(Bloomberg Businessweek) -- In the weeks before the Dec. 12 election in the U.K., a team of consultants decided to test a question with focus groups to try to understand the public mood. In a number of marginal constituencies, places where the election would be won or lost for Boris Johnson’s Conservatives, participants were given a version of Trump’s 2016 campaign slogan: “Make Britain [What?] Again.” They were asked to fill in the blank.
The answer that came back most frequently was “normal.” Make Britain normal again.
Johnson’s resoundingly successful campaign was driven by just these sorts of focus groups. His slogan, “Get Brexit done,” perfectly captured the popular despair with gridlock and division. The result: The Conservatives have an 80-seat majority in Parliament, giving him a legislative freedom neither he nor his predecessor, Theresa May, enjoyed before. How he uses his power will determine the kind of Brexit—and future—Britain gets.
Brexit would end 46 years of close economic integration with the European Union, so that’s not exactly normal. But like Brexit itself, normal can mean different things to different people. For some, it means simply not discussing the B-word at all—preferably ever again. For others, it may mean a return to a time when wages were growing, shopping centers were buzzing, and the country was admired around the world instead of pitied or ridiculed.
“The backdrop to this election was a feeling of gloom and pessimism,” says Deborah Mattinson, co-founder of strategy consultant Britain Thinks, which ran the focus groups. Normalcy is about a sense of calm and purpose. “It’s more of a mood state than to do with any economic specifics.” That, at least, gives Johnson some room to work with.
In the most basic sense, delivering Brexit through Parliament is now straightforward. Johnson is expected to get his terms for the divorce—known as the Withdrawal Agreement—through in short order, which means the U.K. will leave the EU officially by Jan. 31 and enter into a transition period. The hard part, however, is what comes next in the relationship with the EU. “The whole focus in the election was on the next months and getting the Withdrawal Agreement through. That’s not a problem anymore,” says Jill Rutter, a senior research fellow at a think tank called UK in a Changing Europe. “It’s much less clear where he wants to end up long term.”
Rutter lists a range of trade-related questions that will have to be sequenced and discussed, all with an eye to other agreements Johnson wants to do, particularly with the U.S. “They’ll have to be playing a kind of double game—what can they agree with the EU and what does that do to limit their room for maneuver on other agreements,” she says. “Most of these other countries will reckon that the U.K. is not worth spending this time and effort on until it sorts out its relationship with the EU.”
Johnson’s room to maneuver is limited, that is, if he intends to honor some of the checks he wrote along the way to victory. To appease the hard Brexiters in his own party and win over supporters of Nigel Farage’s Brexit Party, Johnson pledged to conclude a trade deal by the end of 2020 rather than take advantage of a provision that allows him to extend the negotiating period by up to two years. Most trade agreements take years to put together; but even assuming both sides lawyer up and sit down in short order, serious negotiations are unlikely to begin before March. That leaves very little time to work out the future of a trading relationship worth more than £648 billion ($856 billion).
Johnson also vowed to give the U.K. maximum freedom to pursue its own rules and regulations post-Brexit, resisting the EU’s demands for a so-called level playing field, which include aligning on areas like environmental regulations and state aid. The Union fears that a low-tax, regulation-lite Britain will rise—Singapore-like—from the ashes of Brexit to suck talent and investment away.
The easy part of a trade deal, relatively speaking, is goods trade. The EU would likely be prepared to remove tariffs and quotas on goods with some commitments on level-playing-field provisions from the U.K. And Johnson may be willing to make some concessions in the name of a quick deal. But zero-tariff trade doesn’t mean zero-hassle trade. Customs and regulatory checks impose a new layer of costs. Rules-of-origin requirements—limits on what portion of a good entering from another country must have been made in that country to qualify for zero tariffs (or whatever has been agreed)—could be devastating for a number of British industries, including the auto sector, which contributes £18.6 billion to the economy and supports 168,000 workers.
