Brexit: the ‘Sunderland Option’

Below are to be found:

(a) the introduction to the paper “Brexit and the Single Market”, which was first published in July 2016. http://www.rpieurope.org/Publications/Yarrow_Brexit_and_the_single_market.pdf. 

(b) a section of the paper’s text located under the heading ‘Response speeds and asymmetries of power’, included now (28 July 2019) because of its potentially very high salience in current circumstances (on first publication it was scarcely noticed), followed by a few comments on the reasons for its suddenly elevated salience.

In my mind I think of it as the ‘Sunderland Option’ because it was conceived in the minutes following the Sunderland referendum declaration at around 00.20 on 24 June 2016.  The sentiment was: “OK, that’s a definitive answer from my home city and the task now is to figure out how to satisfy these aspirations in the best way possible.”

Looking back now (July 2019), the one big thing I would change in the text would be to make a very firm distinction between what are, in fact, two variants of the ‘Single Market’ that have subsequently been conflated: the EEA and the EU Internal Market. Speaking roughly, the former is aligned with Mrs Thatcher’s vision of the Single Market and the latter with Mr Delors’s vision.  The UK will exit the latter automatically upon withdrawing from the Treaty of Lisbon, but will not automatically exit the former.  The act of Brexit will therefore automatically separate the wheat from the chaff . The ‘Sunderland Option’ in effect says “hang on to the wheat: it will be of considerable value in seeing us through the next period”. 

 

Preface to “Brexit and the Single Market”

Summary of main points

The UK is currently a Contracting Party to the European Economic Area (EEA) Agreement, and exit from the EU does not necessarily imply exit from the Single Market (i.e. withdrawal from the Agreement). Exit from the EEA would require that extra steps be taken, either unilaterally by the UK or by the other Contracting Parties to the Agreement.

There is no explicit provision in the Agreement for the UK to cease to be a Contracting Party other than by unilateral, voluntary withdrawal, which requires simply the giving of twelve months’ notice in writing (Article 127). A commonly held assumption that only EU and EFTA members can be Parties to the EEA Agreement – and hence that the UK has to be a member of one or other of these two organisations to be in the Single Market – is not well grounded, although UK consideration of an application for EFTA membership is an option well worth exploring in its own right.

In the absence of a prior withdrawal notice or of steps by other Contracting Parties to try to force UK exit (of a nature not yet identified and not necessarily feasible in the light of the Vienna Conventions on the Law of Treaties and on Succession of States in respect of Treaties), on Day 1 of the post-Brexit era the default position appears to be that UK would still be a Party to the EEA Agreement.

This has major implications for any future negotiations. For example, with continuing UK participation there would be no requirement for an application for “access” to the Single Market.

Should the UK choose not to withdraw from the EEA there would be need for some textual adjustments to the Agreement, if only to reflect the UK’s changed status as a non-EU Contracting Party. The more substantive implications of continuing participation concern the operation of the institutions supporting the non-EU Contracting Parties – Iceland, Liechtenstein and Norway – not the EU institutions. Early discussions with the governments of these three countries are indicated: they need not await Article 50 Notification.

Continued participation in the EEA following Brexit would see substantial repatriation of powers covering the areas of agriculture, fisheries, trade policy, foreign and security policy, justice and home affairs, taxation, and immigration, consistent with the strong desire of many Leave voters to ‘take back control’. It would, for example, give the UK freedom to negotiate its own trade deals and set its own tariffs, as well as dispensing with the egregiously protectionist common agricultural policy.

Immigration is the most vexed issue, not least because of the difficulties in establishing a reasoned discourse on relevant matters. The underlying problem concerns the interpretation and application of the principle of free movement of persons, in respect of which EU political leaderships tend to favour a rather fundamentalist, ‘non-negotiable’ position, motivated by the goal of political union.

The EEA Agreement does not treat the ‘four freedoms’ (of goods, persons, services and capital) as absolutes. In each case it provides for limitations to be imposed when justified by some other aspect of public policy. Importantly, for non-EU Contracting Parties to the EEA Agreement the ‘decision maker of first instance’ is the relevant State, not the European Commission.

