More on the Article 50 process

Kevin’s article in the Irish Times is excellent. In the post below I make some of the same points and some others.

The farce on Monday highlighted Theresa May’s political weakness. It has also, yet again, revealed that many of the Brexiteers (and also many commentators) simply do not understand what is going on.

Various UK commentators and politicians have called on the EU to compromise. For example the BBC reported that “David Davis has said the EU must be willing to give ground too if further progress in Brexit talks is to be made.” This seems to stem from a belief that the so called phase 1 ‘negotiations’ are conducted in the usual way of political negotiations, where each side gives in a little, and in the end some clever form of words is found whereby each side can claim they got their way. This is simply not the case here.

The Article 50 process is about establishing what the UK is going to do regarding their financial liabilities, citizens rights (here the UK will also want to establish what the EU intends to do), whether a hard border on the island of Ireland will be necessitated by the future actions of the UK and whether the Good Friday Agreement, an internationally binding agreement can be maintained.

It is important to remember that it is the UK that wants to deviate from the status quo, so it is up to the UK to spell out in detail what it wants to change. The EU will determine if this is satisfactory for them to move to phase 2 where the future relationship between the UK and the EU will be negotiated.

Determining whether the UK proposals on these Article 50 issues are satisfactory is a technical matter not a political one. Either regulations in the UK (or Northern Ireland) will differ or they won’t, either the UK will end up agreeing to tariffs with third countries that deviate from those in the Customs Union or they don’t. If the UK wants to move in a direction where an open border would undermine the integrity of the EU Single Market and Customs Union, then border controls will be necessary.

Whatever is agreed will need to stand up to legal challenge, e.g. when the first lorry load of chlorinated chicken or beef that entered the UK at lower tariffs than are due in the EU, rolls across the border – so some clever form of words won’t do. There can be no compromise or a la carte approach here.

What can be offered to ease some of the unfounded DUP fears, are assurances regarding the status of Northern Ireland as a part of the UK (unless of course, as is provided for in the Good Friday Agreement, a majority decide to change that).

The plea for some give from the EU side reveals another misconception among Brexiteers and that is that the UK is an equal partner in this. Instead it is by a long way the junior partner in the process.

The latest World Bank World Development Indicators shows that the UK is the 6th largest economy in the world. It slipped a place, at least in part due to Brexit, making France the 5th largest economy, but importantly the EU excluding the UK is almost six times larger than the UK in economic terms. The potential losses of a failure to agree a trade deal are also considerably more significant for the UK than the EU – over four and a half times those suffered by the EU (based on Lawless and Morgenroth, 2016, I also have estimates that put this seven times). Of course Ireland is something of an outlier but even here the impact on total trade is less than half that potentially suffered by the UK.

This coupled with the fact that the EU is the UKs largest trading partner, means that walking away from the process is a strategy that would maximise the self-harm to the UK economy, as this would mean that the UK will not get a trade deal with the EU. Of course a trade deal with the EU would be the quickest one to put in place and of course it would also cover the largest share of UK trade so it is also the most important one.

Brexit and the Irish border

As we get closer to the important EU Council meeting the amount of coverage on Brexit has increased significantly. Of course more noise does not necessarily equate to more content – there is a lot of uninformed opinion around.

There are some fundamental issues that need to be understood.

While we are talking about the border between Ireland and Northern Ireland, we are also talking about a future external border of the EU. That means the issue of the Irish border is very important to the EU and our EU partners and all have the same objectives – to avoid a hard border. Thus, the negative commentary directed at Ireland by Brexiteers and the Brexiteer press, apart from being mostly factually wrong, is badly misdirected.

Of course the impact of a hard border would be felt more by Ireland than in any other Member State (you can find analysis on this here), but the nature of the border is a crucial determinant of the integrity of EU Customs Union and Single Market, and is thus of crucial importance to the EU. This latter point appears not be understood by everyone. To illustrate the significance of the EU external border, and the Irish border will be that post Brexit, it is useful to consider an example:

The UK wants to sign trade deals with other countries, which presumably will give other countries access to the UK market on different terms than are available in the EU. This is why the UK wants to leave the Customs Union. If the UK allows beef from a third country into the UK at a lower tariff than the EU would charge and/or subject to less regulation than applies in the EU (as part of a trade deal), then this beef could enter the EU if there is no hard border. Of course with lower tariffs in the UK than in the EU exporters would move their product through the UK (Northern Ireland) into the EU.

This would mean that the UK would effectively determine EU external trade policy. The EU will not allow such a situation to arise – and neither should Ireland as such a situation is likely to have significant negative impact on Irish businesses and consumers (remember the regulations are there to protect consumers).

This means that the apparent offer by the UK, that there will be no regulatory divergence at least for Northern Ireland, will not avoid the need for a hard border as the issue of different tariffs is not covered by that offer. A hard border will only be avoided if the UK, or at least Northern Ireland, stay in the Customs Union and there is no regulatory divergence – there is no way around this! An offer to avoid regulatory divergence is not enough to move to the next phase of the negotiations.

