U.S. to do business with Europe typically included, you know, talking to the U.K. early and trying to get the U.K. as part of a coalition, or whatever it was that the U.S. wanted, in order to advance that position within European councils.
So I think, you know, one loss from Brexit is that Britain leaving the EU deprives the U.S. of one of its natural friends at the EU’s top table. And I think that’s bad for transatlantic cohesion, bad for NATO, bad for the West and the Western idea more generally, as it’s being challenged by everyone from, you know, Vladimir Putin to Xi Jinping. So I think that is something I worry about.
HILLMAN: So one last question before we open it up to the audience for your questions. So those that are listening in, please do have your questions ready. But I want to just pose this last one. What would you say, both of you, are the odds—I mean, what’s the percentage chance that you think we will get a deal with the European Union before October 31? What is the chances that we see the U.K. leave without a deal? What are the percentage chances, would you estimate, of an election occurring in the U.K.? And if there is an election, how will the Labour Party fare? How will Boris Johnson fare? Or will some coalition of none of the above end up prevailing in any election that might be helped? Maybe, Matthias, I’ll start with you. Yeah, Matthias, I’ll let you start first.
MATTHIJS: Yeah. So I hate to be a pessimist, but I put a deal at zero percent chance. I would put a no-deal Brexit at close to 50 (percent), and maybe just slightly below. And I think there is—I mean, there’s a very good chance of new elections before Thanksgiving. I mean, they won’t happen now before October 31. But I think that the pressure on the opposition parties to allow elections by November or early December at the latest will be—will be very high, right? So the elections are very likely to happen. So put that at 80 percent.
And then the question is once there is an election, I mean, the answer there is it depends, right? If—I think Boris Johnson has a fairly good chance of if he was forced to ask an extension and the EU grants it, let’s say, through the end of January 2020, that he can—he can fight and potentially win an election with a small majority, maybe not a large majority, if he has some sort of signed agreement with Nigel Farage’s Brexit Party that they won’t openly challenge each other. But there is an equally likely chance that elections result in a hung Parliament and that we are back to where we started.
MALLABY: So I agree with much of that. I would actually—I’d say that the chance of a deal by October the 31st, based on this Northern Irish idea, I’m going to put it a little higher than Matthias said, which is not difficult since he said zero. I’ll give it 20 percent. I think the rest of my 100 percent set is that there will be an extension and an election. The only reason the opposition has resisted an election so far is they wanted to be sure that they got the extension agreed before they allowed the election, because they didn’t trust Boris Johnson. So I think 20 percent that there’s a deal, 80 percent that there’s an election.
If there is an election, out of those eighty points I’m giving to the election I’m giving thirty points to Boris Johnson winning a majority and using it to leave without a deal. I’m giving twenty points to the opposition, led by Labour but involving a coalition, getting—cobbling together a government. I think that’s less likely than Boris Johnson and the Conservatives winning overall. I’m giving that 20 percent for the opposition forming a government, in which case what they’ll do is they’ll negotiate a new sort of deal with Europe and they will have a referendum on whether to stay in or leave. The second referendum is getting 20 percent of my prediction.
And that leaves 30 percent that there is a hung Parliament, which Matthias mentioned also, where, you know, we’re kind of back to where we are. And I think the interesting thing is that this is where I think Europe’s reaction function becomes critical. I believe that at a certain point the European Union, maybe driven by President Macron, will just say: Enough is enough. We’ve been waiting for you. We can’t extend and extend and pretend and pretend. And it’s time that you left. And so I think that a hung Parliament, which holds out no prospect of actually, you know, resolving the Brexit impasse, will eventually lead to a no-deal exit.
So adding those together, I’ve got Johnson wins, 30 percent, or nobody wins 30 percent. Adding those together, I’ve got 60 percent no deal. I’ve got 20 percent that we’ve got a compromise before October 31, and 20 percent that we get a second referendum.
HILLMAN: All right. Excellent. That’s a great way to sum up where we are from everybody’s perspective. We will now open the floor for questions. I just want to remind all participants that this call is on the record.
Operator, please give instructions for asking a question.
OPERATOR: At this time we will open up the floor for questions.
(Gives queuing instructions.)
We’ll wait for a few moments to allow everyone an opportunity to signal for questions.
HILLMAN: While that’s happening, I—oh, go ahead. Go ahead.
OPERATOR: Our first question comes from Brian Ween (sp) with The Blackstone Group.
