Into the Brexit Labyrinth

Jacek Rostowski *

After a year and a half of negotiations with the European Union, the British government is no closer to a divorce agreement than it was when it invoked Article 50 of the Lisbon Treaty in March 2017. Sooner or later, Britons will have to choose between self-destruction and no Brexit at all.

LONDON – Anyone familiar with M.C. Escher’s famous illustrations knows what it is like to lose oneself in the haunting infinitude of an eternally recurring maze. The British people are now enduring something similar, only without any of the Escherian precision or wonder.

Call it the Brexit Impossibility Maze. Prime Minister Theresa May marched boldly through the main entrance on March 29, 2017, when she triggered Article 50 of the Treaty of Lisbon. She has been wandering through a political and logistical labyrinth ever since.

SEEKING A DIRECTION

When one first steps into the darkness of the Brexit Impossibility Maze, one must walk forward until encountering a sturdy cross-hedge. At that point, one has a choice: take a sharp turn to the left, or follow a gentle curve branching off to the right. The first path leads toward the “framework for the final relationship” section of the maze; the second toward an “exit treaty” – which deals solely with the conditions of the UK’s divorce from the EU.

Those who turn left soon face the choice of turning more sharply left, toward the “Norway option” – that is, membership in the European Economic Area – or turning right, toward a free-trade agreement like that which the European Union recently forged with Canada. But there is also a third path leading toward a “bespoke deal” that contains elements of both the EEA and FTA options.

As May has now discovered in pursuing her “Chequers plan,” this tempting third path leads directly to a dead end. Since early July, May has been pressing for a compromise proposal that would keep British industry and agriculture in the EU single market and customs union while restricting the free movement of citizens and services between the two sides. The problem is that the EU has rejected her proposal outright, because it would undermine the complex compromises on which the bloc – and particularly the single market – has been built over the past 60 years.

Having hit this dead end, one must retrace one’s steps back to the three-way fork, which is now a two-way fork leading either to the Norway option or to an FTA.

THE GARDEN OF FORKING PATHS

One who takes the rightward path toward an FTA will soon encounter another dead end, only this one is more logistical than political in nature. After 45 years of EU membership, the British economy is bound to continental Europe by a vast network of deeply integrated supply chains. It would take 5-10 years to restructure the UK manufacturing sector so that it could operate within the confines of a new FTA.

Specifically, the UK and the EU would have to establish border checks and a new monitoring and regulatory regime to ensure compliance with newly divergent technical standards, reimburse value-added tax, check that tariff-free goods originate within the FTA, and levy tariffs on those that do not. All of this would make much of today’s “just-in-time” production in the UK unsustainable. But, given that the so-called transition period after March 29, 2019, will last only until the end of 2020, it is simply impossible to make British manufacturing “fit for purpose” in that time.

That leaves one no choice but to retrace one’s steps yet again, only now the two-way fork has become a single path veering leftward toward the Norway option. But, this being the Brexit Impossibility Maze, the third and final path also terminates in a dead end.

This is because Norway-style EEA membership – which would grant the UK access to the single market without any say in EU decision-making – is quite unacceptable to May, as it does not satisfy any of the “red lines” she recklessly proclaimed two years ago before acquainting herself with the complexities of European supply-chain integration. Moreover, it would probably also be rejected by the UK House of Commons, where there are enough opposition Labour Party MPs and anti-EU Tories to vote it down.

YOU CAN’T GET THERE FROM HERE

So now what does one do? The only option seems to be to return to the entrance and try one’s luck with the “exit treaty” path. Here, a formal withdrawal agreement could at least open the door to a “blind Brexit,” whereby the UK would leave the EU on March 29, 2019, without yet having decided on the “final framework” for after 2020.

Yet, needless to say, this path poses dangers of its own. The mystery over what a final Brexit might look like would leave British industry and foreign investors in a state of deep uncertainty. Investment would decline substantially. But with the other paths now closed off, one really has no other choice: exit treaty it is, then.

But where should one start? Upon taking this path, one soon comes to another three-way fork. Taking the center path would require one first to address the intractable “Irish border question.” The challenge is to establish a frictionless border between Northern Ireland and the Republic of Ireland, which will remain an EU member state subject to the jurisdiction of the customs union and single market. 

Alternatively, taking the rightward path would require one first to settle the matter of Britain’s financial commitments to the EU. The size of the UK’s divorce bill and the schedule for paying it still need to be finalized. Lastly, taking the leftward path would force one first to confront the vexing question of EU citizens currently residing in the UK. What rights will these four million people have after Brexit?

If one takes the rightward path and actually succeeds in resolving the issue of financial commitments, one will find that it then merges with the center path. But if one turns back and takes the leftward path instead, one will find that it, too, merges with the center. In other words, solving the twin problems of the divorce bill and EU citizens’ rights still will not settle the Irish question.

