Brexit isn't about trade, or migration. It’s about power

Our understanding of the world is shaped by a hunger for narrative – a story with a beginning, a middle, and an end – with connected events that flow into one another sequentially. This hunger for narrative comes from a natural, human discomfort with ambiguity and uncertainty.

We search for explanation in the face of arbitrary events. We work hard to fit these events into a cohesive story that somehow accounts for what is happening around us, and we gravitate toward the narrative that best explains our emotions. We mine information to support our existing beliefs. My narrative may be very different from your narrative, even though we might be staring at the same thing.

Brexit has begun and, in slightly over 700 days, Britain will leave the European Union. Prime minister Theresa May formally began proceedings this week. It was all very staged and, to be honest, something of an anti-climax. The negotiation period begins, and as it does, Britain seems hopelessly outmatched, and somewhat delusional. On Friday the president of the European Council, Donald Tusk, laid out the negotiating principles the 27 remaining states would follow.

Narratives allow you to be a bit delusional. Of course, leaders must talk up the strength of their national identity – after all, isn’t that what Brexit was about – but the notion of a United Britain negotiating a better deal with its largest trading partner that leaves it better off than before is fanciful.

Look no further than the leader writers of the Daily Telegraph, a pro-Brexit newspaper. Headlines such as ‘The resurgent global economy gives Brexit the following wind it needs’ and ‘Benefits of Brexit will outweigh the loss of a few City jobs’ tell you a lot about where the pro-Brexit narrative is going. Yes, there will be job losses and some pain, but overall, unshackled from the EU’s job-killing regulations, Britain will thrive. Britain just needs to negotiate better trade deals. This line of thinking is wrong. The solution is technocratic, not diplomatic.

How fast can those trade deals be done? The data point we have is Greenland. Once part of Denmark, and still sort of part of Denmark, Greenland left the EU and it took three years to negotiate one trade agreement on agriculture. Over 1,000 days on one policy.

Britain has slightly over 700 to do a deal of enormous complexity, before, most likely, starting another. It will take years, perhaps a decade, to move away from the World Trade Organisation’s basic, tariff-laden, most-favoured nation system, which means Britain can’t be treated worse than other WTO members. This (sort of) puts a floor on how bad the trade shock can be to Britain, and leaves any gains from trade to be made in protracted negotiations. What it means for British and EU businesses is several years of paying more for things, lower demand for their products and services, and far more uncertainty.

The imperial whiff
There’s more than a whiff of Britain’s imperial past coming off a lot of this thinking. The idea is that former colonies will be only delighted to sign up to new trade deals advantageous to Britain is a hypothesis at best, a pipe dream at worst. It also ignores the highly global structure of sectoral trade.

Take Ireland, for example. Many companies send intermediate goods from Britain to Ireland to be finished, and then send them back to Britain to be sold. Ireland absorbs very large amounts of goods and services for this purpose, partly because we are so close to Britain. Our friends in New Zealand and South Africa may not enjoy such geographic advantage. They may also not want to get too close to a former coloniser for historical, as much as economical, reasons.

On the British side, its export-facing businesses are looking at years of uncertainty, and this is toxic, because we won’t see what it lost in deals not done, trades not made, services not expanded. In the event of the hardest of hard Brexits, many of these companies will have to be state-supported to adjust. Those state-aided companies, protected by a tariff barrier, will be competing with Irish companies.

You might think Brexit is all about trade, or migration. It’s not. It’s about power. Narratives allow you to suggest things that seem farcical to others, especially those with relatively more power. In November 2009, when Thierry Henry illegally hand-balled a pass to William Gallas for an extra-time goal, everyone in Ireland assumed that because we were hard done by, clemency would be granted by Fifa.

In fact, Fifa’s Sepp Blatter found the idea of adding a 33rd team hilarious. Michael Noonan pleaded for clemency with the troika on the basis that Ireland had ‘taken one for the team’ in guaranteeing Ireland’s banks and imposing austerity. The troika didn’t see it that way.

Everyone should read May’s letter invoking Article 50, part 2. The narrative is pretty simple: Britain is a large, strong economy with deep ties to Europe, and a special partnership arrangement can be negotiated in parallel with the exit negotiations in exchange for deeper cooperation on security issues. This is a bit like going through a divorce while at the same time talking about an open relationship. It’s not impossible, but it’s fairly unlikely. The narrative that the 64 million people from Britain rank equally with the 460 million of the remaining 27 EU states is farcical. May’s proposal for simultaneous talks got a swift and unequivocal ‘nein’ from the leader of the free world, chancellor Angela Merkel. I imagine the suggestion was greeted with the same level of scorn Fifa showed the FAI in 2009.

The narrative of Britain as a strong, large economy is also demonstrably false. Britain is worth slightly over 2 per cent of the world’s economic output. There was a time when it was responsible for far more, and had the power that now resides with the United States and China, but that was more than a century ago. Britain looks big relative to tiny Ireland – responsible for only 0.19 per cent of the world’s economic output. But relative to really large economies such as India and China, Britain is a minnow.

Britain has nuclear weapons, a largish army and a seat on the UN security council. But all these things are relics of the past, not harbingers of the future.

Large states such as the US and China have the ability to conduct domestic policy and international policy. Small states such as Britain have more influence than tiny ones like Ireland, but that influence doesn’t extend to things like altering the direction of geopolitics, nor does it make Britain a key player in many or even most markets. It is a big deal in finance and a few other areas, but that’s about it. The domestic narrative doesn’t reflect reality: when it comes to doing trade deals, the British government’s policies are all fur coat and no knickers.

