Sunday, October 08, 2017
Clueless on Brexit - and it is taking its toll
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.

Give Us a Clue was a popular TV show featuring the entertainer Lionel Blair. It was also what Tony Blair, no relation I think, was reported to have said to Gordon Brown when the latter, as chancellor, was refusing to divulge his budget plans to his prime minister.

Give us a clue is back, though in a more important context. Sixteen months on from the EU referendum, and less than 18 months until Britain’s formal departure, business still does not have much of a clue about Britain’s future relationship with the EU.

It is, frankly, astonishing that so far into the process, the government does not have a Brexit blueprint that it can communicate. This is not, to be clear, to avoid showing our negotiating hand to the EU. There is no blueprint.

Leaving aside the difficulties she encountered during her Manchester speech, the furthest Theresa May could go in her more substantive Florence speech last month was to say that neither a Canada-style free trade agreement with the EU (which took seven years to negotiate), nor Norway-style European Economic Area membership – staying in the single market but not the customs union – would suit Britain. We thus know what the government is against, but not yet what it is for, a familiar Brexit position, and the frustration is growing.

“Businesses are clear that they want a comprehensive transition period, lasting at least three years, and pragmatic discussions on the future trading relationship between the UK and the EU firmed up by the end of 2017,” said the British Chambers of Commerce. “They will judge the government’s progress on Brexit by this yardstick and will take investment and hiring decisions accordingly.”

The Institute of Directors attacked “the big let-down” of the party conference season and the fact that “far too little time has been spent explaining the plan for how we leave the EU.”

This is not just a matter of the convenience of business. Those that have made contingency plans for a Brexit deal that falls well short of what they need to operate in the EU and have either pressed the button on those plans or are close to doing so. Sam Woods, a deputy governor of the Bank of England, warned a few days ago that if we get to Christmas and no agreement has bene reached on transition arrangements what he described as “diminishing marginal returns” will kick in. The City, in other words, will take action on the basis of no deal and no transition.

The economy, meanwhile, is prey to the uncertainty. The construction sector is struggling because of a lack of new projects and may be back in recession, while service sector growth has slowed. The economy is crawling along, with the third quarter of the year set to similarly weak growth as the first two quarters.

When businesses hear that the government is making contingency plans for a no deal outcome from the negotiations, they wince. Those that have looked at it in any detail also wince when they hear blustering Brexiteers blithely saying that Britain could happily manage on WTO (World Trade Organisation) rules.

Such talk misunderstands the nature of our trading relationship with the EU, and the degree to which the British economy is integrated within the EU economy. Many British businesses see their exports embodied as intermediate components of the EU’s exports, as Mark Carney pointed out in a recent speech, in a way that barely happens in the rest of the world. They are part of an EU supply chain.

British exports to the rest of the world travel long distances, taking a long time, by ship or plane. British exports and imports to the EU travel short distances, usually by lorry, and operate on tight schedules, because they are carrying components needed for just-in-time production, or perishable food products and other products where time is of the essence. Delay these movements and you have serious problems.

The Port of Dover used advertising space at the Tory conference to demonstrate that the 10,000 lorries it handles each day are cleared through the port in an average of two minutes. Extend that average time by just two minutes and there would be 17-mile queues on the English side of the Channel with something similar on the other side. Operation Stack, the occasional queues of lorries on the M20, would become a permanent feature, and worse. Without frictionless trade, there would be chaos, confusion and considerable economic damage.

We come back to a simple point. The single market has changed the nature of Britain’s economy, enabling the advantages of free trade, as well as economies of scale, to be more fully exploited. Withdrawing from it, as the Bank governor put it recently, is an example of “deglobalisation”, which comes at a time when the share of Britain’s exports taken by the EU is growing again. From a low of 46.6% in 2015, the share of UK goods exports destined for the EU was 48.4% in the first half of this year.

Given the recovery in EU economies, it may be heading back above 50%, though any rise will not survive leaving the single market. Smart detective work by Ed Conway, Sky’s economics editor, suggests the true share is already above 50%. Though Britain produces no gold, or at least no gold in significant quantities, gold exported from the London bullion market to Switzerland for processing counts as non-EU exports. The numbers are big enough to make a difference.

The big picture is that about half of Britain’s trade, taking exports and imports together, and on this basis also taking goods and services together, is with the EU, and slightly more with the European Economic Area, countries such as Norway and Iceland which are not in the EU but are in the single market. More than that, much of that trade is currently conducted with as little friction as if it were between Yorkshire and Lancashire. Whether post-EU frictionless trade is even possible remains to be seen.

In an article in the London Review of Books, London Schools of Economics’ economists Swati Dhingra and Nikhil Datta, both pour cold water on the prospect of quick and workable non-EU trade deals and point out how far they would have to go to come anywhere close to compensating for the potential loss of EU trade. China, for example, accounted for a mere 4% of Britain’s goods exports last year.

As they put it: “Countries have always traded the most with their biggest, closest neighbours. This is by far the most reliable fact about international trade and holds true no matter which set of countries, time period or sector (goods, services, e-commerce, foreign investments) is looked at. Given that the EU is within swimming distance from the UK, has a population of more than 500m and a GDP of almost $20 trillion (double that of China), an equivalent replacement is effectively impossible. EU standards on goods and labour are more acceptable to British people than those in the US, China and India.”

The view among the sensible people in government, amid growing realisation of the damage that failure to secure a comprehensive deal with the EU would do. It may be that this week will see a breakthrough in the talks that would allow both sides to move on to the future relationship, but it would be unwise to rely on it. There is fault on both sides but the EU recognises that the weakness of the government’s position is preventing it from moving the negotiations on from matters such as the divorce bill and EU citizens’ rights to more important matters.

As things stand, the best business can hope for is agreement on lengthy transition arrangements, during which very little changes. As to where Britain ends up in the long-term in its relationship with the EU, it is still not getting much of a clue.