Virtual Corporate Meeting

The Final Days of Brexit Negotiations

Tuesday, December 22, 2020
Johanna Geron/Reuters
Speakers

Senior Fellow for Trade and International Political Economy, Council on Foreign Relations

Senior Fellow for Europe, Council on Foreign Relations

Presider

Managing Editor, Council on Foreign Relations

MCMAHON: Well, welcome everyone and thank you for joining us for this CFR virtual, on-the-record meeting on Brexit. I'm Bob McMahon, managing editor of CFR.org. And we are very fortunate to be joined by Jennifer Hillman, who is CFR's senior fellow for trade and international political economy, and Matthias Matthijs, CFR senior fellow for Europe.

So I read the other day that one of the top trending terms on social media for 2020 is "dumpster fire". And by some accounts, a messy, no-deal Brexit will add a final piece of kindling to that fire. But this is a fluid story. And I want to discuss the latest on the UK's looming exit from the European Union with Jennifer and Matthias for about twenty-five minutes or so before opening up to the question-and-answer period with you all to round out our hour-long meeting.

So, Jennifer, I want to start with you to ask for where things stand. The talks are set to a hinge on a few sticking points still. According to the latest reports I've seen, they include fishing rights in UK waters, and what are called level playing field provisions affecting items like subsidies for British businesses. So is there any sense that these issues can be resolved in time for a deal, Jennifer?

HILLMAN: Well, again, I think that's the huge concern. Yes, there is a sense that a deal could be had between now and the end of the year. I think there's already a sense that there will not be sufficient time, for example, for the European Parliament to actually pass whatever this deal might be worked out so that it would have to be applied, if you will, provisionally beginning January 1 and then applied later. But in many ways, there's an equally good chance that we will not reach an agreement because there are still very serious sticking points. And so this is sort of one in a very, very long and winding road, where we have heard time and time again that a deal is imminent, a deal is imminent, yes, we're going to get a deal, only to have what's happened in the past, which is delay, delay, delay.

And so every time we've bumped up against a deadline in the past, and there have been many of those deadlines since June 23, 2016—you have to remember, it's been four and a half years now, where we've known that Brexit was on the horizon, where we've seen these bumps in the road—and every time the decision has been made to push the date outward. At this point, that is the one thing that I do not think will happen, in the sense that Boris Johnson has said now repeatedly that there will be no extension. And the withdrawal agreement, the formal withdrawal agreement that was passed, provided that there could be an extension if it was sought July 1 of this year. And since that deadline has already passed, I think the one thing that we will not see is an extension to try to get yet more time.

MCMAHON: So there's all sorts of ramifications, Jennifer, and we're going to get into some of those as part of our opening conversation. But it's hard to look past what's happening right now. We're in the midst of a roaring pandemic, and for the UK, a disturbing new strain that is causing other countries to shut off transit to and from the UK. So is the UK in danger starting off the New Year with severe supply chain problems for vital goods? Is it that serious?

HILLMAN: Yes, I think it is. A couple things, part of it is we have to remember, what is the UK Brexit-ing from? What are they leaving? And what are those implications? And to me, that's always important to go back to basics. So what is the European Union? It's a single market. And what that means is the four pillars of the single market—that's goods, that's services, that's people, and that's capital—so all four of those things trade freely within the European Union. So the moment the UK leaves, "Brexits", which is December 31 of this year, all of that stops. So goods cannot move freely. Goods will now have to pay a tariff and potentially be re-inspected. Services cannot trade freely. So an insurance product, an approval for a doctor to practice medicine, for a nurse to engage in the nursing practice, those are regulatory approvals involved in the trade of services that can no longer happen without again, a separate system of approving whatever that service may be. Whether it is all of the financial services coming out of the city of London or again, whether it's medical services, now there has to be a separate process to recognize credentials and to approve of that. Movement of capital again, can no longer happen just freely, and most importantly for this notion of supply chains is people can no longer cross that border.

So what do you have right now? You have truckers sitting behind the wheel of these trucks trying to come through the Chunnel between the European Union and the UK saying, I don't want to drive my truck into the UK because I'm going to get stuck there. Because I no longer am going to be able to return from the UK back into the European Union, because of increased, enhanced restrictions on the movement of people as a result of this new strain of COVID. So you now are seeing a backup more than ten miles long today, for trucks trying to get through that Port of Dover. And you are now starting to see a big pile up of trucks on the other side of the Chunnel with drivers saying no, I'm not going to move. And they now have to have passports ready and all kinds of restrictions over the movement of persons. So yes, it's a very serious implication of what could happen if no agreement is allowed that will work out an ability for a freer movement of goods, services, and people.

MCMAHON: If you could say one more thing about the logistics of a deal then. So I have seen that the latest is that they now need to reach some sort of an understanding by December 23 to give them time to go back to their own countries to get this deal matriculated through both parties and to take effect on January 1. Is that your understanding first of all, Jennifer? And is there a way that this can be punted further down the road, so to speak?

HILLMAN: Well again my understanding is, and I will defer to Matthias on this one, but my understanding is that maybe December 23 is in essence already too late, but maybe not. Because in theory, both the UK Parliament and the European Union Parliament have to approve the terms of this because when you say "this", what is this deal? This deal is basically the entire future relationship between the United Kingdom and the European Union. And not just trade but across a whole series of measures. It is in essence defining the future relationship, economic, political, security, across a whole series of realms. You're talking about a major agreement in terms of defining this future relationship. So yes, both Parliaments have to, in theory, approve it. And I think the chances that they can do that between now and the end of the year is getting slim, if not already impossible.