Q: Yeah. My question is what do you think the impact on the economy in the U.K. will be if there is no deal? If October 31 comes and goes and there’s no deal?
MALLABY: Recession. (Laughs.) I mean, as you know the U.K. has already gone from the top performer in the G-7 to the bottom performer. The last data we have showed negative growth in the second quarter of this year, I think. There’s going to be a lot of disruption from a no-deal—serious delays at the border, you know, questions about whether aircraft can land or not land, and just general matters of uncertainty. And I think you’re bound to be looking at one or two quarters or negative growth there.
You know, and then going forward I think you’re sort of back to the negative position that we’ve experienced in the last year, where there’s still a huge amount of uncertainty about the future trading relationship with Europe. Therefore, businesses hold off on investment, which depresses growth. There’s only so much the Bank of England can do to cut rates, to support the system, because we will be importing inflation by the exchange rate because sterling will be weak. So I think, you know, no deal is sort of an immediate recession, followed by, you know, a sort of a very slow and extended period of anemic growth.
Q: Thank you.
OPERATOR: (Gives queuing instructions.)
We’ll take our next question from Christian Alilly (ph) with Booz Allen Hamilton.
Q: Hi. My name’s Christian. And my question is, if there was a second referendum would the question be leave the European Union without a deal or remain? Or would it be leave with whatever deal gets negotiated by the next government, versus remain?
MALLABY: Matthias, do you want to try that one, or should I?
MATTHIJS: Yeah, sure. I mean, it depends a little bit—I mean, there is a kind of—this strange strategy of Jeremy Corbyn and Labour right now, because that would be—the route to get to a second referendum would be with a Labour victory or, as Sebastian has mentioned, a Labour minority government supported by maybe the Scottish nationalists or maybe the Left Dems, or something like that. It depends on the new election. I mean, the logical way to go would have to have a three-way question, right? The deal on the table of the European Union, there’s no deal, or there is remain. What Labour has made clear, as far as I understand it, that they only want the choice between the deal they will negotiate and remain, and that they will actually campaign in that case for remain, right? But, yeah, that’s a—it’s a good question, because it’s assuming that Labour can actually get a better or a different deal from what Theresa May has negotiated, and that they—and that they get there.
The problem, I think, with that sort of referendum is that there’s going to be legitimacy issues with this sort of referendum because a lot of people will say—at least Brexiteers will say—well, there’s no good choice for us. We don’t want to remain. We want to leave. And this deal is unacceptable. So we should have no deal on the ballot. That being said, do you want to put no deal on the ballot in a referendum if that is an outcome that is actually unacceptable for most people, and for the whole establishment?
MALLABY: I’d just—I’d just add that, you know, that—this question, precisely because there is no easy answer, is one of the reasons why a second referendum, you know, has never been the preferred solution amongst, you know, leaders in Parliament. It’s been a popular idea on the streets. There’s been demonstrations calling for a second referendum. You know, I have lots of friends who want a second referendum, and I wouldn’t mind one myself, but it—you know, because of the difficulty of how you phrase it. If there are three questions, you know, you either have to have a sort of transferable vote system, where you express a couple of preferences and—or you could have two rounds, like the French presidential election. But given the fragile legitimacy of referenda in the first place, anything that complicates it or prolongs it is just going to make people more angry and suspicious that, you know, they’re being tricked somehow. So there is no elegant answer to your very good question.
HILLMAN: And how likely is it that you think there could be a second referendum? It seemed more likely some time ago, and these days it seems much less likely that we could imagine a second referendum.
MATTHIJS: Yeah, I think—
MALLABY: Well, and I was just ballparking it earlier at 20 percent on the grounds that that’s the percentage likelihood I give to there being a Labour-led government. And their policy is to have a second referendum, although Matthias is absolutely right to say that they want to get there by first negotiating their version of a deal. It’s not clear that they can negotiate a different deal.
OPERATOR: We’ll take our next question from Ronald Temple with Lazard.
Q: Yeah. Hi there. Thanks for taking the question. So could you just clarify the process from here in terms of an extension? So my understanding is that when the U.K. invoked Article 50 it started the clock on exit. The March 31 deadline was extended to October 31, and hence that’s the exit date. But given the legislation that was passed by Parliament requiring Johnson to ask for an extension if there’s no deal, that’s given a lot of people comfort that October 31 is off the table. I guess my question is, is that really the case? Is there a scenario in which Johnson would be able to not ask for an extension, in spite of the law? Or if he were to ask for an extension, do all of the member states have to agree? And is there a scenario where they don’t agree, and the U.K. ends up with a no-deal Brexit in spite of what’s been passed?