Raoul Ruparel, May’s former special adviser in Europe, notes in a recent paper for the Institute for Government that the data for levels of “local content” isn’t even available for many goods. In the existing manufacturing supply chains between the U.K. and the EU, goods can cross borders multiple times before they’re complete without any rules-of-origin documentation. How will negotiators even know what to ask for in different sectors without that information?
Then there’s services trade, which is generally excluded from trade deals, or barely covered. The U.K. has a trade deficit with the EU in goods, but a £28 billion surplus in services, which accounted for 41% of exports to the Union in 2018. The U.K.’s coveted financial-services sector, which makes up just over half of British services exports to the EU, supports more than a million jobs. The non-binding political declaration that forms the basis of the future trade negotiations makes only a brief mention of financial services. It’s unlikely the EU, which is eager to build up its own financial centers, will concede much on the issue.
Johnson has signaled his determination to stick to a quick exit, even rewriting part of the Withdrawal Agreement Bill to “legally prohibit” a delay beyond the end of next year. That will limit the scope of any agreement and means much of the time will be taken up with negotiating about negotiation—with little time to hammer out a treaty that covers more than the basics.
The EU will want commitments on access to British fishing waters and level-playing-field provisions, as well as a quick deal on tariffs and quotas. It will also likely insist the U.K. accept restrictions on the use of place names and product descriptions called geographic indications (think Champagne or Parmesan cheese), which may complicate a trade deal with the U.S. The time pressure could result in no trade agreement being done at all.
The trade-offs for Johnson are clear: the faster a deal with the EU, the harder the Brexit—that is, the greater the economic costs. One attempt to project the impact on the country’s gross domestic product by Rutter’s UK in a Changing Europe concludes income per capita would be 2.5% lower under the deal Johnson has before Parliament than May’s rejected proposal. A Bloomberg Economics analysis also suggests the U.K. economy would be smaller under Johnson’s Brexit deal compared with any option other than leaving in 2020 with no EU trade deal at all and trade conducted under World Trade Organization terms. The irony is these costs would bite hardest in the northern constituencies Johnson has just won over from the Labour Party.
Nothing Johnson can get will be easily sellable as a great achievement, especially the more people learn about customs and regulatory checks. The political and economic costs of the new customs border along the Irish Sea under Johnson’s deal—though he repeatedly refused to acknowledge them on the campaign trail—are another potential source of backlash. (In fact, the greatest hope of a sensible deal for Johnson would be if the entire country simply tuned out the minutiae. It’s possible they will.)
Still, the Brexit that comes with a speedy trade agreement, while it would impose medium-and long-term costs, would not be as chaotic as a no-deal divorce. If the only trade deal Johnson can get by 2020 is a de minimis one with few benefits, then he may decide it’s easier to bill it as an amicable separation, retain the U.K.’s complete freedom to go its own way, package the split as sovereignty-enhancing, and blame the EU for any hardships. Holding the line on Brexit may also be Johnson’s insurance policy for the next election, in 2024, a way to fend off the euroskeptics who will no doubt find something to gripe about, whatever deal is struck.
To be as successful in office as he was campaigning for it—that is, to keep his northern voters on his side in the next election—Johnson will have to deliver both Brexit and tangible change in their lives. So the tougher the economic conditions that result from Brexit, the higher the price Johnson will have to pay out of state coffers to cushion the blow in his new northern heartlands. That may betray his traditional political base—composed of small-government fiscal conservatives who backed the unpopular austerity policies of the past decade.
It will be hard to both dispel distrust and deliver on pledges that relied, in large part, on glossing over the costs ahead. Johnson won his historic parliamentary victory by being shrewdly tactical. For his first big decision after the election, he may instead have to figure on a strategic move: How close a trading relationship with Europe does he really want and how big an economic price is he willing to pay for the separation he promised? In other words, Johnson has to define not just Brexit, but Britain’s new normal.
Therese Raphael is a columnist for Bloomberg Opinion.
©2019 Bloomberg L.P.
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