MCMAHON: So I wanted to go to Matthias then on what's happening on both sides. So far we've heard fairly consistently from Boris Johnson's government, there will not be an extension beyond the December 31 deadline for the transition period. And yet you're having people, whether it's the Scottish leader or even the mayor of London, other officials saying we really need to extend this. So from the UK side, can you talk a bit about how they're approaching this? Is there huge angst, is there resignation? Are they sort of determined to forge ahead at this point?

MATTHIJS: It's an excellent question. And just to come back briefly to this December 23 deadline, my understanding is that is an EU deadline for provisional application. The European Parliament has already said they will not vote on it because there's not enough time to scrutinize an eight hundred-plus page document with another thousand pages of appendices. I imagine Jennifer is the one of us who has read most of these trade deals and I'm sure she doesn't recommend it unless you suffer from insomnia or something like this. But here's the point. December 23, as far as I understand is tomorrow, right? So if there's no deal by tomorrow, the procedures that the EU needs to take, every government needs to approve–unanimous agreement. So they can ignore, quote unquote, the European Parliament in that scenario, apply it provisionally starting on January 1, and then the European Parliament would be able to take its time in January and maybe vote on it on its first plenary in February and then it would it would go full into effect.

The difficulty of the UK side is the UK has to agree to this provisional application. Both sides have to agree. But the UK is saying we don't want to do this. January 1 is it. Even if there's no deal, we'd rather have no deal. Of course they're trying to get some last minute concessions, it's my understanding, from the EU side. And so I think that is where, what is bedeviling Boris Johnson politically right now is he's had a very tough year. He has to show some sort of competence, at least that's what most of us believe. Competence would be to sign a deal, especially when we're now down to a few million euros or pounds on fisheries on a deal that's worth six, seven, eight hundred billion pounds or euros. And also he has to think about his own party, where there's very loud hardliners fifty, sixty of them who basically prefer no deal because they think that's the cleanest of all breaks. He has to worry about the Labour Party, where he's in a kind of position where they basically will vote for anything that's a deal. Because they see it's binary. If we don't vote for a deal, we get also blamed for no deal. So they'll vote for a deal.

So that being said, we're dealing with a man who wrote two columns, in March 2016, for the Daily Telegraph, whether he was going to support leave or remain. He had both options. He was undecided until the very last moment. He went with leave because he thought it'd be better for his political career and we're still suffering the consequences in many ways.

It seems to me extending it now, there's no easy legal way, because as Jennifer mentioned, Article 50 has played out. The UK is no longer a member of the EU. So they would have to sign a new treaty, basically a very short treaty that both sides would have to ratify very quickly. And both governments could do this, and the EU said all governments would do this, that says okay, we're going to continue negotiating because we're almost there on fish and a level playing field. Macron needs some reassurance and then we'll get there in a few more weeks. I don't think there is the political will on either side to go with this. Also, because I think the French especially seem to be quite comfortable with no deal.

MCMAHON: I was going to ask about the European side. So are you seeing at this point, given their stakes, their proximity, and so forth, that the French are maybe the most assertive? Or is there unanimity on the EU side at this point? Is there is there likely to be any sort of last minute wrench thrown into it?

MATTHIJS: Yeah, again, an excellent question because I think the British side has systematically misread the EU on this. From the very beginning, it was this idea, the moment we vote for Brexit, Angela Merkel will be on a plane to London and will be begging us to secure a deal because of German manufacturers and car makers and so on. And we haven't seen any of this. And we're still waiting for the Germans to save the Brits, if you want.

There's a broader deal going on here where my understanding is that Macron told Merkel, when it came to dealing with Hungary and Poland on the budget, and on next generation EU, and the Coronavirus recovery fund, actually the French were perfectly comfortable going it without Hungary and Poland. But for Merkel, it was important to keep EU unity. And so the deal they made was okay, I won't stop you on Hungary and Poland and getting a deal as long as you don't try to force us into accepting a deal because for the French it's much more important.

So two things on this. So what happens if there's no deal on January 1 is there's no access to British waters for French fishermen, right? That's of course a very temporary state of affairs because they won't be able to sell any of this fish and catch any of it, right? So the French thing, that almost under a no-deal scenario they have a better hand because they now can say, well, you need access to our markets, and it's ours to give. And also, it's almost easier, right? Jennifer knows this better but when you do trade deals it's usually about managing convergence not about managing divergence. And so once there's WTO tariffs, and quotas, and rules in place, you can actually negotiate these away as part of a win-win scenario. Right now it's a bit of a lose-lose scenario, or a lose-win scenario, or zero sum, or whatever.

And so what I think is now clear is the very final days, technically there's nine days left, and there is a bit of tension between the coastal states, the eight states that catch fish in British waters, and then the rest that are perfectly comfortable with what's on the table. But there's also an understanding that EU unity is more important. The additional point is, and that's I think important for Macron personally, you want to show the rest of the EU member states, especially the ones in Eastern, Central Europe, who may be flirting with the idea of leaving, even though I think they'll never do it, is that there's real costs from leaving the EU and I think that's what you're seeing right now.