MATTHIJS: Yeah, there is a scenario where Boris reluctantly goes to the European Council, doesn’t get the deal he wants, and then I think it all centers around the date of October the 18th, right? If nothing gets passed by then, he would have to send a letter to the European Council. I mean, Boris Johnson could resign. He could call a no-confidence motion in his own government, which would then start the clock on fourteen days of potentially being able to find a new government that can command a majority. I mean, it’s such a short period of time. And I think what people underestimate is that, you know, the agenda-setting powers of the government are significant.
I mean, I think—I go back to what Sebastian was saying. I mean, it’s unlikely that—I mean, Boris did say, I think, a few days ago, that this is a country of law, and that, you know, they’re not a bunch of law breakers, right, that they’re lawmakers, and they should follow the law, and that’s important. But I think the other chance—and that is, I don’t think it’s likely that someone like Emmanuel Macron will do some goalless grandstanding and say, you know, we’re done, right? But there could be more than just France, right? I mean, I think what is missed—sometimes misunderstood is that there is a big power change going on in Europe, right? I mean, you have Donald Tusk leaving and Charles Michel, who is my contemporary growing up in Belgium. And he is much more, you know, weary of another extension.
And so I think among the European Union, and Sebastian hinted at this earlier, especially in France, there is a sort of changing of minds about what kind of member is the U.K. going to be if they end up remaining in the next five to ten years? Because any prime minister even beyond Boris Johnson would have to constantly, you know, pay lip service to these kind of leave voters and so on. And what kind of constructive member would they be? Would they block a lot of things? Would it be understood that—and so that’s where you could see minds shifting on the EU side for an extension.
But that being said, I think the smart money so far still is on them going reluctantly along with one last extension and saying, OK, this time it’s the last time. And you guys, Britain, needs to—you know, you just need to decide what you want. And then it may well be a choice between revoke Article 50 by the end of the January or leave with or without a deal.
Q: Thank you.
OPERATOR: (Gives queuing instructions.)
We’ll take our next question from Tony Kutayli with Olayan Group.
Q: Hi. Thank you very much for this call. This has been really, really interesting.
This question kind of goes to both of you, though. I guess I’m going to tailor it a little bit to Sebastian. I was really interested in the piece you had in the Post, “Boris Johnson Could Break Britain.” And I’m wondering if you could expound on some of the points you were making in that piece a little bit—both in light of a no-deal Brexit, or even in the event of some sort of a deal. What does this do for the long-term confidence in British politics, or the legitimacy of British government, considering some of the things you outlined in your piece in terms of, you know, clashing ideologies and the strength of an executive against a fractured legislature?
MALLABY: Well, I mean, thank you. There is a debate around this. I mean, there’s a view that says, look, the good news is that the checks and balances that have come out of nowhere in Britain, that didn’t sort of—you know, we didn’t used to talk about judicial review of the lawmakers checking the executive. These have sort of come up organically just when the country needed them to prevent a reckless Brexit. And we should celebrate that. And ultimately, you know, Boris Johnson may be blustering that, you know, he is willing to die in a ditch and so forth, but actually he has lost his majority in the Parliament and been defeated in a whole series of votes in the Parliament. And so his tough guy kind of, you know, riding roughshod over the norms stance is costing him dearly. And it shows that the British system is resilient and challenging its norms is a losing strategy. So that’s, for example, what the Financial Times said in its editorial this morning.
My own view is that I’m—you know, I’m a bit less optimistic than that. I think that norms politically are fragile. And they can be challenged, and they can be eroded and degraded. And in particular, if you, you know, look at the polls, it’s not impossible that Boris Johnson will get an overall majority or, you know, is quite likely to emerge the largest party in the election, which I expect. So if he—if his political strategy ends up meaning that he does well in the election by campaigning, you know, for the people against Parliament, as he puts it, that will deliver a big hit to the norms by which British politics functioned. And I think, you know, that’s what I’m worried about.
So I mean the short answer is a bit like with the debate over Donald Trump and his early period in the presidency. You know, would the courts and other checks and balances constrain him? Or to what extent would he, you know, get what he wanted? We’re having the same debate in Britain. But the longer that, you know, the challenger—whether it’s Donald Trump or Boris Johnson—remains in power, and the more he succeeds in terms of popular support, the more those norms are on the defensive.
Q: Thank you.
