Brexit Tearing of FlagsThe new Prime Minister of the UK, Boris Johnson, has taken up office following his decisive (66% : 34%) victory in the contest among Conservative Party members who were presented with a choice between him and the Foreign Secretary, Jeremy Hunt. He promised during the campaign to take the UK out of the EU by 31 October (when the extension to the Article 50 Brexit process expires) “do or die”. In his first speech as PM, he again underlined his determination that the UK should leave the EU by 31 October. He said that his intention was that this should be with a new deal – “no deal” was a remote possibility which would only happen if the EU refused to negotiate. But it was right to intensify preparations for “no deal”, which could be lubricated by retaining the £39 billion financial settlement previously agreed with the EU.

So the starting gun for the next phase of Brexit has fired.

What Does the Campaign Tell Us About the Approach to Brexit?

The Conservative leadership election campaign happened in two parts. The first, among MPs, whittled the long list of candidates down to two. Perhaps conscious of the broad spread of opinion among Conservative MPs, both final candidates took a nuanced line during that phase, stressing their desire to leave the EU with a (revised) deal. In the second phase, which involved selection between the two by the broader membership of the Conservative Party (roughly 160,000 people), the tone hardened notably. Polling suggests that a majority of the Conservative Party membership puts delivering Brexit ahead of the economy, the survival of the union of the UK and even the survival of the Conservative Party itself (polling after Theresa May’s European Parliament elections suggests that two thirds of party members voted for another party in those elections, with nearly 60% voting for Nigel Farage’s Brexit Party). Only averting the prospect of a Jeremy Corbyn-led Labour Government is apparently a higher priority for Conservative Party members. Responding to this sentiment, the position of both candidates became harder through the second phase of the campaign. While both favoured leaving with a deal, both were clear that the threat of a “no deal” exit must be real in order to stimulate further negotiations with the EU. Both, therefore, also favoured ramping up “no deal” preparations. In the end, the main difference between the two candidates was that Jeremy Hunt could countenance a “short” further delay to Brexit if that was necessary to secure a deal from the EU, whereas Boris Johnson promised that the UK would leave the EU on 31 October “come what may, do or die”. Significantly, in one of the last public hustings during the campaign, Boris Johnson also ruled out making changes to the Irish border backstop in the Withdrawal Agreement. His approach to how to deliver Brexit could be summarised as: deliver on citizens’ rights straight away, have a “standstill” on trade (not clear how this differs from the transitional period in the Withdrawal Agreement – it would certainly involve zero tariffs on both sides, but unclear whether it would involve regulatory alignment (see trade negotiations section below), still less continued jurisdiction of the European Court of Justice), resolve the Irish border through a comprehensive trade agreement and create “constructive ambiguity” about whether/when the UK would accept the €39 billion exit settlement in the Withdrawal Agreement – presumably making it contingent on the trade agreement. Boris Johnson called for optimism and determination to secure this outcome.

What Do the Key Ministerial Appointments Tell Us About Brexit?

In appointing his Cabinet, Boris Johnson has made far-reaching changes which shift the profile of government decisively towards pro-Brexit. All ministers were required to subscribe to keeping the possibility of “no deal” Brexit open. The principal portfolios concerning Brexit are all held by people who are either comfortable with, or even favour, a “no deal” Brexit. This looks like – and is no doubt intended to be seen in Brussels as – a government fully committed to a “no deal” Brexit, if necessary. Perhaps the most interesting appointment was, however, not of a minister at all, but of Dominic Cummings, campaign director for Vote Leave in the 2016 referendum, as a senior adviser. Taken together, this looks like a team both strongly committed to delivering Brexit and ready for a public campaign (election or referendum), if necessary.

What Happens Next?

The new Prime Minister effectively has more than five weeks’ respite from Parliamentary scrutiny, as Parliament starts its summer recess and returns on 3 September. This gives him time to consolidate his team, articulate his strategy (including boosting preparations for a “no deal” Brexit), and explore the possibilities for further negotiation with the EU. But even within his own party, on both pro-Leave and pro-Remain sides, he is, in effect, on probation.