MCMAHON: That's really interesting. I wanted to go back to Jennifer, to drill down a little bit on, we've been talking about the fisheries issue as if it's broadly understood. I think it would be helpful to kind of talk through what's at stake here. I think part of the issue obviously is a core issue of Brexit for Boris Johnson and supporters, which is a sovereignty issue. It now seems like, as Matthias alluded to, they've come a lot closer on what constitutes the percentage of fish catch in UK waters that will be comfortable for both sides. So Jennifer, can you talk a bit about what that involves and where we might see some daylight?

HILLMAN: Yeah, it is interesting that we're coming down to this point where the issue of fish is becoming one of the last sticking points. And I do think it is bigger than the amount of trade. And part of that stems from the fact that for all of the years of the European Union, trade and fisheries has been governed by a common fisheries policy, which does a number of things. First of all, it makes it very clear that all members of the European Union have the right to fish in all EU waters. Normally under normal maritime rules, every country has a two hundred mile exclusive economic zone off of its borders, and it has the right to say who can come in and come out and fish within that two hundred mile exclusive zone. That is a subject of the international treaty on the law of the sea. So under an EU customs agreement and the EU common fisheries policy, French, Portuguese, Spanish boats are all allowed to fish in the waters between Great Britain and the European Union and the waters around Great Britain.

The problem for Boris Johnson is a very political one that this has now become the central issue over taking back our laws means taking back control over our waters, means kicking all of the Spanish and Portuguese and French boats out of what they now seem to be calling British waters. We want to reassert our two hundred mile exclusive zone. When you come down to the trade aspects of it, it's a very mixed bag. At some level, there are only eleven thousand fishermen in Great Britain. That's it, eleven thousand fishermen. And yet 90 percent of them voted for Brexit, because they want to kick the Spanish and French fishermen out of their waters. And so they are a very powerful political force that Boris Johnson has to contend with. But it gets married up then with the issue of the trade in the fish themselves. And here is the problem for both sides. It turns out that most of what the Europeans want to eat are fish that the British tend to fish, salmon and other things. And most of what the Brits like to eat are fish that are fished by the Portuguese, the Spanish, and the French.

So again, the UK is importing a lot of the fish that they eat from the European Union and are exporting salmon and other things to the EU and all of that trade is going to stop if there is not some kind of an arrangement. And all of a sudden now the British fishermen are going to be competing with other countries, Norway and others, that are very good at fishing salmon that are going to be taking over those markets. So at some level, Boris Johnson has to balance this demand of his fishermen to kick out all of the fishermen, with the actual fact that they're going to need to sell those fish into the European Union. So it's becoming a very, very difficult issue. I totally agree with Matthias.

When people say to me, why is this so difficult to get an agreement? It is because trade agreements are normally about convergence, how to open up markets, how to facilitate trade. Brexit is about just the opposite, how to stop all of this. And here it is the most Brexit issue where what the UK is trying to do is re-assert its sovereignty over waters. And anytime you're getting that sovereignty demand pushed up against the European Union's desire to protect the single market it becomes very hard to see how a deal gets together.

Where we are right now is the UK has said okay, we will only require a cutback of about 30 or 35 percent—I've read different numbers—of the total amount of fish caught in British waters by non-British fishermen that can be sold into the European Union. And the EU has said we can only live with a 25 percent cut back. So I would say somewhere between 25 and 35 percent maybe there could be an agreement. But again, it pushes on all of these other buttons. So it makes it very difficult.

MCMAHON: And this is again also referencing something you mentioned before, which is without a deal the arrangements that then take over are what we call the World Trade Organization rules with a certain tariff applied, and on agricultural goods it's higher. It’s around 6 percent normally, but with agriculture it could be higher than that. And fish could be also a little bit higher than that.

HILLMAN: Okay. And again, it varies by product and I don't normally do this but I will say for those of you that are really interested in this, the Wall Street Journal did a really excellent interactive graph that shows you exactly what the tariff level is on the product and then how much trade actually occurred in each one of these products so you get a sense of how big an effect there's going to be. So for any of the items that have a significant tariff level already under the WTO and have a large volume of trade those are going to be the areas that are the most affected by this no-deal Brexit and you will see fisheries is way up there in terms of both the level of trade and the level of the tariff.

You have to add on top of that a requirement that all food has to be inspected to make sure that it's safe and not spoiled, etc. And so you add that on and you are now adding a huge regulatory layer on top of this that will make trade, particularly in fresh food, much, much more difficult, much more time consuming, require much more customs inspectors, which they don't have. So the trade gets even more complicated with respect to seafood products.

MCMAHON: Great. Thank you. I wanted to ask Matthias one more question and then I'm going to turn to our audience here for an opening for questions. I know there's a lot of you on this virtual meeting and so I want to give you time to ask your questions. I wanted to go back to Matthias and talk about something that's not on the trade docket, so to speak, but is also an area of concern, which is some of the other aspects of the relationship. Although actually part of it is on the trade docket, but it's Northern Ireland. Given now what we've seen in terms of the special arrangement made for Northern Ireland, is there concern that as we get into the formal Brexit kicking in on January 1, we could see some sort of a spike in tensions there for whatever reason?