OPERATOR: And we have no more questions in the queue at this time.
HILLMAN: I would like—I would love to take the opportunity to pivot maybe, if I might, for just a moment over to the United States in terms of a potential agreement with the U.K. When Vice President Pence was in Europe last week, he reiterated a U.S. commitment to a post-Brexit trade agreement between the United States and the U.K., noting very specifically, and I’ll quote him, “The minute the U.K. is out, America is in.” How likely is a U.S.-U.K. agreement, realistically? How fast could it be done? And how significant would such an agreement be in terms of trade between the U.S. and the U.K.? Maybe I’ll start with Sebastian and then turn to Matthias for any comments he might have.
MALLABY: Well, I think two main points here. You know, one is that it depends a lot on whether the U.K. is headed for membership of the European Customs Union. If it is, which it might be, then the U.S. can’t do a deal with the U.K., because by being in the customs union the U.K. gives up its right to negotiate separately. And, you know, there—and so unless you had a deal with the backstop as it now is, which would indicate that Britain would probably end up in the customs union, all this talk about a U.S. deal would be off the table. So I think point one is the manner of Britain’s leaving the EU is—you know, will determine whether a U.S. deal is even thinkable.
But the other kind of simple political point is that I perceive a big advantage in Washington in dangling the prospect of a U.S.-U.K. free trade deal, because, you know, it’s a way of enticing the British government to do what Washington would like on things like treating China, you know, the Huawei 5G question, or other issue that Trump would like Boris Johnson’s support on. You know, the dangling, as Pence did it, makes total sense. The actual doing of the deal, a doing of the trade deal, is a whole lot more complicated. It takes time. You couldn’t depend on support in the Congress. Nancy Pelosi has said that the Democrats would oppose a deal if Britain had mistreated Ireland during the Brexit process by allowing a hard border in Ireland.
So I think the fact, in other words, that Vice President Pence talks about a U.S.-U.K. deal is almost to be taken for granted, because there’s political advantage in that. Whether you get one, you know, it would be a long way off, if it happened.
MATTHIJS: Yeah, I think there’s—I mean, I agree with a lot of this—there’s an inherent appeal, I think, for British conservatives and American Republicans of doing this kind of closer U.S.-U.K. deal, because they see it in kind of broader geopolitical terms as well. But when you come down to it, what the U.S. is going to want from the U.K. in a trade deal will be to open up its agricultural markets basically for the British to buy a lot of American agricultural goods, and then services, right? To open up its financial services, its pharmaceuticals. I mean, these are incredibly sensitive sectors for Britain. Also, the idea that somehow the U.K. could get a better deal from the U.S. than it could do as part of the European Union, where it’s an equally or even bigger-sized market, I think is a little delusional.
But, I mean, the most striking thing really is that here you have an administration, the Trump-Pence administration, that is actively cheering on Brexit, right? That is actively cheering on the U.K. leaving the European Union, and actually weakening the European Union, right? This is the kind of divide and rule strategy that they have in Europe, that we haven’t really seen from a U.S. administration since the Iraq conflict in 2003, when Don Rumsfeld talked about old versus new Europe. And so that, I think, is striking as well.
So the one thing I did want—I do want to come back to your question earlier, Jennifer, is what the impact is on the EU of losing the U.K. And there, I think, I mean, the consequences are quite serious, right? I mean, it does diminish the EU’s soft power and hard power. The idea that the EU could become a kind of military power in its own right is not really that serious a proposition anymore, once the U.K. has left. It loses a permanent member on the Security Council.
On the other hand, as I hinted at earlier, I mean, there are voices within continental Europe—and it’s true in Berlin, it’s true in Paris, it’s true in Rome, maybe less so in Central and Eastern Europe—but that really wonders if it’s not time for the U.K. to leave, right? If they’re not going to be part of Schengen, if they’re not going to be part of the eurozone, what are they going to be part of, right? And these are the kind of areas where Europe wants to integrate further. And so you are going to see the tensions between being a member of the single market and not being a member of the euro becoming more and more wide in the open.
So it—I mean, it is a complicated issue. I think from a geopolitical point of view it’s really sad, and it’s a big loss for the EU. But maybe from a kind of internal coherence view, and from an integration point of view, this may well be—this may well end up being a good thing. But there’s very little agreement on this right now.
