The dark clouds threatening Brexit

29 July 2017

9:00 AM

29 July 2017

9:00 AM

It’s summertime and the living is easy… unless you’re a civil servant working on Brexit. Whitehall has recognised that the UK needs to step up its preparations for leaving the EU and to offer greater certainty about the country’s immediate future. A big speech is planned for September, probably by the Prime Minister, which will set out more of the government’s thinking on the issue.

One aspect of Brexit that urgently needs clarity is how Britain will leave the European Union. Theresa May has long been open to a transitional period or, as she terms it, an implementation phase. But since the election, the government’s enthusiasm for this has become far more explicit. There is now pretty much total cabinet agreement — even if the transition means free movement continuing temporarily. But for any transition to smooth out the Brexit process, it will need to be agreed well in advance. Given that the Article 50 clock is already ticking, and that any transition agreement will have to be signed off by the EU, this must be one of the UK’s negotiating priorities come the autumn.

Almost certainly, the EU will insist that progress is made on the money it claims the UK owes, along with citizens’ rights, before discussing how a transition would work. The desire to extract as much cash from us as possible (without collapsing the talks) is one issue on which the EU 27 and the Commission are entirely aligned.

But the money aspect of these talks, however politically fraught, is relatively simple. There are numerous ways to fudge the issue, unlike the more complicated question of ‘divergence’. It is often pointed out that when the UK and the EU start trade talks they will be in total regulatory alignment. This is true — but it might not last.

Michel Barnier, the EU’s chief negotiator, has already brought up this question. As he put it to a House of Lords committee recently: ‘We are of course totally integrated now in the single market, and you will diverge mechanically. The questions that we have are: is that divergence reasonable? Is it under control? Is it mastered, and if so by whom? Or will it become a tool for regulatory competition with us.’

He went on to warn that if people thought ‘divergence’ would lead to more tax competition then ‘everything is over’. He argued that this would make it impossible for any trade deal to be successfully ratified by the national parliaments of the EU 27.

You could argue, ‘Well, he would say that, wouldn’t he?’ For the EU, an ideal political outcome from the Brexit talks would be the UK leaving the single market but continuing to shadow not only all EU consumer products regulations, but also more general EU standards on labour, the environment and tax. This would be a sub-Norway outcome. It would make it extremely difficult to deliver the potential economic upsides of Brexit.

Recent events have, however, increased the chances of the EU making such an offer. Theresa May’s ‘no deal is better than a bad deal’ warning no longer carries the potency it once did. If she had, as expected at the start of the election campaign, won a majority of 60 or more, the no-deal threat would have been real. The UK could have responded to crashing out of the EU without a deal — as Philip Hammond put it in an interview with the German press in January — by changing ‘our model to regain competitiveness’. With a comfortable Tory majority in the Commons, it would have been possible to pass sweeping tax and regulatory reforms. The EU would have been acutely aware of this.

The desire of the EU 27 to avoid having a major low-tax, low-regulation economy on their doorstep would have made them more prepared to compromise. But in a hung parliament, as any EU embassy will be able to report back from London, there is no chance of the Tories being able to get such fundamental changes to either tax or regulatory structures through Parliament.

But we should be very wary of signing any long-term, as opposed to transitional, deal that requires the UK to maintain the same labour and environmental standards as EU countries and to abjure competition on tax grounds. Such a deal would severely limit the UK’s ability to make its way in the global economy. We would be leaving the single market and heading out into the world with one hand tied behind our back.

Brexit is no guarantee of national success. Rather, it is the removal of a constraint that prevents this country from doing its own thing. What Britain does with this opportunity is the question of our time. But a bad trade deal isn’t the only threat to this; another is regulatory nimbyism. Ministers are becoming too fond of EU regulation in their own area. They might think there are opportunities for deregulation after Brexit. But they don’t think this applies to their domain. This mindset must change.

The other great danger is that the pro-free trade forces in this country are not prepared for the fight ahead. The UK has not had its own trade policy for 40-odd years so there’s a shortage of people who know how to make the case against protectionism. This is a problem because the losses from the extra competition that trade brings are concentrated and the gains diffuse. The producer-interests who will lose out from new trade deals are already organised and ready to go. The consumers who would benefit from more choice and lower prices are not. This creates a risk that trade talks will be derailed by scare stories. The nonsense being talked about chlorine-washed chicken is a taste of the debate to come.

Debate over the Brexit deal will, understandably, dominate British politics over the next few years. But however important an agreement with the EU is, it is less important than what the UK does afterwards — do we embrace innovation and free trade, or just try to maintain the status quo? The challenge is to avoid being pushed into signing any long-term pact that so restricts our freedom of action that it negates the whole point of quitting the EU.

Listen to James Forsyth and Ed West on the Spectator Podcast.

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