MATTHIJS: Yeah, excellent question, Bob. There are two main issues when it comes to the union of the United Kingdom. And I think that's the irony of the last four or five years is that many analysts when the Brexit vote happened told me, this is the beginning of the end for the EU. The EU is disintegrating. I think the pressures on the union of the United Kingdom—Northern Ireland, Scotland, England, and Wales—is actually much more serious.

So there is the Scottish issue, obviously, where 58 percent systematically prefer independence. But the Northern Irish issue is more problematic because of course that's the deal Boris Johnson cut last year. And that's why everybody's expecting him to cut a deal again at the last moment. The deal he made with Leo Varadkar, when he was walking in the woods near Liverpool, where he basically made the backstop into a front stop. I don't know if anybody remembers all of this, but the idea first was Theresa May's backstop was, well, in case we don't find these alternative arrangements for the border, we will basically stay in the Customs Union but leave the single market. And then over time once we find it, if we never get to this, Northern Ireland's will be the backstop.

What this now means is that basically, that was always been the trilemma of Brexit, you can't have everything you promised, you have to put a border somewhere. And the border is either in Northern Ireland, with Ireland, but that would flare up tensions immediately. Or you do it in the middle of the UK, in the Irish Sea between Northern Ireland and Great Britain. And of course, that's what Boris Johnson agreed on.

It is unthinkable that over time, this is not going to lead to Northern Ireland further and further drifting away from the rest of the UK when it comes to regulations, when it comes to trade, when it comes to integration. It's basically de facto staying in the customs union, the single market, right? So if you want to be an optimist about it, you could say, hey, this is wonderful for Belfast, right? It can become the real London because they're going to be in the UK, and they're going to be in the EU. It's almost like you have the best of both worlds.

On the other hand, you could say, well, what this could lead to is them further drifting apart. And then as you rightly ask, this could start with a flaring up of tensions. And then it's not unthinkable that at some point, both sides will say, okay let's have a referendum on what the future is of Northern Ireland. So that's kind of one of the more political significant consequences of Brexit. That over time, both Scotland and Northern Ireland, they're going to be pushed further and further away from England. And you're going to be left over with the former United Kingdom of England and Wales. So F-U-K-E-W, as I put it in Foreign Affairs a few times, very unfortunate acronym. But that's really where we are going.

And so also you would think because of this, you would think that cutting a deal now, today or tomorrow, is so important from a statesman point of view or a diplomatic point of view. It's so much easier to manage that relationship on the basis of a deal and also no breakdown of diplomatic relations. And that I think is for most people, including myself, the most frustrating and I guess the most disappointing thing about this, even if a deal is agreed, is that it's not more ambitious. What about the security dimension? What about the geopolitical dimension? And all these things, and that's where I think a lot of work still would have to be done in the years to come.

MCMAHON: But at least because of the sort of diplomatic fudge at this point, on January 1, we're looking at Republic of Ireland and Northern Ireland border functioning sort of status quo.

MATTHIJS: Yeah, the withdrawal agreement is the withdrawal agreement. So I think a lot of people in the UK forget this, and maybe outside of it as well. The UK is no longer a member of the EU, they left on January 31, 2020. And from then on the withdrawal agreement has gone into place, deal or no deal. The deal is about, as Jennifer said, the future relationship of trade. And that's a managed divergent relationship.

One last thing on the internal market bill that's been passed and the finance bill. There was a lot of tension with between the UK and the EU, because the UK was saying, a couple of these lines in the withdrawal agreement, we won't necessarily abide by because it's not in our interest. So we'll break international law in a limited and specific sort of way, as they put it themselves. So my understanding is that this has been sorted out between the UK and the EU, that the withdrawal agreement will be fully applied and that there won't be a border issue on the island of Ireland starting January 1.

MCMAHON: Got it. Well, thank you Matthias. And thanks, Jennifer in helping me frame this. Now I want to open the floor for questions. And I want to remind all participants that this call is on the record. So Julissa, could you give us instructions for asking a question, please?

STAFF: We will take the first question from Joanna Shelton.

Q: Good morning. A very interesting discussion. And I actually believe that my question was pretty much just answered by Matthias. But I did want to clarify a bit more. My question is about Northern Ireland and the agreement that had been reached between the UK and the EU that prevented a hard border with Northern Ireland. Now, does that agreement remain in force now for the foreseeable future then and would provide for the lack of a border with Northern Ireland until something else intervenes to change that? Could you just explain that just a little bit more?

MATTHIJS: Yeah, absolutely. Thank you, Joanna. So what was bedeviling the negotiations over the last few months is that the EU did not want to sign off on a list, a long list, of goods that were supposedly safe. That Great Britain could export to Northern Ireland and some of it could find its way through Ireland and hence the rest of the EU. That being said, there are going to be checks in the Irish Sea, right? Most of the freight between Northern Ireland and Great Britain is via boats, and some of it of course, air freight as well. So it's not that there's a land border where there's going to be long lines and so on. So that's mercifully been avoided.

But yeah, ideally that's what most experts on Northern Ireland and the Northern Ireland issue are telling me. It's a lot easier to manage a lot of this divergence over time with a trade deal, right? Because you're going to have customs facilitation, you're going to have streamlined procedures, you're going to have trusted trading schemes. And if you don't have a deal, then you're just WTO rules, right? And that actually complicates the Northern Ireland-Great Britain trade as well because then you basically have to have two lanes. A green lane where it's like the end destination is Belfast or any destination in Northern Ireland, then there is going to be a red lane, which is like this is actually meant for Dublin. And so that there can't be a border on Ireland, so it has to be checked in the Irish Sea.