ALL ROADS LEAD TO IRELAND

Upon following the center path, one will soon come to another fork. Here, the choice is whether to have a hard border – meaning customs checkpoints and other “border infrastructure” – between mainland Britain and Northern Ireland, or to have no border at all between the UK and the EU. These are the only two options for avoiding a hard border between Northern Ireland and the Republic of Ireland – which, in addition to the obvious economic costs, could threaten the Good Friday Agreement, which has ensured peace between Protestants and Catholics in the north for nearly a generation.

Taking the first path – toward a hard border in the Irish Sea – would be unacceptable to a large segment of May’s Conservative Party and to the Ulster Protestants upon whom her government depends for its parliamentary majority. But taking the second path – no UK-EU border at all – leads straight back to the dead-end “Chequers” route, because the EU will not agree to the free movement of goods without the free movement of people. And though the EU would accept the Norway option, May has already indicated that she would not.

Still, let us assume that the Irish question could be resolved with a “standalone” deal or the introduction of “soft” infrastructure that would enable customs monitoring without a hard border. Even then, it is an open question whether Parliament would accept a “blind Brexit.” Pragmatic MPs surely will be asking themselves why they should take their country out of the EU without having any idea what arrangement will follow.

THE NUCLEAR NON-OPTION

At this point in the maze, one faces three more choices. The first is to take a torch to the hedges and try to clear a path to the center without getting burned. But this scenario – a “no-deal Brexit” – cannot end well. As we have seen, after 45 years of EU membership, Britain’s economy – especially its manufacturing sector – is more interwoven with the rest of the continent than British politicians and even economists seem to have realized. Of course, the same is true of all EU member states, but none of them is self-destructively leaving the EU.

To understand what this entails, consider a concrete example. Dozens of automotive parts producers have factories in Zaragoza (a rather drab city in Northeastern Spain) to manufacture small assortments of inputs that are then distributed by truck across the continent. Each part arrives at its respective destination “just in time” to be used in the production of a car.

These factories can be found in dozens of cities across Europe. Why are there so many? Because a modern car contains approximately 10,000 different moving parts. To produce all of the components for a single car in one place would require an urban agglomeration many times larger than Zaragoza (population: 750,000). Europe simply does not have manufacturing megacities of this scale (though some Asian countries do). This means that if European countries want to modern manufacturing industries, they must have just-in-time supply chains.

Moreover, this industrial structure allows each producer to reap the benefits of specialization and economies of scale. A factory might make relatively few items, but its production runs are long because it is supplying much of the continent. And because there are multiple suppliers for each part, the resulting competition drives innovation, reduces prices, and prevents monopolization and other inefficiencies.

Finally, because Europe’s just-in-time supply chains deliver small batches of inputs precisely when they are needed, producers have cut their working-capital costs dramatically. One Honda factory near the Southwest English city of Swindon stores its incoming shipments so briefly that it would have to cease production within 36 hours if supplies were disrupted. Honda fears that with the re-introduction of customs checkpoints after Brexit, European parts will take up to nine days to reach Swindon. The problem, notes the Financial Times, is that, “A warehouse capable of holding nine days of Honda stock would need to be 300,000 square meters – one of the largest buildings on earth.”2

Thus, a “hard Brexit” – withdrawing overnight from the single market and customs union in March 2019 – would have unbearable costs, especially for manufacturing workers (who, ironically, voted overwhelmingly for Brexit). If “Leave” politicians realize this obvious truth, they will never follow through with a no-deal Brexit. If they did, their supporters might cheer them on at first. But once the economic chickens came home to roost, the Brexiteers’ would be decimated at the polls.

LIGHT AT THE BEGINNING OF THE TUNNEL

If one has (sensibly) rejected the self-immolation option, then two alternatives remain. The first is to go back to the entrance, sit down, and wait for “something to turn up.” In practice, this means asking for successive extensions of the “transition period” beyond December 2020. Brexit will have happened, but the UK will still be subject to EU decisions, laws, and regulations. The difference is that Britain would no longer have a seat at the table in Europe, nor would it be able to enter into trade agreements with other countries – a prospect that Leave supporters hold dear. It would be de facto in the EEA, though informally and indefinitely.

This first option, then, is what the Brexiteer Boris Johnson would call “BINO”: Brexit in name only. The UK would, in his words, become an EU “vassal state,” but at least its economy would be spared a massive disruption.

The last option, assuming that one has grown tired of stumbling through a maze of insoluble dilemmas, is simply to walk out of the entrance and never look back. In practical terms, this would mean reversing the decision to invoke Article 50 and then holding a second referendum to abandon Brexit entirely.

The choice, Britain, is yours. /project-syndicate

* Jacek Rostowski was Poland’s Minister of Finance and Deputy Prime Minister from 2007 to 2013.