HILLMAN: I would only add, by way of a question, a little bit on Sebastian’s point, because part of my question would be what’s the sequence of events? Because for an awful lot of the U.S. investment that’s gone into the U.K. historically, it has been to produce goods or services that will be sold throughout Europe. So part of the advantage for American companies has been to go into an English-speaking country, but then to sell those cars or those financial services, products, into the EU market. And obviously in the absence of an agreement between the U.K. and the EU, or in the absence of the U.K. being there, you then have to both pay a tariff and undergo a second regulatory process or inspection in order to move those goods or services across the channel, which significantly diminishes the value of that investment going into the EU.
So if we were to be serious about a U.S.-U.K. agreement, would it necessarily have to be proceeded by some, at least, understanding of what the relationship would be between the EU and the U.K. first?
MALLABY: Yes, I agree with you, Jennifer. I think that’s right. You would have to—you would want to sort out that relationship between the U.K. and the EU first, because otherwise the U.S. doesn’t know what it’s negotiating with.
HILLMAN: Fair enough.
Just going to pause a moment to see, Operator, if there are other questions in the queue?
OPERATOR: No, ma’am, there are no question in the queue at this time.
HILLMAN: All right. Then I wondered if we could come back just for a moment to the issue of whether the WTO, the World Trade Organization, and its trading rules, does form its own sort of form of backstop, at least with respect to the trade issues. Given that the U.K. was an original member of the GATT in 1947, it retained that original membership, and therefore is a member of the WTO in its own right. So it does not have to formally join the WTO in some sense. Do the WTO rules save the U.K.? Would trading on WTO terms be a potential option or appropriate backstop for the U.K.?
MALLABY: So, I mean, the point is that the single market in Europe goes deeper than the World Trade Organization rules do. And in particular, you know, 80 percent of the U.K. economy is services, which is an area where WTO rules are less strong. And notably, financial services as being the system called passporting, whereby if you have regulatory recognition for your financial services company in London from the Bank of England or the other U.K. authorities, you get a passport to go sell financial services elsewhere in the EU. And that’s’ a tremendously valuable piece of liberalization to an economy like the U.K., which has a lot of financial services export.
And the other big sector that would be affected is automobiles. Jennifer, you probably know better than I do, but I believe that the WTO permitted tariff on cars and car parts is 10 percent.
HILLMAN: Ten percent, and inspection requirements.
MALLABY: Yeah, and inspection requirements, exactly. So you’d suddenly—you know, if you look at the supply chains in cars in Europe, you’d see chunks of cars crossing borders, you know, three or four times before final assembly of the vehicles. And so you’ve got, you know, different pieces of the vehicle moving back and forth. If each time it collects a 10 percent tariffs, plus the delay at the border for the inspection, which then messes up your just-in-time manufacturing system, that would be extremely disruptive to the U.K. automobile manufacturing sector.
HILLMAN: I wonder if following—sort of following on that—one of the other implications of a hard Brexit or even any form of Brexit is that the U.K. loses access to the agencies—the many different agencies within the European Union system. Everything from nuclear power plant inspectors, to those that are granting approvals for all kinds of licenses, you know, approvals for patents, approvals for pharmaceuticals, approvals for many things. Those inspectors and that processes will now reside within the European Union, which presumably means that there are a significant number of these kinds of regulatory agencies that will need to be replicated within the U.K.
I mean, you take even a basic thing like nuclear power inspectors, where 40 percent of the power in the U.K. is nuclear, and the inspectors are all located at Euratom, which is among the other institutions that the U.K. would be Brexiting from. Where do we stand in terms of the U.K.’s replication of these many agencies that would be needed just to, in essence, conduct sort of the governance of and rulings over the U.K. economy? Where are we?
MATTHIJS: Yeah. I mean, I don’t think we’re very far there, right, because no-deal preparation has been extended twice, and then been aborted, and now they’re starting to get serious about this. But I think the point you raise is absolutely right. And that’s why, I mean, I’ve been arguing that—(laughs)—the best of all possible bad worlds really is Theresa’s May deal, right, because there is a transition period and all this stuff is figured out, and the Britain would have a kind of two-year period to figure all this stuff out, depending on what kind of Brexit they have. But you’re absolutely right, when there is a no-deal situation all these—Britain would rely on all kinds of European agencies and their goodwill to ad hoc agreements kind of continue to do this, and then start the process of setting up their own agencies, right? So this not—I mean, maybe it’s taking back control, but it’s also creating all kinds of new government red tape and creating a huge amount of cost for the British government that they’ve never really talked about.
