The business and economic effects of Brexit matter: ask Brexiters

As the politics of Brexit continues to go round in circles, there is an increasing atmosphere of concern, possibly even desperation, amongst British businesses. The latest CBI Industrial Trends survey, published this week, showed new manufacturing domestic and export orders falling at the fastest pace for three years and optimism regarding export prospects falling at the fastest pace for six years. Meanwhile, concerns about access to skills and labour are the highest they have been since 1974, and manufacturing investment is set to fall at the fastest rate since the financial crisis.

A separate new CBI survey, of both large and small businesses’ Brexit preparedness, shows some even more alarming trends. These include that 80% of firms surveyed said Brexit has had a negative effect on their investment plans (up from 36% a year ago). Of course Tory Brexit Ultras such as Steve Baker have, in a rather extraordinary about-turn considering the historic link between the Conservatives and the CBI, nowadays written off the business group as a “grave menace”, whilst Boris Johnson’s view of business concerns about Brexit is well known.

In another new set of figures, the Society for Motor Manufacturers and Traders (SMMT) has announced a 16.8% fall in UK car manufacturing in September, the fourth consecutive month in which output has fallen. This comes amid ever-louder warnings from the industry of the damage Brexit could cause, the most recent being a very unusual public intervention from the global President of Toyota.

Brexiters dismiss business concerns

Again none of this matters to hardcore Brexiters. A dismissive article by Iain Duncan Smith the other day (cheered on by pro-Brexit economist Ruth Lea) railed against the car industry’s “prophets of doom” suggesting that the industry was of little account anyway. Strangely, the overwhelming importance they ascribe to the German car industry is not matched in Brexiters' regard for that of their own country. But apart from the disdain shown by this former leader of what was formerly called the party of business, the article contained at least two howlers.

One was the observation that UK auto manufacturing had been greatly “rejuvenated by the arrival of the Japanese under Lady Thatcher” – apparently in ignorance of the fact that she attracted them by virtue of British membership of the EU and the single market. The other was an apparent failure to understand the difference between global supply chains and regional just in time supply chains. Duncan Smith appears to think that since car makers source parts from outside of the EU single market and customs union, this must be through the same technique as those sourced from within. Thus he is able to conclude that all those car firm bosses don’t, in fact, understand their businesses in the way he does.

Duncan Smith calls on Anthony Bamford of JCB to pray in aid for his analysis, but he’d do better to look to James Dyson, the second of the triumvirate of businessmen invariably called upon by Brexiters (the third being Tim Martin. In passing, these three feature so regularly because there are so very few pro-Brexit business people – Duncan Smith also invokes the CFO of Aston Martin for the less than ringing endorsement that “Brexit doesn’t materially impact our plans”).

Dyson is relevant here in relation to his announcement this week that he would build his electric car in Singapore. The main discussion about this has been whether or not that is hypocritical in view of his pro-Brexit stance. But that isn’t really the key issue. Rather, it is his stated reason for doing so: “the decision of where to build our car is complex, based on supply chains, access to markets, and the availability of expertise …”. In other words, precisely those matters that UK car makers keep trying, unsuccessfully, to get Duncan Smith and the other Brexit Ultras to understand.

In any case, even if the car industry were as insignificant as the article imagines – and, apart from the fact that it actually employs about 1 million people directly or indirectly and accounts for 12% of UK goods exports, it’s important to consider the strategic significance of the industry as an R&D intensive (£3.65billion per year), high skill hub of the wider economy – it is hardly the case that it is the only one issuing “dire warnings”. Aerospace, pharmaceuticals, financial services … well, why bother to list them: it’s difficult to think of any sector of business, either in manufacturing or in services which is not issuing ever-greater cries of alarm. Brexiters write each individual one of them off, and in the process write off the greater part of the collective voice of business.

The paradox of Brexiters’ economic analysis

The most striking thing of all, though, is the way in which they do so. A few – a very few – Brexiters are quite open in saying that they are advocating and pursuing a policy which will cause considerable economic damage, but judge it to be worthwhile, normally on grounds of sovereignty. A much larger number of Brexiters – and no small number of bien-pensant remainers – chide the remain cause and especially its referendum campaign for over-focussing on economics and on dry analysis, thus misunderstanding what motivated leave voters. Yet, in fact, most Brexiters are at pains to try to make, precisely, economic arguments for what they are doing. Indeed, Duncan Smith’s article is replete with such arguments.