All of this becomes extremely much more facilitated if there's a deal. Because don't forget part of the deal that Michel Barnier on the EU side and David Frost on the UK side are still negotiating as we're speaking right now is things like customs facilitation, is these sorts of streamlined procedures that are in place that it won't take away the red tape, it won't take away rules of origin and anything like this, but it will speed up the trade between the two countries.

HILLMAN: And can I add just two quick points? One is the theory behind this is effectively that goods moving from Britain into Northern Ireland would effectively be treated as though they are an export, if you will, even though it's intra-UK trade. So they will effectively do a customs declaration and in essence declare duties paid, if you will. And then if they can later prove that those goods never left Northern Ireland, in other words, they never were transported south down into Ireland, they get those duties back. Or they're effectively never collected is the way that it would work.

So as a technical matter, goods moving from the UK to Northern Ireland are going to be considered an export and treated as such. And then the second thing is it's my understanding that at least the UK and the EU have now agreed to a grace period on trade in food items, because again, the inspectors are just not there right now to treat a food export from the UK going into Northern Ireland. There aren't the inspectors ready. So there's going to be this three month grace period, six months for meat, chilled meat items. So at least for the next three months, there is a greater ability to trade in food items moving between Britain and Northern Ireland.

MCMAHON: I would just follow up on that, Jennifer, there's so many different areas where people are going to become aware of how much trade is affecting them, either via Northern Ireland or the rest of the UK. And I think one of them that you've identified is auto. The U.S. auto industry has some concerns. Can you talk a little bit about that before we take our next question?

HILLMAN: Yeah, sure. Obviously one of the most heavily traded items that is subject to a relatively high tariff, probably among the single highest traded items subject to tariffs, are autos and auto parts. So again, many, many U.S. auto companies as well as many Japanese and others have significant auto production in the UK, heavily in Northern Ireland, but in general in the UK. Eighty percent of that auto production is designed for those cars to be sold into the European Union. And that's how the trade has worked for all these years with no problems, no tariffs, no regulatory inspections, no issues. The U.S. ships in auto parts from the United States, they arrive in Northern Ireland, they're assembled into an automobile at a Ford plant, a GM plant, and those cars are then sold on into the European Union.

Beginning January 1, again assuming there is no deal, every one of those cars will now have to pay a 10 percent tariff, and will have to be re-inspected and re-certified as safe and having gone through a normal vehicle inspection and that may cost between two and five thousand dollars per vehicle. And again, there are not lots of inspectors waiting to do these inspections. So between a timing, a resource, and paying that 10 percent duty, all of a sudden for many of the auto companies that are invested in the UK, this investment is starting to look less and less like it can be viable. And you are starting to see a number of the auto companies either pulling out or certainly cutting back on their investments because they simply cannot make it work if they have to pay a tariff and go through a full regulatory process just to move a car from the UK into the EU.

MCMAHON: Thank you. Julissa, do we have another question, please?

STAFF: Sure. We'll take the next question from Ron Shelp. Please accept the unmute now button.

Q: Am I unmuted?

MCMAHON: Yes, go ahead, please.

Q: I'm Ron Shelp. Because of the pandemic I've become an author and a struggling documentary filmmaker. Could you look forward a ways and tell me a couple of years from now, if this causes the complications of it sounds like it would, is it possible that the British people would decide maybe this was mistake, number one? And number two, if they did, and they tried to move back, would the European Union accept them?

MCMAHON: I guess I'll have Matthias kick off on that one.

MATTHIJS: Yeah, it's an excellent question, Ron. I can only imagine how hard it is to be a documentary filmmaker during a pandemic. So good luck with that. But I think the frustrating part, for those who do want to rejoin the European Union, will be that there'll be some real drama at the border in the next few months. And then we'll never know if this affected GDP or productivity. It's something that would not have happened. And so it's going to be incredibly hard to prove that it is Brexit that caused it, because we're dealing with a pandemic right now. So in a way, that's what almost is saving the Brexiteers in the UK. They can say look, this is COVID-19 that is causing this dramatic slowdown in growth that takes much longer to recover, higher unemployment, and so on.

Because at the end of the day, I expect there to be a deal. If there's no deal today or tomorrow or the next week, then there will be a deal at some point in the spring. Because no deal is not an outcome, it's a temporary state of chaos and slow trades. But that I think is going to be, the idea that the British are going to realize, oh my God, we made a giant mistake in three years. The ones that voted remain already think that and the ones that voted leave, I think they're gonna have to see some real evidence of this and they won't see that. So you need a generational shift almost. And you also are going to need considerable dynamism on the EU side for it to make it attractive to rejoin.

But then rejoining is a whole other can of worms, because in the next generation, that's Article 49, rather than Article 50, right? And then you have to join the Euro, you have to join Schengen, right? And then the EU is going to be in a very strong position to demand all these things. And that is going to be a very different proposition. It's one thing for the UK to stay in its status quo position, which by the way already doesn't exist anymore because they've already left.

