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.

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.