So too was a recent piece in the Daily Express by Jacob Rees-Mogg, claiming Brexit would bring about a leap in prosperity. Just as Brexiters always turn to the same tiny minority of business leaders, so too do they look to a similarly small group of economists. In the case of the Rees-Mogg article it won’t be a surprise to learn that, yet again, Patrick Minford and the Economists for Free Trade (EFT, formerly called Economists for Brexit) are cited for the evidence (as they are in Duncan Smith’s piece).

This time it was their recent ‘Budget for Brexit’ report, which had already been comprehensively taken to pieces by trade expert Frances Coppola, whilst former Chief Economist at the Cabinet Office, Jonathan Portes, tweeted that it “contained fantasy numbers” and was “an insult to the intelligence of its readers” (this, interestingly, in relation to a specific claim about the small size of the auto industry, which is apparently the Brexiter meme de jour).

None of this should be a surprise: the underlying basis of the EFT’s analysis of Brexit has been discredited over and over again (see a previous post for links to several examples). Moreover, whilst Rees-Mogg correctly acknowledges that Minford’s is a minority view he is surely wrong to say it should be given attention because of his “remarkable record” of successful forecasting, as – to take one of many examples - this chart from Chris Giles, Economics Editor of the FT, shows.

Of course, no matter how often this is pointed out and whoever does so it will make no difference. But it reveals again the fact that the Brexiter case is very much based on economics and that they are more than happy – indeed seek – to bolster that case by appealing to expert authority. Contrary to what seems to be the received wisdom on all sides of the debate, the question of whether Brexit will or will not make people worse off is still a key battleground. One of the achievements of the Brexiters is to continue to fight on that ground whilst, paradoxically, arguing with some success that it is not the ground that actually matters.

The enduring importance of economics

Yet it is clear that the reason both remain and leave advocates continue to discuss Brexit in economic terms is because it is a key dividing line amongst remain and leave voters. Polling evidence shows that some 56% of leave supporters (compared with 6% of remainers) think the economy will be better as a result of Brexit, whilst 69% of remainers (12% of leavers) think it will be worse as a result. It’s not at all clear where the cause and effect lie here (i.e. if people’s views of the economic impact explain their position on Brexit or vice versa), but it does suggest that economics – or perhaps more accurately people’s jobs, standard of living, taxes and public services – has not ceased to matter.

And we are no longer in the territory of forecasts. The latest (30 September) assessment by the Centre for European Reform’s Deputy Director John Springford is that the UK economy is 2.5% smaller than it would be had the vote been to remain in the EU, with a knock on effect of £26billion on public finances. The test of whether or not these and other economic effects of Brexit matter to voters is this: do Brexit advocates say that they do not matter? Or do they deny that the effects are happening and/or say that they are nothing to do with Brexit? The answer, almost invariably, is the latter.

What did the People's Vote march achieve?

It’s often said that political marches change nothing, but large ones are a powerful symbol, not least because of the media attention they command, and symbols matter hugely in politics. Mobilising significant numbers is a visible reminder of strength of feeling, especially as it’s a fair assumption that for every person marching there will be several more who share that feeling.

Before Saturday’s People’s Vote march, I thought that if it attracted anything less than, say, 100,000 it would be seen as a flop, if it got to 250,000 then it would be a success. So by that or any other reasonable standard the actual turnout, estimated at 700,000, marks it out as a demonstration of historic proportions. It’s very unusual indeed to get 1% of the British population to take to the streets.

Even more important than numbers is context

That’s important, but what really gives those numbers political cut through is the timing of the march. Although long planned, it came at the end of a week when months of deadlock in the Brexit negotiations came to a head. This was meant to be the moment when a deal was done, ready for ratification (indeed, I assume that this was why the date was chosen by the march’s organizers). Instead, issues that were supposedly settled in the Phase one agreement last December remain stubbornly unresolved. At the same time, the bitter warfare within the Government and the Tory Party is on ever more open display.

This context is crucial. Without it, the numbers probably wouldn’t have been so large and, even had they been twice the size, the march would still have been relatively easily dismissed. If Brexit was being confidently and competently executed, it would be easy for the Government and Leave campaigners to pronounce that everything was going smoothly and Britain was on track for a successful Brexit.

