Sunday, April 02, 2017
The inscrutable in pursuit of a softer Brexit
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

If you were looking for single word description of our prime minister it would be inscrutable. Her ability to pad away difficult questions with non-answers rivals that of Geoff Boycott. When it comes to inscrutability, the Great Sphinx of Giza has nothing on her.

It would be unwise therefore to read too much into the tone of her letter on Wednesday to Donald Tusk, the European Council president, invoking Article 50. Perhaps, apart from an eye-catching link between trade and security co-operation, which nobody in Europe seems to have much minded, she was just being polite.

But, having warned myself off, I will read something into it anyway. It is that, having talked the language of hard Brexit over the past nine months, not least to convince the Brexiteers in her party that she as a Remainer could be trusted, she is now embarking on a softer and more pragmatic course.

The hard Brexit language – no single market, no full membership of the customs union, reflecting the will of the people on EU migration, no deal is better than a bad deal – will still be wheeled out from time to time.

But it is now possible to see something softer emerging, assuming it can be negotiated and is acceptable to the other members of the EU, the so-called EU27.

What would this kind of softer Brexit entail? In talking to businesses, I have always seen it as including the following. It would involve, not single market membership but a comprehensive trade deal with the EU. Britain would have no influence on drawing up single market rules and directives, as May has conceded, but, except in the few cases where they are inappropriate or irrelevant, British business would still abide by the rules of our biggest market.

There would also be lengthy transitional arrangements, providing for a gradual adjustment for business to a post-Brexit world, as the prime minister has hinted. Nobody with any sense should have any problem with this. There were transitional arrangements stretching for at least eight years when Britain joined the European Economic Community in 1973. If they were appropriate on the way in, they are even more suitable on the way out.

There would be a continuation of significant migration to Britain from the EU27, though employers would have to go through a few more hoops, including visas and work permits. The hope is that these would not be as bureaucratic as the current arrangements for non-EU skilled migrants. Whether overall immigration would fall remains to be seen. In the short-term there is evidence of a drop in skilled EU migration to Britain.

Britain would continue to pay into joint EU-UK schemes post-Brexit, not in the sense of a direct budget contribution, but more in the way that Norway does currently. The full Norway option, which includes membership of the European Economic Area and thus the single market, is not currently open to Britain because it would require free movement of people. That may change, though it would be unwise to rely on it.

As an exercise in damage limitation, such a softer Brexit would beat the alternatives. Britain would formally exit the EU, as the referendum required. It would chime in with public opinion, which in the main wants control of Britain’s borders – hence visas and work permits – but recognises the need for EU workers and is concerned about the trade effects of Brexit. Some would baulk at any payments to Europe but that is probably not an insurmountable barrier.

Something as close as possible to single market membership would still be inferior to what we have now. Apart from losing the ability to influence the rules, Britain would no longer have the opportunity to push for greater liberalisation of trade in services, where much of our comparative advantage lies. As we are already seeing, there will be some loss of activity to the EU in services, particularly financial services, but the hope will be that this can be kept to a minimum. Employing EU migrants will involve more bureaucracy than now, which could affect smaller firms in particular.

A useful report from Open Europe, “Nothing to declare: A plan for UK-EU trade outside the Customs Union”, makes 12 good points about how to make the best of the new situation. Britain, it says, cannot be half-in, half-out of the customs union (the common external tariff and common commercial policy) if it wants to negotiate future trading arrangements with the rest of the world. But an extension of customs union membership for up to two years beyond 2019 makes sense.

Future trade between Britain and the EU will not be frictionless, it notes, creating difficulties for sectors with complex, cross-border supply chains, such as the motor industry, and there will be costs associated with leaving the customs union. But those costs can be minimised with a free trade agreement which seeks to avoid most of the difficulties over so-called rules of origin. This can be achieved by what is known in the jargon as liberal cumulation, under which products that are substantially transformed in the UK or EU, in other words put together from components imported from elsewhere, are assumed to originate there.

The Open Europe paper , recognising that it will take time, probably many years, to negotiate new trading arrangements with the rest of the world, says Britain should seek to replicate, or “grandfather” the 30 free trade agreements the EU has concluded with more than 60 non-EU countries, including the recently concluded agreement with Canada. Given that Tusk, in his reponse to the prime minister, has said no to this, some work will be required. In time, assuming it can be done, those deals may or may not be replaced with bespoke UK deals.

Where there will be scope for improvement, according to another interesting paper, “Post-Brexit trade and development policy”, is in Britain’s trading relationships with poorer countries; the developing world. The paper, published by the Centre for Economic Policy Research, by Richard Baldwin, Paul Collier and Anthony Venables, notes that it will take many years to secure new trade agreements with other advanced economies, including America.

But there will be early scope for making friends and influencing people, and standing Britain in good stead for the future, in negotiating speedy deals with developing countries. These, currently subject to EU agricultural and in many cases industrial protectionism, could be good be good for both the countries themselves and for British consumers.

As the authors put it: “While the British government faces massive complexities in its trade-policy dealings with the EU and other advanced economies, it could, almost instantly, launch bold trade-policy initiatives with respect to developing nations.”

That is food for thought. On the wider point, how likely is a Brexit at the softer, and therefore less damaging end of the spectrum? These are early days. There is the question of the Brexit exit bill, estimated by the influential Bruegel think tank to be between €25.4bn (£21.9bn) and €65.4bn (£56.4bn), and which the EU wants agreement on early. There is the question of what will be acceptable to some of the headbangers and hardliners on the Tory benches and beyond. There is the question of Gibraltar.

A deal can be done. Whether it is a good one remains to be seen. It could yet be a case of the inscrutable in pursuit of the impossible.