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Brexit: Wheels Coming Off

Summary:
We’ve been quiet about Brexit because so many things have been happening on other fronts, and truth be told, because reporting has been thin. That isn’t necessarily due to a lack of newsworthy developments but that getting a good picture would involve things like interviewing haulers and farmers or at least their trade associations, and that means developing new sources, which equals work. But even adverse outcomes for the City are getting surprisingly little notice. Some of that may be Brexit fatigue. But many UK businesses are making surprisingly little noise relative to the pain they are suffering. Is that because they recognize or have been told that the Government simply is not going to petition the EU for waivers any time soon, so they are not wasting the few chips they have? We are

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We’ve been quiet about Brexit because so many things have been happening on other fronts, and truth be told, because reporting has been thin. That isn’t necessarily due to a lack of newsworthy developments but that getting a good picture would involve things like interviewing haulers and farmers or at least their trade associations, and that means developing new sources, which equals work. But even adverse outcomes for the City are getting surprisingly little notice. Some of that may be Brexit fatigue. But many UK businesses are making surprisingly little noise relative to the pain they are suffering. Is that because they recognize or have been told that the Government simply is not going to petition the EU for waivers any time soon, so they are not wasting the few chips they have?

We are therefore even more than usually dependent on our Brexit brain trust and Twitter. And we will stick to very broad strokes.

The Brexit Deal Was a Triumph for the EU

I have to confess to completely misreading the EU continuing to extend negotiating deadlines. I lacked the imagination to realize that it was because the EU had already settled many issues lopsidedly in its favor, and the UK was so clueless as to what the agreed sections of the pending deal that the EU had every reason to press on, that they had very good odds of doing well on the contested points. The notion that the EU kept extending its deadlines….for what? for fear of not getting a deal? for a desire to establish for history and maybe for smaller EU states that it had been more than fair didn’t seem sufficient reasons to go past the December EU Council meeting and into the Christmas holiday period. The lack of adequate reasons for the EU to be so indulgent nagged at me, but I didn’t have an alternate theory.

And the EU also gets kudos for being totally poker faced. Barnier regularly briefed the EU ambassadors who are an extremely leaky bunch. I would very much like to know how Barnier and his team kept from letting on how much ground they had taken. Perhaps they kept their updated to high level issues, where the degree to which they EU had secured advantages was evident only in the detail….which the ambassadors would see, but only when they received the final text as part of the approval process.

As PlutoniumKun said:

Everything I’ve read over the past week or so shows the agreement is full of little tripwires for British businesses or foreign businesses operating there. I’ve no idea if this was a deliberate strategy by the Commission – it would well be simply the inevitable outcome of a negotiation in which only one side was serious about details.

I think we’ll see if it was deliberate or accidental over the next few months by how the EU reacts to UK attempts to renegotiate details to fix the problems.

David replied:

I think it’s deliberate in the sense that the EU, which has had hundreds of specialists working on the detail, without being distracted by elections, Covid and so on, did what any sensible negotiating team does, and built negotiating fat into each of its positions. The normal assumption is that the other side turns up in much the same state, and during the negotiations you trade bits of your negotiating fat for bits of the other guy’s, and you arrive at a situation you can both live with. But of course the UK was a hopeless negotiating partner, and was exclusively fixated on a small number of politically visible issues. It’s not clear to me whether the UK never read large chunks of the Commission draft, or just didn’t care. But the effect was a 19-1 victory for the EU, rather than a 10-10 draw or something similar, which is what negotiating theory would have predicted between two teams who knew what they were doing. There are, as you say, all sorts of nasty surprises which would normally have been spotted and challenged, and in some cases negotiated away or neutered.

This is not necessarily a good thing, even for the EU. There’s a situation (it’s been called the Versailles syndrome) where one side is comprehensively shafted and everybody knows it. At that point, the legitimacy of the process itself starts to be questioned, and the hunt is on for “traitors” who “betrayed” the people. My impression from today’s news is that that process is now starting.

PlutoniumKun’s response:

The Versailles Syndrome may explain the remarkable silence of European politicians on the situation. For the Irish government, it was a triumph – they got pretty much everything they wanted (only a few fishing ports complained, but even that was half hearted). Arguably, they got more than they wanted, because so far as I can work out, the application of the phytosanitary provisions will give a clear advantage to Irish dairy interests over British ones in trade. But they haven’t said anything in public, apart from the usual welcomes for the deals. I can only explain this by an informal agreement among EU leaders to expressly avoid any triumphal statements, or even anything that could be interpreted as inflammatory.