Even a special status for Northern Ireland, where the border runs through the Irish Sea and where UK authorities ensure that third country products do not end up in the EU market, is problematic as it would be difficult for the EU to enforce the proper policing of that border, given that it is located outside the EU in a sovereign country.

Another important point relates to opinions about the use of existing or yet to be invented technological solution to police the border. A lot of the legitimate routine trade is already processed electronically, and could easily continue to be processed that way. But that does not remove the need to check that what is being transported is what had been declared, and more importantly border checkpoints are there to stop illegal activity. It is hardly credible that criminals are going to be declaring their trade via an online system!? Importantly, once the UK is outside the Customs Union illegal activity will not only encompass the usual things like drug smuggling but will also encompass shipments where the tariffs and duties due in the EU have not been paid or where the goods do not meet EU regulatory requirements. In the event that the UK is outside the Customs Union (tariffs) and Single Market (regulations), Ireland is obliged to police this border adequately, which means physical checks.

This brings me to my next point. It would be very easy for the UK to guarantee that it will not introduce physical border checks, but given the arguments I put forward above, what the UK would needs to guarantee is that the EU will not need to put in physical border check in response to changes introduced by the UK in the wake of Brexit, namely deviations from regulations, tariffs and tariff-quotas.

Finally, there is talk about some form of words being found that would allow negotiations to progress to the next phase. Again given the facts, what is needed are very concrete undertakings that would be legally binding and would avoid the need for a hard border i.e. that the UK will not leave the Customs Union and there will be no regulatory divergence. Without such undertakings the negations should not proceed to phase two. Importantly, this is the point where Ireland holds all the cards, and it would be great mistake to settle for anything less than such an undertaking.

Bogtec (continued)

The recently signed Memorandum of Understanding between Ireland and the UK on wind power has led to excited talk of tens of thousands of new jobs and billions in tax revenue and expert earnings. How realistic is that?

The Memorandum itself is silent on the implications of the deal. Pat Rabbitte and Ed Davey agreed to negotiate a treaty under the Renewables Directive. There are targets for renewables for all Member States of the European Union. Some countries will easily meet these targets, but most won’t. Under the Renewables Directive, Member States with a renewables surplus can sell this to the highest bidder or to an exclusive buyer.

Ireland may have more wind power than it needs. Ministers Rabbitte and Davey intend to enter into an exclusive agreement. This is obviously attractive to the UK. It is not obvious why Ireland would want this, rather than let the Brits compete against the French and the Poles. The first contours of the plan emerged shortly after the UK offered soft loans to bail-out Ireland’s public debt.

The UK cannot meet its renewables obligations. It cannot ignore these targets because the coalition is fragile enough and relations with Brussels already tense. Great Britain has plenty of wind, but people have effectively used the planning system to stop the erection of new wind turbines. So, the plan is to build turbines across the Irish Sea and transmit the power via a dedicated grid to England and Wales.

The Midlands are the leading candidate to build these new turbines. The plan is therefore known as Bogtec, after a similar plan involved the Sahara called Desertec. New wind capacity may amount to 5,000 MW. The current installed capacity is 1,700 MW.

Long distance power transmission is expensive. The East-West Interconnector cost 600 million euro. It has a capacity of 500 MW. Similar interconnectors elsewhere cost 200-300 million euro. Assuming that the Brits will not pay for gold-plating, the bill for the undersea cables alone would be 2-3 billion euro.

The delayed new North-South Interconnector will have a capacity of 400 MW. People are already up in arms against the planned pylons. Transmission from the Midlands to the sea will need 12 times as many pylons.

The potential benefits of Bogtec for Ireland are unclear. The more optimistic estimates aim to impress voters and politicians. Wind power does not generate a lot of employment. Estimates often ignore the jobs lost in thermal power generation, and the jobs destroyed by dearer electricity and higher taxes. There certainly are jobs in “sandwiches and concrete” as Pat Rabbitte put it. The more attractive jobs, however, are in manufacturing and in designing new turbines. There is overcapacity in wind turbine manufacturing, so companies would hesitate to build a new plant in Dublin Port – even if Ireland would suddenly discover its talent for mechanical engineering.

Export earnings depend on the selling price. The REFIT tariff in England and Wales is 25 c/KWh for small suppliers. The retail price of electricity is only 18 c/KWh, the wholesale price 6 c/KWh. If Irish wind farmers are paid the wholesale price minus the cost of transmission (2 c/KWh), revenue will be around €0.5 billion per year. Higher revenues will be at the mercy of the generosity of British subsidies.

If manufacturing jobs are in Denmark and revenues low, the government will not see much tax revenue. No royalties are paid on wind. Bogtec does not appear to be a great deal for Ireland.

Wind farms have real costs. They can spoil the landscape, affect wildlife, and disturb people living nearby. Do the benefits outweigh the costs?

