Coronavirus (COVID-19): the case for extending the Brexit transition period

Section 2: How to Use the Breathing Space that an Extension to the Transition Period will Create

2.1 The New Global Context

In the previous sections of this paper we have set out the case for delaying the UK's exit from the EU in the context of the COVID-19 pandemic and its impact on Scotland's immediate economic and social prospects.

This section covers the post-COVID-19 global economic and political setting in which the UK will find itself. When the worst of the crisis is over, the global community will not return to the status quo ante, but will evolve towards an as yet undefined 'new' state. The UK government's post-exit trade strategy, already questionable even before the COVID-19 crisis, is now wholly unrealistic because of it.

Taken together, these considerations make a compelling case for using the breathing space created by extending the current arrangements beyond the end of 2020 to reassess the relationship the UK Government envisages for the future relationship with the EU.

Extending the transition beyond the end of this year is essential. But simply postponing a deeply damaging exit from the Single Market by two years without revaluating the impact of the kind of hard Brexit the UK Government currently favours, given the consequences of the coronavirus crisis, would also be highly questionable.

For a range of industries, as well as the health and social care sector, the contribution of EU workers in Scotland has never been clearer, once again highlighting the damage of ending, permanently, freedom of movement.

On the 3^rd February, before the scale of the COVID-19 pandemic had become clear, the Prime Minister set out in a speech in Greenwich his vision for a future 'global Britain' in which the UK would be in the vanguard of a new era of global free trade. This would, he said, counter the trend towards trade conflicts and protectionism that has developed in recent years.

The speech confirmed the central plank of the UK government's approach to EU exit ever since the arrival of Prime Minister Johnson: that the UK could and would negotiate new trade deals with countries other than the EU with such rapidity, and of such quality, that the benefits from them would over time make up for the economic damage caused by exiting the EU - damage which is an inevitable consequence of the distant EU-UK relationship which the Prime Minister favours. At the heart of 'global Britain' would be a network of new trade agreements with countries such as the USA, Australia, New Zealand, Canada and Japan.

Even before the COVID-19 crisis, this approach to the UK's global future did not stand up to serious scrutiny. As mentioned earlier, the UK government has not even made serious headway into securing the many 'continuity' agreements with other countries that are necessary to avoid the loss of the trading benefits the UK enjoyed as an EU Member State. The assertion that a network of complex new trade deals could be completed and implemented at breakneck speed during 2020, or even shortly after, and the benefits felt immediately, was always absolutely unrealistic. In reality, no real progress has been made towards these new deals, and with presidential elections in the USA scheduled for later in the year there seems little likelihood that UK-US negotiations will succeed in that timescale.

Indeed EU trade commissioner Phil Hogan has recently suggested that the US government, and perhaps others such as South Korea, would be unlikely to wish to conclude a bilateral trade deal with the UK until the EU-UK negotiations have been completed, 'because after all we are 450 million people in the European Union … Size matters in trade.' The US Chamber of Commerce commented on 5 May:

"it is vital that the UK secure a favourable trade agreement with the EU as quickly as possible. A continued lack of certainty about the way forward will continue to constrain inbound investment and risks limiting prospects for bilateral trade negotiations between the U.S. and UK. We continue to believe it makes sense for the UK to reset its relationship with the EU before it turns to setting the terms of its trade ties with other trading partners."

Aside from whether or not new trade deals could be in place by the end of this year, any objective economic analysis shows clearly that the scale of the potential impact would come nowhere near compensating for the huge losses caused by withdrawing from the EU's trading system. The UK government's own analysis shows that, for example, a Free Trade Agreement with the US would only increase UK GDP by up to 0.16% in the long term. This can be contrasted with reductions in GDP as a result of Brexit, compared with remaining in the EU Single Market and Customs Union, which Scottish Government modelling has estimated at between around 6% in an FTA scenario and 8.5% if the transition period ends with no deal.

But in any case, in the few months since the Prime Minister delivered that speech, the world has changed.