Many (Too Many) UK Businesses Unprepared

Mind you, a certain amount of failing about and initial gear-grinding would have been inevitable for many player, given how late the deal was concluded. At a minimum, exporters would/should have prepared for a “no deal, so tariffs and quotas” and “thin deal, no tariffs and quotas” outcome. The Government was unhelpful by failing to prepare much in the way of guides, particularly on documentation….but where were the industry associations? Why weren’t they stepping up?

There was very little lobbying by business about Brexit, or even much pressure in the form of comments to the press about possible damage. The noteworthy exception was the Japanese automakers, who were early to speak up and uncharacteristically blunt. It was hard to fathom the lack of self protective action. Our experts believe that whether it was actually the case, many companies believed that if they spoke out, the Government would find a way to make their lives miserable.

The City did ask for what it wanted, equivalence, and kept nattering on about that even after the EU had said “nein” very early on. The whole spectacle of the City’s lobbyists occasionally nattering to the press when they had no seat at the table (services issues weren’t part of these negotiations, and services deals are vastly more complicated than trade deals and generally take years more to conclude) was bizarre. It was awfully reminiscent of the Monty Python King Arthur sketches, where the King gallumphs around Britain only to find no one has much respect for his rule. This appears to be due to neglect. As Colonel Smithers wrote:

The support, including funding and campaigning, for the Tories from the traditional City (shorthand for banks, insurers and fund managers and firms based in the square mile) has weakened since the turn of the century, especially as foreign firms have become more prominent and the founding families cashed out.

Much of the money for the Tories now comes from investment firms, often based in Mayfair, so not the square mile, and overseas or goes to proxies / allies like the Tufton Street think tanks. In some cases, the investment firms have employed think tank employees, e.g. Matthew Elliott, for political analysis, a cover to advance their interests.

Americans by contrast, recognize that if you want politicians to stay bought, you have to keep buying them.

But the reason many businesses were caught flat-footed is that they didn’t understand what getting a deal meant. They believed in cakeism, that the UK could leave the EU yet still enjoy no/low friction trade. This is rank incompetence.

To illustrate that there is no excuse for having been caught flat-footed. Speaking of the Japanese:

By contrast:

For instance:

From a policy person:

You get the picture.

Brexit Pain Is Underreported

Mind you, there has been some bleating. But what is noteworthy is that the noise on Twitter isn’t much making it through to the press. For instance:

This is odd because journalists are all over Twitter. It’s now acceptable to integrate tweets directly into article or mine their quotes. And if you want to look like you did more in the way of reporting, you can contact the tweeter and get more detail and contacts.

Admittedly, there have been some exceptions. From the Guardian last week:

Ministers must restart trade negotiations with Brussels immediately to sort out the “baffling” array of post-Brexit rules and regulations that now threaten much of the UK’s export trade to the EU, leading business groups have said.

Amid mounting anger among UK firms at cross-border friction they were told would not exist, British manufacturing and trade organisations met Cabinet Office minister Michael Gove in an emergency session on Thursday…

The prime minister had hailed what he claimed was a “zero-tariff” and “zero-quotas” deal that would allow free and simple access to the single market. Less than a month on, however, Britain’s EU departure appears to be anything but pain-free.

One leading figure involved in the talks with Gove described the new rule book as a “complete shitshow”. Another said Gove seemed “very concerned” at hearing reports of problems…

In the first week after the UK finally left both the single market and customs union, the parcels firm DPD suspended some of its services, bookseller Waterstones halted sales to customers in the EU and UK fishermen warned they would not be able to sell their fresh produce into EU markets because of delays at borders.

And yesterday in the Independent:

Exports to the EU will plunge by more than one-third because of Boris Johnson’s hard Brexit trade deal, a new study predicts.

Total UK trade will nosedive by 13 per cent, according to the London School of Economics (LSE) analysis, making a mockery of the government’s claims of a buccaneering “Global Britain” outside the bloc.

And Britons will feel the pain in their wallets and purses, with income-per-head forecast to fall by 6 per cent – just 2 per cent less than if there had been a no-deal Brexit.

The City is taking body blows. As soon as the transition period ended, €6 billion of daily trading in European stocks moved from London to the Continent. Vlade pointed out that that’s over 50% of LSE trading volumes. Bloomberg anticipates that fund managers (who to be buzzword-compatible, are typically in Mayfair, not the City) are next in line:

Fund managers in London have already seen stock-trading upended by Brexit. Now, they worry they could be next.

As the European Union weighs tighter rules on outsourcing key functions such as stock-picking, there’s a risk that management of some assets could be forced out of London, putting another dent in the city’s status as a global financial center. Firms in the U.K. handle about 1.4 trillion pounds ($1.9 trillion) for hedge and mutual funds in the EU’s main hubs of Ireland and Luxembourg — nearly half of all fund money managed in Britain.