That this is not so is the political millstone that Brexiters now carry. The repeated campaign claims about how easy a deal would be now look absurd. It was supposed to be the case that being the world’s fifth largest economy, with a trade deficit with the EU, combined with the supposed interests and influence of German car makers meant that from day one Britain would hold all the trump cards. Had that – or anything remotely like it - proved true, demands for another referendum would now be the preserve of eccentrics and fantasists, rather than a conceivable scenario.

Of course Brexiters have all sorts of excuses for what has gone wrong, blaming the EU, or remainers, or a Prime Minister who did not truly believe in the cause. But excuses are rarely a compelling political message. They are certainly less compelling than being able to point to tangible success. In the absence of such success, the headline counter-argument to another referendum is the rather illogical one that a democratic vote would be undemocratic, or some sort of insult to voters. Yet if leaving is still the will of the people, they will vote for it again; if they don’t then it’s no longer the will of the people. As I’ve discussed in detail elsewhere on this blog, the arguments against another referendum in principle don’t stack up.

Another referendum could only be the product of political crisis

Be that as it may, there are profound practical and political barriers to another referendum and none of these is removed, or even addressed, by the march. Issues of timing – such a vote would certainly require agreeing an extension to the Article 50 period - the question to be asked, and the extent of the franchise remain amongst several powerful difficulties. Moreover, all of this would have to be resolved by a deeply divided parliament, facing a febrile public mood. It would entail Labour shifting decisively towards supporting a referendum, which they have already inched towards, and, for it to be meaningful, a referendum with an option to remain. And it would entail a very abrupt U-turn by a terribly weakened Prime Minister, assuming she could even survive in such a scenario, or considerable toughness – and imagination - from her replacement if she didn’t.

It is all but inconceivable that any of these problems could be addressed in any circumstance other than MPs voting down any deal the Government reaches with the EU, or no deal being struck at all. But those circumstances would be ones of grave political and economic crisis in which the options would be very limited and any possible solution would be reached for, for want of anything better and for fear of something worse.

Control of the agenda is half the battle

It would be in that context that Saturday’s march – and, in such a situation, no doubt even greater public demands for a vote - would assume its greatest importance. By keeping it so visibly on the agenda of possible political options, another referendum would be the off-the-peg solution that politicians could reach for when few other options were available.

It has long been a truism of politics – both national and organizational – that having your policy at least on the agenda is half the battle. The necessary, though not of course sufficient, condition for any policy is that it is both discussable and discussed. That was the achievement of Saturday’s march: it firmly hammered home that another referendum lies in the domain of discussable and therefore possible options.

Brexiters are very keenly aware of this, which is why they go to such strenuous efforts to say that another referendum is not even up for discussion. That it might be so is precisely the threat made to them by Theresa May in her conference speech, and precisely what lies behind Michael Gove’s view that, to paraphrase, what matters for Brexiters is to get a Withdrawal Agreement over the line, even if in a form they don’t like, so that Brexit doesn’t slip through their fingers.

If – and in my view it still not likely, even if it is becoming a little more likely – another referendum came to pass, remainers should certainly not assume that their cause would win the vote and, if it did, that would only be the beginning of a long hard road to healing the damage that’s already been done. But what has already been achieved through the People’s Vote march is to keep open at least the possibility of that road being taken.

Transitioning to incomprehensibility

Following the twists and turns of Brexit has often been a complex matter but in the last few days, for I think the first time, I have really struggled to understand what is going on and why. The idea of an extended transition period was floated by Michel Barnier, apparently as a concession to the UK. Which in a way it is, to the extent that originally Britain had sought a longer transition; two years rather than the 21 months envisaged in the phase 1 agreement. It got pared back to December 2020 in order to fit in with the EU budget cycle.

Yet Barnier’s suggestion was greeted by Theresa May as a new EU demand to which she might, with concessions, accede. Meanwhile Brexiters reacted with fury, calling it a plot to keep Britain locked into the EU (apparently unaware that the increasingly predominant view in the EU is that the sooner it is rid of Brexiting Britain the better) and remainers seemed unimpressed.

The argument for such an extension appears to be that it would give more time for the future trade terms to be agreed. This in turn would mean that the Irish border backstop would never be needed, and there would be a smooth shift from transition to those new terms. That, in itself, might not be enough to get a deal done on the Withdrawal Agreement, if May sticks rigidly to the recent line that writing in a Northern Ireland only scenario could never be acceptable. But, if she moves on that, it might conceivably be enough to persuade MPs – apart from the DUP, anyway – to agree to such a deal on the basis that it was entirely hypothetical.

