Neither the FX market nor most commentators are taking at face value Boris Johnson’s statement on October 16th that “trade talks [with the EU] are over”. While I would definitely agree with this sceptical view of what Johnson says, this is not even my main reason for reiterating that a UK-EU Free Trade Agreement (FTA) is inevitable.
To start with the sound basis for discounting the Johnson tough talk, negotiating brinkmanship is routine and necessary. The threat or semblance of walking away makes the eventual deal seem all the more of a hard-fought triumph, while also helping to camouflage the concessions required by the give-and-take involved in any deal. And it is only a show of toughness. Johnson’s gloss on the talks being over was that there would only be any point continuing them if the EU were ready for a rapid negotiation “on a legal text”. Well that’s a low bar: the EU is a champion producer of legal texts! So the talks will continue this week, after Michel Barnier arrives in London with a briefcase full of legal texts. Given that prospect, the rhetoric from Johnson on Friday 16th October will have helped ease him around the corner created by his own previous statement (in September) that Thursday’s EU Summit was the deadline for concluding a deal.
Turning to the main reason for sticking to the "Inevitable FTA" view: this is not based on an opinionated judgment call. By “judgment” here I means views like “the chaos and economic harm of a no-deal would be too much for the UK government to bear politically, especially amid the second Covid-19 wave”. While such statements may sound pretty reasonable, they are just views, which may prove correct or not. Instead, we are focused on certain practical, legal and ‘hard’ political consequences of there being no FTA that would force the UK government to continue negotiations on an FTA even if, as is possible (but still unlikely), the end-year deadline for sealing this deal were to be missed. These consequences include:
- (‘hard’ political): alienating the US (especially if Biden wins) over the Irish question, and a UK-US trade deal shelved until this matter had been resolved;
- (‘legal’): the UK would be sued over treaty breaking and, even if that might be tolerable for a time, the UK would have an open trade border with Ireland and hence, under WTO rules, with the whole world. Any UK import tariffs could be challenged by anyone.
- (‘practical’): the UK would be forced to the negotiating table over temporary and emergency arrangements on absolute essentials like continuing civil aviation links between the UK and the EU.
With negotiations bound to continue, and even if the parties were to be formally negotiating something other than a FTA, they would always in reality be getting back to the FTA agenda. To sum up: while there can be no guarantee that the present talks won’t “dribble into failure” (as one journalist put it), the talks would promptly start again.
This is why in our freshly published Asset Allocation report we say that “we are positive sterling this month”.