Brexit: Ratcheting up the pressure for a trade deal
"There are only three people who understand it: one is dead, one has gone mad, and I have forgotten." This was the famous joke by Lord Palmerston about the Schleswig-Holstein Question.
Faisal IslamEconomics editor@faisalislamon Twitter Ahead of Boris Johnson's fateful dinner date in Brussels, it would be tempting to apply it to the "ratchet clause" - what I'm told is the kernel at the centre of the nut that needs to be cracked in the post-Brexit trade negotiations. Indeed, the PM's carefully scripted prepared words at the beginning of PMQs hint at the problem and the solution. "Our friends in the EU are insisting if they pass a new law in the future with which we in this country don't comply or follow suit, then they want the automatic right to punish us and to retaliate," he said. But actually, it isn't that complicated. The UK and EU negotiators have, I understand, agreed to "non-regression" on its standards for trade. Broadly, the same standards that now exist over workers' rights, the environment and climate change will continue. They will form a base below which both sides will not "regress" or fall. This is a level playing field, and there is no argument that some sort of arrangement like this will be in the document. Some in the UK will find this controversial. For them, the very point of Brexit was to undercut EU rules and regulations. The answer is that we will be able to, but that would be subject to retaliation by the EU (and vice versa) which would have the power to restrict UK trade. Cross-retaliation But what happens if and when those standards increase? In the past, for one area of the Level Playing Field - subsidies for companies known as state aid, the EU insisted that the UK should keep up with the evolving EU standards - what is known as "dynamic alignment". The EU's original position is that these would be enforced by its institutions too. That has been dropped in negotiations since the summer. Instead, the discussion had centred around a "ratchet" clause. If both parties raise standards, that forms the new baseline, below which either nation can retaliate. It provides a disincentive to diverge, so potentially, a profound one. But each side has a sovereign choice: whether to keep standards in step or to diverge with consequences. That, though, was rejected by the UK in the summer. The basics What happens next with Brexit? So the EU came back saying that if a common system is not acceptable, then both sides should have a sovereign unilateral right to hit back against future divergences even more strongly. "Cross-retaliation" is now considered as an essential power - so if one side undercut the other on say, aircraft components, the other could hit back on car exports. This was seen as a one-sided ratchet clause by the UK and a necessary "evolution clause" by the EU. As German Chancellor Angela Merkel said this morning: "We not only need a level playing field for today, but also for days to come. "For this, we need to find agreements about how each side can react when the other changes their legal situation. Otherwise there will be unfair competition conditions, which we can't do to our companies." So it is at the heart of the problem. Sovereign right Now let's return to the PM's words: "If they pass a new law in the future." That sounds rather like setting your own bar for a negotiating win. It is rather easily dealt with, by adopting the original form of the clause where both sides have to agree to raise the baseline in standards. So there is very legitimate debate about whether the UK would want to be constrained in this way. But to be clear, both the UK and the EU would have the sovereign right to diverge from the current baseline of standards and from mutually agreed higher standards. It's just that the divergence (and each side would have to show that the divergence distorted trade) could then see a proportionate retaliation, in terms of trade tariffs and taxes. The problem is plausible, but also a hypothetical, about which it is difficult to conjure concrete examples. It is about the risk of future retaliatory tariffs. The question for both sides is whether seeking to avoid the future possibility of such action justifies guaranteed widespread tariffs in 22 days' time. "Ratcheting" up the pressure on this could yet have created the space for a deal.