So rejoining, would the EU allow it? Absolutely. Of course, they would welcome it, but it would be much more on EU terms, and there would be the understanding that the last thing they want is to reintroduce a former veto player and all the integration projects that they have planned.

MCMAHON: Thank you. Julissa is there another question please?

STAFF: Sure, we'll take the next question from Tara Hariharan. Please accept the unmute now button.

Q: Thank you. I'm Tara Hariharan from NWI, a New York-based hedge fund. My question broadens Brexit implications to the transatlantic sphere. Are UK-U.S. relations going to change at all under President Biden versus President Trump, given Biden has seemed to be less pro-Brexit? And are there any openings for a closer UK-U.S. trade relationship given that the UK only wants this? Thank you.

MCMAHON: Jennifer?

HILLMAN: Well, I'll start on the trade relations. Obviously, the United States is currently trying to negotiate a free trade agreement with the UK. And we don't know whether that will get finished before President Biden takes over on January 20. I personally think it is unlikely to conclude a trade agreement. And so the question is, what will the Biden administration do with this halfway negotiated agreement? Just as a starting point, the authority for the United States to enter into this kind of a trade agreement, something referred to as Trade Promotion Authority, expires in July of this year. So unless the Biden administration takes this up and finishes this agreement by April, that's the sort of deadline that you would have to get in line to use this existing authority, it would be very hard if not impossible for the United States to enter into an agreement with the UK if they reach one. So I personally am fairly skeptical about it.

And the second thing is what the Biden administration has said as a general matter is that they're not going to be in the business of pursuing significant new free trade agreements until, if you will, the U.S. gets its domestic house more in order, until we've made a lot of investments in our people, in innovation, in arming the American workforce and the American economy to be in better shape to take advantage of trade agreements. So I don't see them immediately reaching out and trying to start a new agreement with the European Union. Because as a general matter, everybody steps back from it and says, okay, if you had your choice between negotiating an agreement with the EU versus negotiating one with the UK, unquestionably, you would choose the European Union. It is way, way more significant a market, way more important for the United States, much more already existing trade and investment relationships between the U.S. and Europe than there is between the U.S. and the UK.

But again, I don't see that as a sort of political matter for the Biden administration to sort of start out. Which then you step back from it and then say, well, then what comes without a trade agreement? Is there something else that can be done? And here again, the concern is twofold. One is what's the else, and that may be clearly shoring up security relationships, reinvesting in NATO, rejoining the Paris Accord, rethinking about working with the EU with respect to Iran, possibly much more significant work with the European Union over a common approach to China. So there's a lot of other realms outside of trade where I can see a Biden administration really working very hard to shore up its relationship with the EU. In terms of the relationship with the UK, I think it will be second to the efforts to really reach out to the EU.

And on the other hand, we have to remember that right now as we sit here, there are a lot of trade irritants between the U.S. and the European Union that may get in the way of a good relationship. We have $7.5 billion worth of tariffs on European goods coming into the U.S. market because of subsidies for Airbus. Europe has $4.5 billion worth of U.S. good subject to tariffs because of our subsidies for Boeing. The French have put on a digital services tax, which is supposed to be in essence assessed at the end of this year, and the United States has said, if you put that digital services tax, which heavily falls on our companies, Google, Apple, Facebook, Amazon, that the United States will retaliate against the French digital services tax, and on and on. We have a whole series of trade irritants between us and the European Union.

So even though the Biden administration says we don't want to really do trade agreements right away, they are going to have to face these irritants sort of early right out of the box, which I think is going to mean lots more conversations, lots more negotiations, lots more engagement between the EU and the United States. And the big question for me is where is the UK in all of those discussions? Because I think that's much less clear as we sit here today.

MCMAHON: Matthias, anything to add to the transatlantic dynamic?

MATTHIJS: Yeah, from a domestic UK political point of view, you could say there's about 20 percent of Tory MPs who really would like a deal with the United States, but I don't think it's a big winner politically. It's not like the British people are waiting for a big trade deal of chlorinated chickens and pharmaceuticals that will enter the National Health Service market and even financial services. It seems like it's not a particularly good sell politically.

So where I do think there's gonna be a real divergence between the EU and the UK, which the U.S. may seek to exploit or not, is in dealing with China. The EU is very close to concluding a kind of investment agreement with China, which they hope to conclude by the end of the year. It's very important to the German presidency, who will benefit the most from this, Germany will. And you could see a UK-U.S. kind of common approach in dealing with a rising China when it comes to intellectual property, when it comes to investment and national security elements there. So there I can see, to what Jennifer was saying, the other aspect.

If it's not trade, what will it be? Because let's not forget, the good old days when we were talking about T-TIP and so on. It's not the Americans that walked away from this. It's Germany's domestic opposition from environmental groups, from consumer rights groups, and so on, that basically ended that agreement or the momentum behind the negotiations. And then now, of course, under the Trump administration was put on ice and I don't see it coming back. Because of course, there's lack of enthusiasm on the Biden side. But there's also lack of enthusiasm on the EU side for further trade deals.

MCMAHON: Thanks for the question, Tara. Julissa is there another question, please?