However, and this is the really puzzling thing, it is just not clear why an extension would make any difference. One issue is simply time: even with a 33 month transition it seems extremely unlikely that a trade deal will be completed and ratified. The other, more important, one is that it is inconceivable, at least on my understanding, that any trade deal would avoid the border issue re-emerging. The only way that could happen would be if the ultimate trade arrangement was for the whole of the UK to remain in the single market and some form of customs union. Back to Norway (+) which the government has ruled out, but which could, I suppose, come back on to the table in the future, especially if the Political Declaration is sufficiently vague.

Incomprehensibility is now the aim

The puzzle, though, is solved by recognizing that the negotiations have now entered a phase when what is proposed is not meant to be comprehensible. The political imperative now is not to find something that makes sense but to make a deal – any deal – that can get through. That is common enough in diplomacy, and it is especially evident when there is a need to accommodate massively divergent views. Indeed, the Irish peace process is a good example of it, with many of the constructive ambiguities that enabled its success being dependent on the fact of both Ireland and the UK are EU members, hence the threat that Brexit poses for it.

That comparison is a revealing one, because it suggests that the reason the Brexit talks are now in the territory of such diplomacy is that they have become so riven by conflict and irreconcilable positions that increased use of incomprehensibility – to facilitate multiple readings – is necessary. The same thing happened, albeit to a much lesser extent, with the phase 1 agreement. That had a bit of ambiguity in it with the consequences we’ve seen when it got drafted into legal text for the draft Withdrawal Agreement, which removed those ambiguities. The price of getting the final Withdrawal Agreement deal done only by use of much greater ambiguities would be that it would not settle anything in a substantive way, with future interpretations and re-interpretations being made by all sides.

The dangers of incomprehensibility

If so, I see great dangers ahead. First, it will set up years of claim and counter-claim (in what will, of course, be on-going negotiations between the EU and the UK on future trade terms) about what exactly the parameters of those talks are and, ultimately, when and how the backstop will come into play. Second, and relatedly, it will means years in which British domestic politics continues to be divided and entirely dominated by Brexit. Third, and related again, it will mean years in which Britain’s global role and reputation are solely bound up with the pursuit of a project which other countries see as, at best, incomprehensible and at worst reckless.

Fourth, and perhaps most importantly, it will lead to a gradual, slow-burn economic decline as more and more businesses relocate more and more of their operations; and as individuals, whether British or EU-27 national continue to re-locate themselves, for both economic and cultural reasons. For it shouldn’t be forgotten that in this scenario the possibility of a no deal cliff edge won’t disappear, it will just be postponed. We will have avoided the massive bang of a 2019 no deal and replaced it with an economic depth charge slowly but surely eroding investment, jobs, taxes and public services.

Cobbling together some gloop of backstops and double backstops and potential transition extensions is probably the worst of all worlds, pleasing neither leavers nor remainers. Leavers will see no Brexit dividend, no resurgent Global Britain, and far from taking back control will have abdicated it. Remainers will have lost all hope of EU membership, at least in the short and medium terms.

An unsettled future

Far from the referendum having ‘settled the European issue for a generation’ this will leave it unsettled for a generation. A vote to leave always had that danger, but a practically workable and politically consensual soft Brexit would have minimised it. Instead, the government’s initial embrace of hard Brexit and the subsequent backtracks in the face of its predictable and predicted unworkability have created an intractable mess that dooms us to years of political bitterness and economic limbo. And this, remember, is the scenario even if a deal can be done that gets ratified by all the bodies that need to ratify it.

In such circumstances, it’s not surprising that both sides of the debate are polarising in search of more clear-cut outcomes. That is both a condition for and a consequence of the drive for ambiguity and incomprehensibility. For Brexiters, it means ‘clean Brexit’ which seems to imply a kind of ‘soft no deal’ (i.e. no Withdrawal Agreement but side deals on things like flying rights). For remainers it means a People’s Vote in the hope of a decision to stay in the EU after all.

So I think that that is where we are at the end of this week: Brexiters and remainers are in different ways trying to cut through the Gordian Knot that has been created over the last two years, whilst the British government and the EU, again in different ways, are trying to wrap it over with new and even more fiendish knots. Meanwhile – to mix Greek myth metaphors – the Sword of Damocles hangs over our heads by a thread.