Wednesday 27 June 2018

What business is saying about Brexit, and why

Much attention has been focussed on the dismissal of warnings from Airbus – and an increasing number of other businesses - by Jeremy Hunt, Boris Johnson and others. Less attention has been given to the specific reason given by Hunt as to why Airbus should keep quiet: that it undermines the British government’s capacity to negotiate with the EU.

This is nonsense, for the simple reason that the EU negotiators, and all informed commentators, know full well how damaging Brexit will be for most businesses, especially those with closely integrated European Just-in-Time supply chains (£) like Airbus but, to varying degrees, all businesses of all sizes which trade with the EU-27. Indeed companies and trade bodies have been warning about it for well over two years and with growing insistence since last year, because of the way that business investment cycles and location decisions work. This isn’t a game of poker – or, if it is, it is one in which both players can see each other’s hands.

The only people who persist, wilfully, in not recognizing this damage are the Brexiters who dismiss it as (of course) Project Fear. Even that dismissal is perverse, since if the warnings are indeed nonsense then making them would not be helpful to the EU negotiators in the way suggested by Hunt anyway.

In fact, the only thing which make the negotiations difficult is that Britain, to the extent that its government can agree on an aim, is seeking as the outcome things that it has already excluded by virtue of its red lines. Specifically, Britain is seeking something like the kind of frictionless trade that is only achievable by being in the single market and a customs union, which it has ruled out; and participation in agencies and programmes regulated by the ECJ, which regulation it has rejected.

So, in summary, this is the central paradox of the government’s Brexit approach thus far: it is seeking to negotiate something which it has already rejected.

This is the real meaning of the ‘Barnier stepladder’. It is not so much that, as leading Brexit academic Professor Anand Menon recently put it, “this is the choice that the EU has presented us with”. It is rather just a tabulation of the types of relationship which have been identified by numerous other analysts, going back well before the referendum – but set against the red lines Britain itself has specified.

It’s true that Britain can expect to have a ‘bespoke deal’, but only in the trivial sense that every relationship with the EU has its own particularities (e.g. the Canada FTA is different to the South Korean FTA): but the basic binary of being inside or outside the single market is unavoidable, as Sir Ivan Rogers, amongst many others, has repeatedly pointed out.

On Barnier’s diagram, the British red lines mean that the only trade options left are a Canada style FTA or no deal. Personally, I do not see how a Canada FTA (or any other FTA) can be compatible with the UK (and EU) red line of there being no hard Irish border. But, leaving that aside for today (although, of course, it is a core issue), we might wonder why Brexiters are so troubled by this? After all, before the referendum, those who were not saying that we would be ‘like Norway’ were usually, like Boris Johnson, extolling the virtues of a Canada-type arrangement. If this were indeed so desirable then, again, there would be no problem save, perhaps, timing. The EU are, apparently, quite willing to enter into such a relationship.

But, of course, Johnson’s was a false prospectus. As he and other Brexiters were warned, but ignored, at the time, a ‘Canadian’ hard Brexit would be completely inadequate for services, and also for most manufacturing, because of the non-tariff barriers that the single market seeks to abolish. A no deal Brexit would be even worse for trade and – potentially far more immediately damaging – for non-trade issues such as air travel. Again, there’s no mileage in the idea, floated by Fox, Davis, Johnson and others, that somehow the EU can be made to believe the UK would walk away with no deal: it is, literally, incredible and the EU know that to be so whatever bluster the Brexiters put up. No country is going to deliberately engage in such self-immolation (though that does not mean it might not happen through a series of accidents).

So at least for the government – although some ministers have apparently still not grasped it – it is no longer possible to regard either Canada or, still less, no deal as viable policy. Thus it has lighted on the idea that it is possible in some way to ‘negotiate’ membership benefits without membership. That won’t happen not because the EU are punishing us, and certainly not because we have ‘shown our hand’, or had it revealed by Airbus et al but, simply, because it is a logical and legal impossibility.

The question then becomes: is the government going to realise that in time, which means either forcing the Brexiters within and outside the government to accept that or at least to face them down? This, supposedly, is what next week’s cabinet meeting is intended to result in, but we have heard that before. Perhaps the pressure of time and the pressure from businesses will yield results this time. I am not so sure, though, because even the softening of hard Brexit which seems to be under consideration seems to be a long way from realism, being based, still, on the ‘customs partnership’ idea and, now, on seeking single market membership for goods only. The former is an entirely untested and highly bureaucratic model, relying on high levels of trust and goodwill. The latter, I believe, seriously understates the complex inter-relationship between goods and services and, even if the EU accepted it I doubt it could be made to work in practice. I’ll post more on this if and when it emerges as government policy.

The fact that, thus far, the government have refused to face up to the real options available and the choices to be made is what is leading so many businesses to speak out now (and, it seems, many more are saying similar things privately). It is not simply about no deal Brexit versus hard Brexit, it is that even hard Brexit will damage them. In this sense, whilst it is true that businesses want clarity, it certainly does not follow that once they have clarity they will be happy to stay in the UK. It is just that they will then be able to make the decision as to whether to stay or not, with all that means for jobs and taxes which the Labour Party would do well to note. Thus clarity may be good for them, to allow them to make plans, but it won’t necessarily be good for the rest of us: for many manufacturing and services businesses the only clarity that will make them likely to stay would be for Britain, in fact or in very near effect, to stay in the single market and a comprehensive customs union.

In the absence of that, there probably won’t be big, immediate pull outs – especially where there are large sunk cost installations as in the car industry - but, rather, gradual disinvestment over many years. Indeed, there is already evidence of that as the government’s own figures show. But whilst ruling out the least economically damaging option, the government has not accepted what the alternatives must, by definition, be. What businesses are saying to them is that it’s time – in fact it’s long overdue – to get real. In that way, far from undermining the negotiations they are pushing for the only way in which the negotiations can make progress.

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