STAFF: We'll take the next question from Lee Cullum. Please accept the unmute now button. Ms. Cullum if you can–

Q: Got it, thank you very much. And thank you for this excellent session. It's the best I've heard on Brexit. I'm finally understanding that fisheries are not a trivial matter. My question is this. Ursula von der Leyen said a couple of weeks ago to her fellow states in the EU don't cut any side deals with the UK if this falls apart on December 31. Just stay put, stay quiet, because we want to get them back to the table as quickly as possible. I think Matthias you suggested that talks will continue. What can we expect if the show goes on?

MATTHIJS: You mean, Lee, if the show goes on beyond January 1?

MCMAHON: Lee, you can unmute yourself.

Q: Thank you very much. Yes, she seemed to be expecting and hoping the talks would continue immediately.

MATTHIJS: Yeah, that I think is a much more complicated proposition, right? Because you never know, you can never rule anything out of these negotiations. Because of course, if there's willingness on both sides to keep negotiating and avoid no deal and they decided this on December 30. Will they find a way? They usually seem to. It seems incredibly hard this time because there's no legal framework and again, of course, you're dealing with twenty-seven EU member states. But that I think has been actually the most frustrating part for Boris Johnson. I was actually reminded by Donald Trump in the beginning of his presidency when Angela Merkel came to DC. And he kept asking her like eight, nine times whether she would do a trade deal between Germany and the United States. And she kept repeating, well, Germany has no trade authority. The European Union does trade deals, they've been doing that for a long time. And at some point, Trump finally said, okay we'll do a deal with the EU if that's the case.

And so it's like Boris Johnson still kind of thinks that dealing directly with Merkel and Macron will be easier. And they keep saying, well, no. As Merkel said, thank God, I'm not negotiating, right, and she isn't. And so I think the Commission has been very effective there. If there is a break down, if they realize by December 30, that they're not going to get there, there is going to be I think, a very brief period of no deal. Where WTO tariffs come into place, rules come into place, where there is gonna be temporary shortages in the UK, and all that sort of stuff. And then I think there's gonna be a big political battle in the UK on what to do, because there's the hardliners that say we can weather the storm and WTO thinks it is, and at some point, maybe we'll start talking about a trade deal, but it's not what we want. So these are the types that really care about industrial policy.

And it's kind of the tragedy of Brexit is in a way that as industrial policy is becoming popular again, and everybody's wanting to do it, the EU is even embracing doing it. It's going to be very hard for the UK to do this on its own. And because it's much smaller from a kind of market point of view. And so then the question is how important is that deal with the EU? Of course, it is because of transportation of people, goods, and services and so on. But there is a possibility that they've decided, okay, let's do this. And they conclude one in the spring, and it actually proves to be easier, because fish can now be used to make an agreement rather than it's keeping them apart. But I wouldn't underestimate the diplomatic failure and the mutual recriminations that will follow from a no-deal scenario. I don't think it can last all that long because simply the UK needs that relationship with the EU. But I think it could get very ugly in the short term.

MCMAHON: Jennifer, I want to let you share as well.

HILLMAN: Can I only add what you're what you're asking, I think Lee, is basically let's assume we don't get a deal between now and the end of the year. And so then the question is, could you later, sometime next year or whatever, negotiate an agreement between the UK and the EU? And the answer, obviously, is yes. But whatever that agreement is, it's no question going to be far smaller than the relationship that the EU and the UK have today. And I think this has been made clear from the very beginning where the European Union said, hold on here, the single market is all four pillars, free movement of people, capital, goods, and services. And it seemed right from the get-go, that what drove the vote on Brexit was in part, a UK objection to the movement of people. In other words, the UK wanted to keep out or kick out the Polish plumbers, whatever words you wanted to put on that.

So whatever agreement might be negotiated a year from now or two years from now, if there is one, will look like a more traditional trade agreement, which will cover goods, maybe services. But again, services gets very tricky as part of a trade agreement, because with services inherently comes the issue of who has the right to regulate, because almost all services are regulated. And so the question is the UK prepared to accept effectively EU regulation over services in order to get that agreement. So whatever you end up with, if you don't do a deal now, is going to be far smaller, will probably not cover the movement of people.

And this is one of the ones where the UK is going to start feeling the pain of Brexit pretty soon, given how much everything from students to nurses to everything else, are heavily supplied by European nationals coming to go to school in the UK, coming to provide nursing services, medical services, etc. Those are heavily, heavily provided by EU nationals. And when you stop that flow, that's where you're going to see a big effect. But a trade agreement typically does not cover that. So we'll have to see where we end up but I think there's no question, if there is no deal by the end of the year, whatever the relationship is between the EU and the UK going forward, it will be less than, smaller than, their relationship right now.

MCMAHON: Thank you and just reminder this is a Council on Foreign Relations on-the-record virtual event on Brexit, and I want to get to as many as possible of you in the last ten minutes of this meeting. So Julissa another question, please?

STAFF: Sure. We'll take the next question from Michael Mosettig. Please accept the unmute now button.

Q: I know that we can only predict into the future so much, but following up on some of what you both have said–can Boris Johnson survive this? The one test that British voters do impose on governments is competence, far more than ideology or anything like that. And this government, not just the prime minister, but the rest of the cabinet have not demonstrated a high level of competence across the board. Now you have the country, we're three thousand miles away, I don't think we understand the misery, the sheer misery that's going on, and particularly tear for England at the moment. And also, we can never underestimate the Tory capacity for intrigue. I know we're way into the crystal ball, but where is this going?