HILLMAN: Sebastian, any thoughts on what you would see as the main hurdles in terms of concerns over where the level of preparation is on the U.K. side for a hard Brexit?
MALLABY: Well, you know, the debate has been focused on managing this question of trucks coming over the channel at the Calais crossing. And that’s sort of seen as the key chokepoint that could go badly wrong. But as you’re saying, once you get past that immediate potential sort of economic heart attack, there are a whole bunch of other critical conditions that have to be addressed. And you’re quite right, that there is a long list of regulatory functions that will have to be replicated for U.K. only. And the irony, of course, is that not only does this mean a whole a bunch of new civil servants being hired and new red tape, but it also is the case that, you know, in many cases Britain will just mimic the rules in Brussels in order to make things more simple in compliance terms for U.K. companies.
So you have all the downside of having to pay for and organize your own inspection regime, without necessarily the freedom and sovereignty that you might expect from that because you sort of need to stay in line with the regulations that prevail in your big neighboring market.
HILLMAN: Pause one second for the operator to see if we have any other questions in the queue.
OPERATOR: No, ma’am, there are no questions in the queue at this time.
HILLMAN: Then one final, I guess closeout, question on my end is the implications of the sort of legality of this for the rest of the world. And by that, I mean, to try to understand how far we think the U.K. has gotten in terms of shoring up its relationships with those outside of the EU. I look, for example, here in the United States that we have some 156 treaties or agreements between the United States and the European Union that all need to, in some way, either be amended to now be agreements between the United States, the European Union, and the U.K., or arguably need to be replicated as a separate agreement between the United States and the U.K. that replaces that existing text.
And of those 156 agreements, my understanding is that less than a handful have actually been done. We have an air transport agreement between the United States and the U.K. And we have a series of mutual recognition agreements in the trade space. But other than that, we’ve still got some 150 left. And I would argue that we are probably not alone in the United States. How much and far has the U.K. done its work in terms of trying to replicate or amend the existing EU relationships with many of the other trading partners outside of just the EU itself.
MALLABY: My sense is not very much. I mean, this is one of those things which, you know, is expensive and difficult to do. Governments have limited resources. It’s tough to prioritize things until you have to. So even though, you know, some work has begun on this kind of thing, as you just described, it’s simply a big lift, as you say, of things which haven’t been done. And my experience in watching—you know, it’s a little bit like the financial crisis in ’08. Is that, you know, once you get into the shock you discover bits of a complicated system that nobody really thought about—like triparty retail or something. A lot of it suddenly turns out to be way more fragile than you thought.
And I think it’s going to be the same with a no-deal Brexit, that people just assume that, you know, lots of aspects of, you know, lots of aspects of, you know, data transfer across borders or, you know, what happens if you want to fly from, you know, London to Berlin, and hire a car. And what’s the rule that governs the transferability of your car insurance? I mean, all of those sorts of details—you don’t have to argue that they’re all going to go wrong. You just have to point out that there are so many of these cross-border agreements that we rely on without realizing it in a globalized world, that sort of shock therapy deglobalization will probably turn out to be more unpleasant than we expected.
MATTHIJS: Yeah, no, I—the very few things you’ve seen of the U.K. getting ready are, like, bilateral trade agreements with Lichtenstein and Fiji and, you know, tiny places like this. There are so many trade deals the EU has with the rest of the world, but there is no guarantee from the other side—let’s say if it’s an EU-Canada agreement, and EU-Chile agreement, and EU-Singapore agreement—that the other side has to kind of honor these commitments to the U.K. I mean, and that’s really—a no-deal Brexit, Britain takes itself completely into a legal vacuum. And it’s completely unpredictable what could happen. I mean, we’d like to think that reasonable voices will prevail, right, and that they will be managed to the best they can. But I think what Britain’s realizing is just how tightly connected it is within this single market, right? This is not like 19th century trade where tariffs go up or down a bit. I mean, it really is regulatory and that sort of stuff.
And I don’t think they are prepared for this at all, because Sebastian’s absolutely right. They are just ready to have a bunch of ships to get goods across from Calais to Dover. And that’s where the main—the main focus is. But there are so many other things that—I mean, there’s simply not enough civil servants in the U.K. to prepare for this, and especially not in the space of, you know, six, seven weeks, which is all they have now.
HILLMAN: Well, having reached the end of the hour, I would like to thank Sebastian Mallaby and Matthias Matthijs for sharing their insights and their expertise. And I want to thank all of you for participating in the call this morning. All may now disconnect.