One election, two winners, three losers

The United Kingdom went to the polls in a general election on 12th December – the first winter election for almost a century.  Boris Johnson’s Conservatives campaigned on a strong “Get Brexit Done” slogan, against most other parties arguing for a second referendum or to stop Brexit altogether (Nigel Farage’s Brexit Party in contrast were arguing that Johnson’s deal was not really Brexit).  Johnson’s Conservatives won 47 seats to give a substantial majority of 76, the Tories’ best result since Margaret Thatcher’s heyday in 1987.  Nicola Sturgeon’s SNP took 48 of Scotland’s 59 seats, reducing Labour to just one seat in Scotland.  Jeremy Corbyn’s Labour Party lost 59 seats, including many which had not voted Tory for many decades if ever, taking the Party to its worst result since 1935:  only in London and some big cities did the Labour Party perform relatively well.  Jo Swinson’s Liberal Democrats failed to make any headway, and Swinson herself lost her seat.  And Farage’s Brexit Party failed to win a seat (though Farage can console himself that Brexit – even if not his preferred version – would not be happening but for his long campaign to make the Brexit referendum happen in 2016).

 

What does the Tory victory mean for Brexit?

Johnson’s Government will now press ahead with the legislation required to ratify the Withdrawal Agreement he re-negotiated with the EU in October.  This also needs to be approved by the European Parliament.  All of that, plus a number of other necessary pieces of UK legislation, is most likely to take place in time for the UK to leave the EU on 31st January, and to go into the so-called implementation period (which runs to 31st December 2020 unless a decision is taken by the UK and EU before the end of June to extend it).  With the majority the Prime Minister now enjoys, that’s the easy bit.

Boris Johnson promised during the campaign that he would get a deal on the future relationship with the EU by the end of 2020, and would not seek an extension to the implementation period.  There is much scepticism among trade policy experts that this can in fact be done within the time available, but Johnson has shown himself willing to set seemingly impossible objectives only to bring them off.  Much probably depends what the UK’s approach to the trade and future relationship negotiations will be.  On that, there are so far few clues in what the Prime Minister has said.

 

Which Boris Johnson has the UK got?

Within the Conservative Party, two reflections of Boris Johnson can be discerned.  One is economically liberal, “one nation”, pro-internationalist and pro-European.  The other is more of an ultra-liberal nationalist, who would embark on aggressive de-regulation of the UK economy with a more competitive dynamic in the relationship with the EU.  Whichever version of Boris Johnson is now in 10 Downing Street, Brexit will be the means by which he delivers his vision for the country’s future.

The Prime Minister now has a pretty free hand to shape Brexit as he wants.  His majority is large enough that he can ignore opposition from either the pro-European or the purist Brexiteer wings of his party – or both.  Over the coming days, we may get more sense of his intended direction.  There are probably only two kinds of trade deal achievable in the time he has set – a very basic “zero tariff, zero quota” deal which would not achieve any regulatory alignment;  or one which involved close dynamic regulatory alignment across the board.  The former would involve substantial dislocation of the UK economy, and would mean a pretty hard regulatory border (though not a tariff border) between Northern Ireland and Great Britain – something the Prime Minister said during the campaign he would not allow.  The latter could make the UK a passive rule-taker, and could call into question the whole purpose of Brexit.  Some clues as to what the Prime Minister’s approach might be:

  • Boris Johnson will already be thinking about how to win the next election in 4 or 5 years’ time, when neither of the two main factors behind his success this time (Brexit and Corbyn) will be present.  An economically smooth Brexit will stand him in better stead than one which causes significant economic dislocation;
  • Likewise, he will not wish to be remembered as the Prime Minister who broke the Union.  He can only deliver on his insistence on no controls between Northern Ireland and Great Britain with a pretty high degree of regulatory alignment with the EU, at least in some areas.  Similarly, while he will resist the SNP’s call for a further Scottish independence referendum, he will also have in mind that any such referendum would be much harder for the pro-Union side to win against the backdrop of Brexit-induced economic dislocation;
  • He must also expect that at least some of the traditionally safe Labour seats the Tories have now won will return to Labour next time, so he will need to do better also in pro-European London and the south-east, which will be easier to do if Brexit has not resulted in a significant rupture with the EU and its member states.
  • But Boris Johnson will not be able to accept any automaticity or European Court of Justice jurisdiction over regulation of the UK market, nor any fundamental constraint on the UK’s ability to do free trade deals with other countries.

Best guess at the moment:  a UK-EU deal involving substantial dynamic regulatory alignment but based on a third-party relationship (probably with some means of independent adjudication and dispute settlement) rather than Norway-style effective incorporation into the Single Market with all the jurisdictional implications.  We will know more as the coming weeks unfold.

 

What about UK-US and other country FTAs?

The Conservatives have been very clear about the priority they attach to securing trade deals with other jurisdictions, as part of a more global re-orientation of the UK economy, and in support of the UK’s traditional liberal trade policy approach.  President Trump tweeted as soon as the election result was clear underlining his ambition for a massive new trade deal between the US and UK – “bigger and more lucrative than any deal that could be made with the EU”.   It remains however likely – not least because of the dynamics of the arguments relating to the preservation of the Union – that the UK’s negotiations with the EU will effectively have priority.  The timescale the Prime Minister has set for achieving the deal with the EU also points in this direction.  His freedom of manoeuvre should mean that the EU has an interlocutor who can be more decisive and more relied on to deliver than has been the case over the past three and a half years.  And particularly he will have the ability to choose what he considers the optimum path for the UK between alignment with the EU and alignment with the US.

 

Implications for companies with trading interests in the UK and EU

This all points to a highly complex set of interlocking trade negotiations, significant parts of which will happen through 2020.  The ability to secure an outcome in one negotiation may well depend on the direction another negotiation is taking.  With our presence in the UK, EU, US and Asia, and our strong policy focus, we are uniquely well-placed as a firm to guide you through how best to secure the outcomes your company or organization needs.