3 February 2020

How the UK can regain control – and get a good deal with Brussels

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Today has provided some welcome clarity on the Brexit process. Both the UK and the EU have now set out their opening positions for the next stage of negotiations, covering the long-term relationship after the transition period. At first sight, the two sides may appear far apart. But I believe there’s enough common ground – and shared economic interests – to take an optimistic view.

The UK’s position was explained clearly in the Prime Minister’s Greenwich speech and his rather more substantial written statement to Parliament. In short, we are leaving the EU’s single market and customs union at the end of the year, either with a new free trade agreement (FTA) along the lines of the deal the EU has with Canada, or based simply on the Withdrawal Agreement concluded in October 2019. Either way, the UK will not accept any requirement for continued regulatory alignment with the EU, or any jurisdiction for the EU’s Court of Justice in this country.

No-one should be surprised at this tough line. If it means anything, Brexit means regaining control of our laws, not continuing to delegate rules and regulations to EU policymakers or judges. The UK must therefore have the option to diverge. This isn’t so much a ‘red line’ as a statement of the blindingly obvious.

As outgoing Bank of England governor Mark Carney put it ‘it is not desirable at all to align our approaches, to tie our hands and to outsource regulation and effectively supervision of the world’s leading complex financial system to another jurisdiction’. What’s right for the City is surely good enough for the rest of us.

Needless to say, this is still anathema to those who wish we’d never left the EU in the first place and would now prefer some form of ‘Brexit in name only’. Often this is simply a question of politics. Many people seem to have extraordinary confidence in the wisdom of Brussels to determine what’s best for the UK. ‘Whatever the EU decides must be right’.

This is often allied with a lack of faith in the competence of UK politicians to do any better, or the ability of British voters to hold them to account if and when they fail. It is also consistent with the tired tropes that the Johnson government is beholden to shadowy billionaires and free-marketeers, bent on a ‘race to the bottom’, even though pretty much everything the new administration has done points to a more pragmatic, centrist approach.

I have only a little more sympathy with those who argue that there are strong economic reasons for continuing to follow EU rules, as the price that needs to be paid to maintain ‘unfettered access’ to the EU’s single market.

Many here are still relying on the Whitehall analysis of the long-term economic impact of different post-Brexit scenarios, even though this was prepared under the previous administration, when gloomster-in-chief Philip Hammond was still Chancellor. This analysis included a ‘modelled average FTA’ scenario in which the level of GDP is projected to be about 5% lower than if we had remained in the EU, with the hit rising to nearly 7% with additional negative assumptions about migration.

These numbers are often trotted out as a proxy for the sort of FTA that the government is now aiming for. But this is misleading. For a start, the Whitehall analysis took a relatively pessimistic view of almost every aspect of Brexit, with absurdly high estimates for the potential costs of new trade barriers with the EU, and absurdly low estimates for the potential benefits of freer trade with the rest of the world and better regulation at home.

What’s more, even if you accept the Whitehall analysis at face value, the UK government is aiming for something much more ambitious and comprehensive than an ‘average’ FTA. This is also the stated ambition of the EU, albeit with a rather different vision of what this means. The EU has now published its own negotiating mandate in which the phrase ‘level playing field’ occurs no fewer than 14 times.

In my view, there is still plenty of wriggle room for what this phrase means in practice. The EU’s default seems to be that the UK should copy the EU’s rulebook (with no say in making it). That’s simply not a reasonable or sustainable position. In reality, most trade agreements are based on concepts such as mutual recognition, equivalence and adequacy, where the rules do not need to be exactly the same as long as the outcomes are similar.

Indeed, over the coming months we can expect to see more and more examples of how breaking free of EU rules would be good for the UK. For instance, The Times has reported that the government is considering plans to allow pharmacists and paramedics to qualify as doctors through a fast-track conversion course, which is something not currently allowed by the EU.

I also expect more reminders that trade barriers work both ways, and that the EU has a lot to lose too. Nissan is said to have prepared contingency plans to pull out of continental Europe if Brexit leads to tariffs on car exports, and increase production in the UK instead. The company has denied the report, but it would make sense (as does the unwillingness to admit it publicly). This is consistent with evidence from other sectors, such as the large number of EU financial institutions that are now opening offices here.

Of course, only time will tell. But the decisive election result has clearly strengthened the position of the UK government, as well as providing a welcome boost to the UK economy. The chances of doing a good deal that allows the UK to regain control are higher than many seem to think.

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Julian Jessop is an independent economist