The COVID-19 pandemic has pushed the world into a deep recession. We do not know how long this downswing will last, or the impact it will have on the UK's or Scotland's future economic and trading prospects. World trade is expected to decline by up to 33% in 2020, and it is impossible to predict when it will fully recover. In such an environment, history teaches us not only that the conclusion of new free trade agreements is unlikely, but that active protectionism becomes a real possibility.

As a result, there is considerable uncertainty about how the international trading environment will unfold over the short-term, and how willing and able the UK's putative trading partners will be to negotiate preferential agreements during this period. Even if the administrative bandwidth were to exist to engage in what are highly complex negotiations, in countries facing their own recovery challenges it is unlikely that the political will and popular support will exist to take forward such negotiations at this time. This uncertainty will add significantly to the burden facing our businesses as they struggle to recover from the damaging consequences of the pandemic. In both the private and public sectors, some organisations will need to fundamentally review their business models - as illustrated below for one example sector.

Example: Higher Education

Scotland's university sector is being hit hard by the coronavirus, Brexit and the proposals for a new UK immigration system. It has already been adapting to the changes Brexit is likely to mean for its world-leading research and education. Now added to that is the huge scale of the challenge that the COVID-19 virus brings, both in Scotland and worldwide. COVID-19 has already limited international travel, affecting both students and staff.

Scotland's reputation and performance as a global force in research is a vital national asset sustaining jobs and growth and ensuring that our people and economy are ready for the opportunities of the future. International research collaboration offers a beacon of hope as a key part of Scotland's and the world's response to tackle the coronavirus. A vibrant research and innovation sector will also have an important role to play in the post COVID-19 economic recovery period.

However, in a post-COVID-19 post-Brexit world researchers will have more reason to consider where to take their expertise and their next project. In a survey by the University and College Union (UCU) in 2017, over three-quarters of EU academics at UK universities said that in light of the Brexit referendum result, they were more likely to consider leaving the UK higher education sector. Professor Lee Cronin, regius professor of chemistry at Glasgow University, has said that 'if I can't run a world-leading team of researchers here I'm not going to let the skills, knowledge and momentum we've built die because of a hard Brexit. Many of us will be forced to move our research abroad or seek joint affiliations in the EU.'^[30]

In addition, many universities in Scotland and the rest of the UK are truly global players in the education market, and have developed business models based around students coming to them to study from the EU and across the world. On top of the impact of Brexit on the likely numbers of EU students, in a post-COVID-19 world the level of international student exchange that universities had been expecting will neither re-establish quickly nor in the same form as before, with inevitable consequences for their operational and financial strategies.

Questions about countries' future international strategies are linked to their decisions on their domestic recovery plans and strategies. Rather than viewing recovery as the global economy simply "bouncing back" from this COVID-19 health crisis, the Scottish Government fully supports the view that protecting our future requires us to consider measures that will ensure the economic system "bounces forward". This means looking for economic, environmental and social policies, and coordinated international action, directed to increasing economic and social wellbeing and creating a framework for sustainable development which protects and restores nature for future generations.

Over the last few years the Scottish Government has increasingly placed our citizens' wellbeing at the heart of Scotland's national performance framework. This is an explicit recognition that the rate of economic growth alone cannot be regarded as the sole indicator of wellbeing. Not only must growth be inclusive - with added prosperity being shared equitably between our citizens and used to enhance our public services - but economic growth itself must be sustainable.

The same reflections are being duplicated across the world. The importance of sustainable growth and a resilient economy are set to be at the centre of post-pandemic recovery plan for many nations. For the EU, the European Commission's Green Deal - designed to transform the EU into a sustainable and climate-neutral economy by 2050 - is a central component of the roadmap for recovery. By stressing increased investment in the fields of sustainable mobility, renewable energy, building renovations, research and innovation, the recovery of biodiversity and the circular economy, the EU has the potential to construct an economic and social framework at the heart of which is the wellbeing of its citizens.

The Scottish Government's objectives for inclusive and sustainable growth are very similar to those underlying the EU Green Deal.

And with governments worldwide facing the same long-term challenges, international collaboration - especially with our closest colleagues and neighbours in the EU - will become even more beneficial than before, placing further question marks over the direction of the UK Government's current policy towards the EU.