MCMAHON: Matthias you want to field that?

MATTHIJS: Thank you, Michael, for the question. A couple of things. There are growing reports that Boris Johnson doesn't actually like being prime minister. It's too much work. It's too demanding. He doesn't get enough sleep. He doesn't like sitting in half the meetings he's in. It is much more fun writing a weekly column for the Daily Telegraph and being paid five thousand pounds for it every time and making fun of what's going on. And so there's that.

Number two is that there is a sense among a part of the Tory party, that he is incompetent, and that he needs to be replaced and that he was useful for them to get to win the election. He was useful for them to get through Brexit and get Brexit done. But whether it's the last promise of 2019, unite the country, he may not be the best person to do this. So absolutely. The rules of the Tory party are still there. If there's 15 percent of MPs who go to the 1922 Committee of backbenchers and submit their letter of lack of confidence in the prime minister, there is going to be a contest for a new Tory leader. So we can't rule that out. If it's going to be a dark winter, as it definitely looks like it's going to be.

That being said, it's not that they have that many Uniters on that party either. These are all people that had to write in blood their commitment to Brexit. And if you look at the opinion polls, actually, the latest poll, I saw five minutes before we went live on this meeting was that the Tories are up 2 percent. So figure that one out. Labour is stable at 38. The Tories are at 40 percent. So it's not that they're taking a severe hit.

On competence, though, I think what you'll see is the narrative that of course, they have their vaccines out, they're heavily vaccinating right now. And Europe is really struggling there. They have this kind of obsession with starting all at the same day. And that's now going to be December 29. And then it's now clear that they didn't sign enough contracts. And so they may have to be short of supplies. And if you compare this with the incompetent Trump administration and the incompetent Johnson administration, the U.S. is expecting to have more than one hundred million people vaccinated in a few months. In Germany, they're hoping to have ten million done of the eighty million people by the end of March.

So I think that is also something that will play in. And last point, is for better or worse, the U.S. and UK, they rebound very quickly from economic downturns. So when things do get brighter and better, they have very flexible labor markets, they have very flexible capital markets. So money flows in, confidence returns, they also are much more consumer driven. And so it's not unthinkable, that Boris Johnson who has been lucky his whole life, could still be lucky. That this time next year, we're saying, oh my god, I remember thinking that he was going to be replaced and it won't be the case.

MCMAHON: Thank you. Julissa, do we have another question, please?

STAFF: Yes, we'll take the next question from Rebecca Patterson. Please accept the unmute now button.

Q: Great. Thank you so much. Rebecca Patterson from Bridgewater. Trying to follow all this, it's my understanding that if we do get a free trade agreement that will not cover services and non-tariff barriers on some goods, and that we'll need to get new agreements on all these items. If we fast forward to this time next year, will businesses in the UK know what rules they have to work with or with these different deals we need to do across many, many different sectors and pieces of the economy keep a lot of uncertainty in the economy? I don't understand how long it's going to take for us to get there and I'd love your perspective.

MCMAHON: Jennifer, can you take that, please?

HILLMAN: I wish I could tell you how long it's going to take. But whether or not uncertainty will remain, I think that is very definitely, the answer is yes. British businesses simply already today, they do not know. Come January 1 if they ship an item to the UK, I mean to the EU, will they have to pay a tariff? Will it have to be inspected? What's the process? Many, many traders right now, again just on really basic things like where is the good made? Right now, because the EU is a customs union, anything that is made anywhere in the EU, with components from anywhere in the EU, qualifies as an EU-made good. And you don't have to fill out all these forms and declare what is the origin and declare what's the tariff classification of it. Now all of a sudden you do and half of these traders have no idea where their good is actually made under rules of origin, no idea what it's classified as.

So already, the chaos level is high, hence the ten-mile backup of all the trucks. Even if you get an agreement there is still going to be, again, a requirement for customs procedures and to go through normal trade facilitation, which again, huge portions of the trading community don't know what those rules are. The UK has tried to propagate training manuals and online videos and sample forms and everything else. But there aren't even what in the United States are freight forwarders and customs brokers. There are not as many of those human beings out there and trained, compliance officers with within each corporation. So yes, the chaos is going to reign for quite some time, I think.

On services again, we don't know yet. If there is a broad deal reached before the end of the year, it will probably cover services, which means that you will have some better sense of how services are regulated. If there is no deal, a separate agreement on how do we govern services is going to have to come into fruition. If there's no deal, trade in services will again be governed by the WTO rules, the General Agreement on Trade in Services, and the schedules that everybody has put into that General Agreement on Trade in Services at the WTO will govern whether or not any given service is tradable at all, what kinds of requirements are required. So you will have a fallback of the WTO provisions, which provides some measure of certainty. But again, what it doesn't provide is the kind of unfettered access that the companies are used to.

MCMAHON: And on that uncertain note we are going to wrap this meeting. We have cruised through an hour. I want to thank Jennifer Hillman and Matthias Matthijs so much for helping us try to navigate what is happening when it's still playing out, frankly. I would note that this meeting will be posted to CFR.org, we hope in short order and following that also, we would like to get a transcript up as soon as we can as well. But I want to thank Jennifer and Matthias and all of you on the call for your great questions and for attending this Council on Foreign Relations on-the-record meeting. Thanks, everybody.

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