There is not much information on Bogtec. The government has yet to publish an impact assessment, but it protests only meekly against the fantastical claims put forward by companies hoping for subsidies. Evidence is not the strongest point in Ireland’s energy policy. Paul Hunt has shown that energy policy in Ireland is run for the benefit of the state-owned energy companies and their workers, Minister Rabbitte disagreed. Mr Hunt’s analysis is based on data. Mr Rabbitte promised data, but has yet to deliver.

People that could be affected by the new turbines fear that planning regulations will not protect them. Indeed, Bogtec exploits the difference in planning between England and Ireland. The UN has ruled that Ireland’s National Renewable Energy Action Plan violates international planning standards. The High Court has agreed to hear this case in March.

Bogtec is a good deal for Britain.* Is it a good deal for Ireland too? We need to know before we proceed. Why is an exclusive deal with the UK better than selling to the highest bidder?  Is Bogtec related to the bail-out? Will the Irish government or state-owned companies invest money in Bogtec? What is the expected rate of return? What if UK subsidies are less generous? Will planning properly protect households? In the past, the Irish government repeated sleepwalked into a bad deal. It is time to kick that habit.

* Well, it is a good deal for Britain given the corner it has painted itself into. Without political constraints, the best solution would be to ditch the Large Combustion Directive and replace coal with gas over a 15 year period or so.

America, Britain and Europe

I see that some people in Britain are in a bit of a kerfuffle about recent indications that the Americans would not be pleased if they left the EU. So it seems appropriate to quote at length from a well-known passage by Miriam Camps (1964, pp. 336-7):

Early in April [1961], Mr. Macmillan went to Washington for talks with the new Administration. Although he had met the new President at Palm Beach in connexion with the Laos crisis, the April visit was the first opportunity for a general review of common problems, and Britain’s relations with the Common Market was obviously one of the matters which Mr. Macmillan wanted to discuss. The available evidence suggests that Mr. Macmillan asked Mr. Kennedy a hypothetical question: ‘What would be your reaction if we decided to join the EEC?’ and that he was given an enthusiastic affirmative answer. There is no evidence to suggest that Mr. Macmillan was ‘pushed’ by Mr. Kennedy, as was alleged, and denied, at various times. But it is clear that Mr. Kennedy left no doubt in Mr. Macmillan’s mind that a British decision to join the Six would be welcome and that Mr. Macmillan left Washington convinced that, far from straining Anglo-American relations, Britain’s joining the Community might well lead to much closer and more far-reaching transatlantic links than the British could hope to achieve in other ways. The reflection that the shortest, and perhaps the only, way to a real Atlantic partnership lay through Britain’s joining the Common Market seems to have been a very important — perhaps the controlling — element in Mr. Macmillan’s own decision that the right course for the United Kingdom was to apply for membership. Mr. Kennedy’s warm response undoubtedly strengthened Mr. Macmillan’s own conviction that joining was the right course of action and encouraged him to continue his efforts to bring the sceptics in the Cabinet to accept this view. Also, like the discussions with General de Gaulle and Dr. Adenauer earlier in the year, the discussions with the United States Administration underlined, once again, the fact that ‘association’ arrangements were not likely to be negotiable. It was clear that the United States was prepared to accept the additional commercial ‘discrimination’ against itself because of the political advantages it saw in British membership in the Community, but that it would be hostile to arrangements short of membership which, in its view, would simply increase ‘discrimination’ but would not, like full membership, add to the political stability of the Community or strengthen the ‘Atlantic’ orientation of the new power-complex the Six were clearly coming to be.

Economic Foundations of Irish Foreign Policy

I was asked to write this chapter for a forthcoming RIA volume on Irish foreign policy. A summary:

A country’s foreign policy is largely driven by what it perceives to be in its economic interests. That this does not provide a complete picture is evidenced by the fact that Irish development assistance has never taken the form of tied aid. Nor can the influence of powerful vested interests be discounted. A case can be made that Ireland turned protectionist again once membership of the European Union had been achieved. Agricultural and sheltered-sector interests have sought to stymie the liberalisation efforts of the WTO and the European Commission respectively. A further complicating factor is that a society’s own economic interests can occasionally be miscalculated. Joseph Lee has noted that “while the ‘political’ skills of Irish representatives in negotiating positions are widely acknowledged… there seems to be no comparable criterion for assessing the calibre of conceptualisation of the Irish case.” Irish foreign policy through the years has nevertheless recorded many successes in defending the economic interests of the citizens of the state.

The paper considers the political and economic determinants of Irish trade policy, the evolution of its inward foreign direct investment strategy, and the country’s position on international migration and on the broadening and deepening of European integration. A separate case study focuses on how successive governments have sought to defend and exploit the advantages of Ireland’s low corporation-tax regime in international negotiations.

Gratuitous book recommendation

How will the international community respond to the challenges of a rapidly changing world? Will we see deeper and more sustained cooperation, or a reversion to crude power politics? To answer such questions, it is natural to turn to the international relations literature. I’ve just read Dan Drezner’s little introduction to the subject in one sitting, and if there’s a funnier social science book that has been published in the last couple of decades I’d be interested to hear about it.