Nations once again?
Britain may break up under the strain of Brexit, but I doubt it. Lots of ink has been spilled on whether Brexit means a vast devolution of power to the individual nations of the union, and this will probably happen as the carrot for staying within the same union. Talk of reunification in Ireland is premature, and serious consideration is only starting to be given to the economics of reunification, the likely timescales involved, not to mention the potentially toxic politics of the process. Park that one for now, but consider just what the devolution of powers – perhaps including fiscal powers – to Northern Ireland would mean.

This devolution may be what May referred to in her Article 50 letter, and that kind of active policy management would change some of the discussions being had in both Westminster and in Merrion Street. All of a sudden you would have policy coordination problems, and a serious government imbalance in the North.

The institutions of assembly in the North have shown through their failure to deal with the Renewable Heat Incentive scandal that they are not mature enough for such powers to be granted to them, at least not yet. So in addition to potentially creating a fiscal monster, the capacity of the British government to do its job and keep the union together might well suffer, if not falter entirely.

Much has been made of the commitment on both sides of the negotiating table to try to maintain the common travel area between North and South. The reasons for this are obvious. Everyone is using words like ‘creative’ and ‘flexible’ to describe how they are going to approach the issue of border policing. I am not reassured.

What I see is an element in play in a negotiation, and this negotiation might turn bitter very quickly if neither side feels like it is making progress on its issues of choice. Ireland clearly wants to maintain as close to the current situation of free trade and common travel as humanly possible, which means any deviation from that as the negotiation moves to a close will be to our detriment.

Britain is likely to trade off any sum of money for stable access to the European Union. The sums involved – between €25 billion and €65 billion stretched out over several years – are trifling by either the standards of the EU or Britain. The EU’s budget in 2015 was €145 billion, for example. It is the symbolism in particular that matters to Britain, and it is here I think the most leeway is. The money involved is far subordinate to the diplomatic scaffolding that will be created and on which an economic structure can grow.

The Irish Narrative: we’ll be grand
Ah sure, we’ll be grand. Everyone likes us. Theresa May said in part five of her letter that the special status of Northern Ireland and the Republic be respected. Donald Tusk enshrined the need to deal carefully with the Irish question as one of the principles of the EU’s negotiating approach. That everyone is aware of the sensitivities of the Irish at this point is a testament to the huge amount of behind the scenes work Enda Kenny’s government and its diplomatic service has done since Brexit was announced to make the EU 27 members and Britain aware of Ireland’s concerns.

The narrative you can read from Ibec and Labour’s Brexit documents is that this uncertainty is regrettable and avoidable for business and for workers, but that really the focus should be on the border between the North and the Republic, and getting some ‘special status’ for the North. I think this narrative is deeply misguided. Yes, we are all lovely people on this island and obviously no one wants to see a return to the Troubles, but we are being delusional if we think the other EU 27 states will not seek to use Ireland’s issues for their own gains.

Say the North becomes a specially designated area. Why not the Basque country, Czech Silesia, or Wallonia? The need to maintain a cohesive European Union may well trump the need to be ‘creative’ and ‘flexible’ with Ireland’s issues.

I believe Ireland’s focus on the Border with the North is overriding other considerations. As a tiny state with no independent monetary policy and little leeway in fiscal policy, Ireland has control over its industrial policy first and foremost. Everyone accepts we need to help maintain the free travel area between Britain and Ireland. An all-island economic model can be developed only if the border situation is resolved satisfactorily.

Our industrial policy should include a comprehensive state aid package to avoid potential economic disruption, and this package should be regionally focused. Labour’s report on Brexit has some excellent suggestions in this area. State agencies will need extra resources so they can better support companies diversifying into new markets. I have argued in this column many times that Ireland’s response to Brexit should be to see Enterprise Ireland put on horse tablets. Budget 2018 should see a vast increase in the funding allocated to agencies which support Irish industries.

The real threat to Ireland: Britain becomes us
Ireland has always thought of itself as a small open economy. That narrative is probably wrong. There’s evidence we should really think about ourselves as tiny. For me, there’s a real risk that Britain wakes up one morning and starts behaving like a small open economy. It would become a direct competitor for Ireland, and given the size differential, it just might win. Here’s how it might work.

First, by 2020 the Britain might move corporation tax to 10 per cent in a Foreign Direct Investment putsch, especially if the City retains some passporting rights.

Second, Britain can change the structure of individual taxation such that the total nominal amount of tax levied on any individual is about 25 per cent of gross income. This increases disposable income, income inequality, and starves large social programmes, which is already under way. The hardship caused by these changes to the 1st, 2nd, 3rd and probably 4th income deciles in Britain, the people who voted for Brexit overwhelmingly, can be blamed on the EU essentially forever. The EU will become the bogeyman par excellence, in the same way the troika was in Ireland for several years.

Third, May’s government can mandate savings of some kind to offset pension expenditure in the future – this also produces a handy revenue stream for the City of London.

Fourth, the government can force the Bank of England to change its approach to British funds and financial products, thus creating a pull of British-originated funds back into Britain from abroad. This partially solves the outstanding problems of the negative current account deficit Britain suffers from, and reduces the risk of an economic crisis coming from a sudden stop on funds from abroad. It also makes Britain much more insular. But that’s what Brexit is all about.

Despite the narrative about being a rich global economy, the reality is that Brexit means a poorer Britain. The task of Irish policy-makers for the next 1,000 days is to figure out how to mitigate the damage Brexit will cause. Last week’s developments should give no comfort. In the end, reality must take precedence over narrative.