The commercial aim of the EEA Agreement affects the interpretation and application of the free movement principle in consequence of its significance when determining what measures can or can’t be justified. A ‘political’ interpretation and application of free movement of persons is not well adapted to the aim of the EEA Agreement set out in Article 1(1). Given this misalignment, free movement of persons is almost inevitably a highly contested issue.

Nevertheless, the Agreement provides scope for unilateral action on free movement of persons that is not currently possible for the UK as a member state of the EU. Post-Brexit the Agreement would allow scope for at least some degree of re-alignment of interpretation and application of the free movement principle to better fit with commercial policy objectives.

In relation to budgetary payments by the UK, the default position appears to be a zero contribution from Day 1 of the post-Brexit era, if the UK opts not to withdraw from the EEA Agreement. This again affects the negotiating position. If the UK subsequently agrees to make financial contributions it should expect a quid pro quo, for example increased influence in the rule-making process for the Single Market and/or more explicit recognition of greater flexibility in the interpretation and application of the free movement of persons principle (whilst still pledging allegiance to the principle itself). Such developments would also be of benefit to the other non-EU Contracting Parties, and arguably to EU Contracting Parties as well.

Crucially, the EEA Agreement does not foreclose future policy developments of the types suggested by those who favour immediate exit from the Single Market: it simply leaves those other options available for future consideration and possible adoption, allowing ‘market testing’ of new policy approaches in the interim. On this basis continued participation in the EEA Agreement can be said to be sufficient unto the day.

Such optionality coupled with the faster response speed of the UK governance system amounts to an asymmetric competitive advantage over the EU in policymaking, which serves to counteract the asymmetric disadvantage of smaller market size. The overall imbalance in power in Single Market rule-making is therefore somewhat less than it might appear at first sight.

The aim of the EEA Agreement (set out in Article 1(1)) is highly consistent with the longstanding aims of UK commercial policy, steady and dogged pursuit of which could be a stabilising factor that, inter alia, serves to reduce political uncertainty in markets.

 

From the section headed ‘Response speeds and asymmetries of power’ 

…  A second identifiable factor is the relative response speeds of different Contracting Parties in the face of unwanted conduct by others, i.e. the speed with which they can adjust their own policies in reaction to unwanted conduct by others. A fast response speed is a distinct advantage to whoever can command it. If the possessor is a dominant economic agent, it tends to reinforce the asymmetry of power and provide greater incentives for the use of that power; if the possessor is a weaker economic agent, it tends to mitigate the asymmetry of power and give rise to weaker incentives to use that power in the first place.

The UK’s governance arrangements can, when needed, be remarkably speedy by international standards: the system has what might be called a low inertia mode that can be switched on when circumstances dictate. In contrast, EU rule-making is a relatively cumbersome and slow process, which is unsurprising and difficult to avoid in a structure with so many members with differing interests. …

Comments

Game theory provides a conceptual framework for strategic thinking in the military arena as well as in economics and indeed one of key readings for my own postgraduate lectures in the 1980s used to be Thomas Schelling’s ‘The Strategy of Conflict’.  That highly readable book (with a central theme deriving from Odysseus and the Sirens) was concerned mostly with US cold war strategy, but the shared conceptual framework is indicated by the fact that Schelling was subsequently awarded the Nobel Prize in Economics.

In the military field the importance of differential response speeds in determining outcomes has been particularly emphasised by the US Air Force strategist John Boyd, who argued that a key strategic advantage flows from being able to create situations in which it is possible to make appropriate decisions more quickly than opponents. 

‘Brexit and the Single Market’ pointed out that such a situation was already established at the outset of Brexit negotiations: it didn’t need to be first created by other strategic manoeuvring and that fact allows for a great simplification.  To be turned to advantage though, it would be necessary first to ‘flick the low inertia switch’ (since in most circumstances UK governance sits in a high inertia mode). The tragedy of the last three years is that that was never done.  

There are two immediate reasons why these points are , quite suddenly, highly salient:

  1. With arrival of the new Government the switch has been flicked (arguably because it became necessary for the survival of the Conservative Party in anything like its current form).
  2. Dominic Cummings is deeply familiar with the work of John Boyd.

 

Author: gypoliticaleconomyblog

Lifetime student of political economy, retired academic and regulator.

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