The Parliamentary arithmetic has not changed significantly from that faced by Theresa May, but by carrying out such a substantial eviction of Mrs May’s ministers, Boris Johnson is likely to have increased the number of opponents to his Brexit policies on the Conservative back benches. They now also have an important figurehead in former Chancellor Philip Hammond. The Prime Minister has no majority without the support of the 10 Northern Ireland Democratic Unionist Party (DUP) MPs. And, within the Conservative Party, the hard Brexit supporting European Research Group (ERG) is now balanced by an anti “no deal” faction bolstered by ministers who resigned because they could not support his approach to Brexit or were sacked by him. Technically, the government’s majority, including the 10 DUP MPs, is down to two (three including one MP under criminal investigation). A by-election on 1 August is likely to reduce that by one. If the PM tries to push through a deal based on the existing Withdrawal Agreement (with changes to the accompanying Political Declaration about the future relationship, to which the EU has said it is open), he risks losing the DUP and some ERG from his majority. If his policy becomes “no deal”, he risks losing the more pro-European faction. In either case, he lacks a majority to deliver the result. The two big questions are whether Parliament (which has a substantial anti “no deal” majority) can find a way to erect a legal barrier to a “no deal” Brexit and, if not, how many Conservative MPs would really vote against their own party in a confidence vote to force either a change of direction or a fresh election – several have already indicated that they would do so if necessary. All of which points to the same Parliamentary deadlock Theresa May faced returning in September. So, unless the PM can come up with a renegotiated deal which the DUP and ERG would accept, the only way out of the deadlock would be to go back to the people. Mr Johnson’s strong opposition to a further referendum would make that a politically difficult choice. Current polling suggests that an election before Brexit is delivered would be a high risk strategy for the Conservatives.

As one influential commentator put it, the strategy may be to try for a new deal and see if the EU blinks. If they do not, go for “no deal” and see if Parliament blinks. If it does not, hold an election or referendum – an election is probably higher risk, but can be done more quickly and does not involve going back on strongly expressed views of the Brexiteers, including Mr Johnson.

What About the Europeans?

The debate about Brexit over the Conservative Party leadership campaign has been an entirely Brit-on-Brit affair, with reference to the EU position, but no engagement with it. European leaders’ reactions to Boris Johnson becoming Prime Minister have been polite, but also uncompromising, showing no willingness to re-open the Withdrawal Agreement. Michel Barnier looked forward to working with the Johnson Government to facilitate the ratification of the Withdrawal Agreement – signalling that negotiation is possible about the accompanying Political Declaration on the future relationship, and possibly other complementary accords, but not the Withdrawal Agreement itself. If the EU sticks to this position – and the EU team follows the UK Parliamentary arithmetic closely, so they know how much resistance there will be to “no deal” – the prospects for finding an agreed way forward look slim.

So “No Deal”, Then?

In April, we assessed the possibility of a “no deal” Brexit as very low. It has clearly now increased and, with a Cabinet committed to “no deal” if there is not a new deal, there are a number of ways in which it could come about. But Parliament’s majority against “no deal” remains, and there remain a number of obstacles to “no deal” in Parliament and in the economic analysis of the impact of “no deal” Brexit if the UK and EU are not able to agree on tariff-free trade using GATT XXIV. While some form of political process – such as an election – looks more likely than moving straight to “no deal” if the EU talks fail to yield a result, companies should certainly now put in place “no deal” contingency arrangements.

Free Trade Agreements

There are three interlinked free trade agreements (FTAs) in play: EU-US, EU-UK and UK-US. During the leadership campaign Boris Johnson spoke about making very rapid progress on the UK-US FTA (at one stage suggesting having a limited agreement in place by 31 October), but also about finding the long-term solution to the Irish border issue in the UK-EU FTA. In practice, it is likely that the UK-EU FTA has to come before the UK-US FTA, not least because the more the UK aligns to US regulatory standards through a UK-US FTA, the harder the solution to the Irish border issue will be – nowhere more so than in agriculture. The UK-EU FTA also has a unique character, in that the two parties start from a position of zero tariffs and complete regulatory alignment and the negotiation will, therefore, be about how far and in what respects to diverge. Both the EU-US and UK-US FTAs will have to address some highly charged political issues (agriculture, public procurement (in particular healthcare) and climate change); it could be argued that the UK would secure a better result on these issues by allowing the EU to find a politically workable way forward with the US first.

In an illustration of the complex interaction in the trade policy approach, the UK government has not been able to roll-over the EU-Canada FTA (CETA) into a bilateral UK-Canada FTA. This is because the Canadian government has analysed the impact for Canadian businesses of the UK moving to the interim “no deal” tariff policy published by the UK earlier this year – 87% of imported goods would be tariff-free to prevent harm to consumers – and concluded that the impact would be small. UK exporters to Canada would, however, face full Canadian WTO tariffs, rendering trade in some sectors unviable.

However the order of negotiations takes place, the three FTAs are effectively interlinked, and it will be important to ensure, for example, that something desirable in the UK-US FTA is not rendered more difficult to achieve by something agreed within the UK-EU FTA.