The trade deal reached at the end of last year largely ignored financial services, and said nothing about this kind of outsourcing, known as delegation. Curbing this practice would impact the entire fund-management industry, from U.S. giants like BlackRock Inc. to U.K. and European firms such as Schroders Plc and Allianz SE, disrupting their long-standing business model and forcing them to move teams responsible for managing EU funds into the bloc…..

The extent of the threat is still unclear. It depends on how far EU regulators go…The goal of the European Commission, the bloc’s executive arm, is to prevent the creation of so-called letterbox firms that outsource so much business that that they can’t be effectively supervised or control their own operations.

Fund managers and lobbyists interviewed for this article said they think it’s unlikely the EU will resort to what one hedge fund executive called the nuclear option — forcing portfolio managers to relocate — because the current system benefits both sides. In the EU, delegation has helped tiny Luxembourg become the world’s second-largest fund center after the U.S., and fueled a tripling of assets held in Dublin over the past decade.

Still, the industry is lobbying hard behind the scenes to prevent major changes to EU rules.

Remember fish? Remember also how fisherman said they’d go bust if they were subject to 5% tariffs? The impact of the non-trade tariff barrier of more documentation looks to have the potential to kill them stone dead. From Reuters earlier this week:

Scottish fishermen have threatened to dump rotten shellfish outside the British parliament after their deliveries to the European Union were blocked by post-Brexit red tape….

Logistics group DFDS suspended its groupage export service – which allows multiple exporters to ship products in a single consignment – on Jan. 8.

It aims to resume the service on Jan. 18 after it clears a backlog, but it will take longer than before Britain left the EU.

To get fresh produce to European markets, logistics providers now have to summarise the load, giving commodity codes, product types, gross weight, number of boxes and value, plus other details. Errors can mean longer delays and French importers have also been hit by the red tape.

Fishermen in Scotland have stopped sending their boats out to fish. The Scottish government says the disruption has cost the industry millions of pounds in lost contracts, and meant lower prices at market.

And it’s not just fish:

On the Great Britain end, the trucking disruption means food shortages could be coming. And it’s not as if the EU hasn’t tried to help the UK:

From inews yesterday:

Fears over food shortages on supermarket shelves are growing as figures show French and German delivery companies are avoiding post-Brexit red tape at UK ports in record numbers.

Data from logistics software company Transporean show the number of haulage companies from Germany that are rejecting delivery contracts to the UK have more than doubled since the end of the Brexit transition period on 31 December. French trucking firms are rejecting three times as many UK deliveries.

This has led to around half the usual deliveries coming into the UK since the turn of the year, and is increasing fears of food and other product shortages in the coming weeks.

And the Daily Mail flagged a new spanner in the works, more stringent Covid testing. From a story yesterday:

France is demanding that truckers have Covid tests which can take 72 hours to give a result before being let in amid growing fears of further Dover chaos.

Last month the French government banned HGV drivers from crossing the English Channel in a desperate bid to prevent the spread of ‘mutant’ coronavirus detected in London and the South and East of England.

The unprecedented ban left thousands of lorry drivers stranded in Kent during the Christmas period and led to clashes with police at the border – only resolved when the UK gave drivers lateral flow tests which take 20 minutes to produce a positive or negative result.

But now the French government is worried about the accuracy of the tests and has called on the UK to introduce a fully saliva-based PCR test for the truckers, according to the Times.

Ministers, who are already drawing up plans to allow supermarket lorries to bypass queues at the Channel ports amid fears of food shortages in the UK, are concerned that the demand will result in gridlock at the border again.

The Road Haulage Association (RHA) said that drivers already queue for up to eight hours in the Waterbrook Park estate while waiting for approval for border paperwork. The park is being used for customs checks until March, when the massive 1,700-capacity Kent lorry park will then take over operations….

Meanwhile, Brexit disruption has lead to deserted ‘ghost ferries’ leaving for France, with boats on the Dover to Calais route which should be filled with HGVs and drivers eerily quiet – while many trucks are being held up at factories, warehouses and truck stops across the UK, rather than heading to Europe.

To be clear, the PCR test requirement isn’t just for haulers. France is requiring it of all entrants from the UK starting January 18.

And if this sort of thing doesn’t get straightened out, you’ll see haulers charging much more to go in and out of the UK…to the extent they are willing to come at all:

In other words, things are turning out to be just as bad as we expected. Remember we said repeatedly we’d rather not be proven right.

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