Thursday 12 April 2018

Business gets vocal about Brexit

One of the many remarkable consequences of the Brexit vote is the extent which it has fractured the traditional closeness of the Conservative Party and the business community. For the Ultras, in particular, it has become commonplace to treat bodies like the CBI and the IoD, and the City in toto, as being part of the assorted horde of saboteurs and enemies of the people stretching from universities to the judiciary.

This seems to have spread to the government more widely. Following the Referendum, there were repeated complaints that neither the Prime Minister nor DExEU would engage with businesses unless they express positivity about Brexit. Since few businesses see anything positive in Brexit this inevitably eroded business influence on the Brexit process. That is said to have changed somewhat since the General Election, admittedly, and the government’s acquiescence to a standstill transition period on EU terms is widely understood to reflect this.

But even with a transition period agreement in prospect, at least, the concerns of business are only very temporarily met. Hence there is now a growing public clamour to mitigate the worst effects of Brexit. A high profile example this week came from the CEO of Airbus, which directly employs 15,000 people in the UK and indirectly perhaps another 100,000. Moreover, many of these are highly skilled jobs. For Airbus, the main issues are the customs union and EASA membership (which entails a role for the ECJ). In passing, I once heard Jacob Rees-Mogg loftily opining that since (as is true) there are no tariffs on aerospace parts the industry had nothing to fear from Brexit. A small example of the way that a little knowledge is a dangerous thing. At all events, lack of clear and realistic plans on the part of the government, Airbus warned, threatened long-term investment and time is running out fast to develop such plans.

Aerospace was one of multiple sectors covered in a CBI report entitled ‘Smooth Operations’ published this week, setting out the views of its members on regulatory issues post-Brexit. This report deserves high marks for recognizing some things which the Brexit business debate has often missed (although both have been discussed on this blog). First, that very often goods and services cannot be separated out, for example where companies provide repair and customer support services for their products, or where software forms part of the product. Second, that business sectors can’t be neatly and discretely packaged up: they interact, as does their regulation. This did, however, make it puzzling to then identify some sectors where divergence would be desired; a reprise of Theresa May’s ‘three baskets’ approach, with all its attendant problems which I’ve discussed elsewhere.

The overall thrust of the report was that British business should for the most part stay closely or completely aligned with EU regulations (thus, of the three baskets, two are virtually empty). The problem, though, is the clear implication of this is that Britain should remain in the single market. Since the CBI were not willing to argue that (they have done in the past, but presumably now see that political horse as having bolted) it becomes unclear what ‘alignment’ actually means. Presumably it means always adopting EU rules as they arise or change and some body, which can really only be the ECJ (or, perhaps, the EFTA Court), to enforce them. On these matters – which go to the heart of the entire debate about Brexit, soft Brexit and hard Brexit – the report only speaks in vague terms of the need to develop “mechanisms for influence and enforcement that benefit both sides”. It may have been politically astute of the CBI to avoid re-engaging with the debate on single market membership, but it leaves a big hole in their analysis and, more importantly, has the potential for adverse consequences for Britain, and for business, further down the line.

I will come back to what those consequences are, but before doing so it’s worth noting the response to the CBI report from Richard Tice, Vice Chair of Leave means Leave (which may perhaps be taken as representing the views of the Ultras more generally). He bemoaned it “as protecting the vested interests of the global multi-nationals at the expense of the approximately 90% of the British economy that does not export to the EU”. This short sentence embodies a series of misleading implications. Of course it is true that most of the British economy doesn’t export to the EU. Like all countries, most of the economy doesn’t export to anyone. But it makes no sense to have two sets of rules, one for the trading economy and one for the rest, which would be a recipe for red tape and would also permanently freeze the British economy into exactly the shape of its present pattern of trade activity.

However, the bigger implication is the populist one of Brexit as a battle with the “vested interests of global multi-nationals”. That is a nonsense given the kind of trade deals the Brexiters want to sign, anyway. It’s also a nonsense in terms of the way that all advanced economies – Britain’s, for better or worse, especially so – are globally embedded. Unless Britain wants to lose those firms, their jobs and their taxes then that needs to remain so. Brexit was never sold to the British public as a manifesto for economic autarky, and wouldn’t have been bought by them on that basis. And it’s nonsense because the CBI represents, and the issues it raises apply equally to, small and medium-sized businesses not just multi-nationals.

One of the most informative and saddening things I read this week was a blog post by Natalie Milton, the owner of small manufacturing company exporting mainly to the EU. In it, she details how leaving the single market and customs union will destroy the business she and her partner have built up over many years because of additional processes and costs. She explains precisely the nitty-gritty practicalities of Brexit for such a business (something few advocating Brexit seem to understand) and also how she and her family have built it from nothing so that losing it will devastate their whole lives. On her own account, these are ordinary people who don’t come from a privileged background but have created a successful business, earning foreign currency and providing jobs in their local community. It is crazy to think that destroying all this is a blow against “vested interests”. And, coming back to the point at the start of this post, it is striking how this person is almost the embodiment of what the Conservative Party used to claim to be the backbone, even the model, of what Britain was about. No longer, it seems.

How much influence business has on what happens with Brexit now remains to be seen. There are potentially heavy penalties for individual firms speaking out: as long ago as 2014 Brexit Ultra John Redwood threatened punishment for firms which spoke in favour of EU membership, and there are risks of adverse press coverage and lost government contracts. Still, as the government slowly come to appreciate that the fantasies of the Brexit Ultras cannot be put into practice, some degree of sanity may prevail. There is an irony in that, by the way, since what we see happening is the mirror image of that now rarely-heard piece of Brexiter scripture that the ‘German car industry’ would pressure the EU into delivering a cake and eat it Brexit deal.

It may be such business pressure that is leading to rumours that Theresa May will, after all, seek a form of customs union with the EU (something both the CBI and IoD have lobbied for and which recently became Labour Party policy). It may be that something like what the CBI are setting out in ‘Smooth Operations’ comes to pass. And that could, indeed, mitigate a lot of the economic damage of Brexit. However, even if so, there is a real danger ahead if the efforts of the business lobby are successful. The danger is of drifting into a kind of de facto soft Brexit when it has never been clearly articulated or framed as such, and doesn’t sit within a defined framework such as EFTA. I think there are many people in business and beyond who expect something like this drift or fudge to occur, and in a way it would be a rather British, make do and mend, kind of Brexit if it did.

But if that happens it will always be liable to future attack and unstitching by the Brexit Ultras, or for that matter by others. It won’t represent a clear, strategic decision by the UK but will rather be a patchwork of compromises and ad hoc solutions cobbled together in such a way as to slip it past not just the Ultras but everyone else, including the EU and including the British public. That won’t be particularly good for businesses – it means that investment in Britain will always have an additional risk factor – and it certainly won’t be good for Britain as whole. It will mean that far from Britain’s relationship with the EU being settled for a generation, that relationship will continue to be the running sore it has been for the last three decades with the added inflammation, of course, that Brexit has rubbed into that sore.  

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