16 January 2017

The Brexit blueprint Theresa May needs to follow


Theresa May has not yet delivered her key speech on Brexit, but friends of free trade are already celebrating. The weekend papers were full of reports that May’s version of Brexit would include exiting from the single market and customs union, the better to make our own arrangements with other countries around the world.

Meanwhile, in the United States, Donald Trump was telling Michael Gove – in an interview for The Times (£) – about his enthusiasm for an Anglo-American free trade deal. “We’re gonna work very hard to get it done quickly and done properly. Good for both sides,” Mr Trump said, later repeating: “We’re gonna get something done very quickly.”

In his interview this morning on the Today programme, Mr Gove kindly put aside his famous scepticism towards experts to credit my own research as proof of the jobs and growth that Brexit, properly handled, could bring.

Which raises the question: what does that kind of Brexit look like? When she stands up tomorrow to give her speech, what should the Prime Minister say? In other words, what does a good Brexit look like?

On this score, it is actually not very helpful to use language like “hard” and “soft” – or, indeed, to look at specific countries as examples for Britain to follow.

What is clear from our research is that a full Brexit could lead to a significant increase in material wellbeing for this country. What does that mean? A full Brexit is one that allows Britain to negotiate free trade deals with other countries.

One aspect of this, as I have suggested before on CapX, would be coming together with like-minded advanced economies to catalyse the development of a new global prosperity zone.

But there would also be bilateral agreements with advanced, emerging markets; real economic partnership agreements with developing countries, in which we offer to be more open to their key exports in agriculture than the protectionist EU, and they engage in regulatory reform; and a revitalised domestic agenda embracing more competitive regulation and a reduction of cost of key inputs for British households.

This, then, is the target. But in order to achieve these goals, it will be necessary to ensure that we don’t unwittingly take any of them off the table. And this will be determined, above all, by the way in which we leave the EU.

That is why we have argued for three pillars of Brexit which must remain protected in order to ensure we can maximize its potential outcome. These three pillars are:

  1. We cannot be in the Customs Union, because then we cannot negotiate agreements with other countries, as we will still be bound by the EU Common External Tariff. Nor can we be in the Customs Union on a transitional basis, as our potential trading partners do not operate in a vacuum and will move on to other potential partners if it looks like we will take too long to be able to do a deal with them.
  2. We cannot remain a member of the European Economic Area (EEA). Since services form 80 per cent of the UK economy – an unusually high proportion – we will need them to be part of any trade deals we strike. But in order to persuade other countries to open up their service sectors to ours, we need to be able to put our domestic regulatory agenda on the table for negotiation, so that they can gain access and benefits of their own. Under the EEA rules, this is impossible.
  3. We must be more open on agriculture. That means not only leaving the Common Agricultural Policy and Common Fisheries Policy, but making sure that we do not replicate their trade-distorting subsidies. This does not mean that we cannot make some direct payments to farmers – and indeed the Chancellor has made it clear that these will continue until 2020.  But if we are free of the CAP and CFP we will be able to make progress, in our negotiations with other countries, on tariffs and quotas for products we don’t produce – and lower distortionary subsidies in other areas.

But why am I so sceptical about a transitional deal? Don’t we need something in place to stop the UK economy falling off a cliff?

Yes, it is possible that, as the negotiations go forward, guided by these three pillars, there will be some need for interim measures. But these must be narrowly tailored – to deal with only those areas which actually need to be dealt with.

The truth is that there is no cliff edge. Instead, there are a series of issues where both the UK and the EU will need to reach agreement, if at the end of the two-year Article 50 period there is no concluded free trade agreement (FTA).

There may (for example) be specific deals in financial services, or a zero for zero tariff offer, or other industries where some interim measure is needed, pending the negotiation of a full FTA.  These are matters for the negotiation.

But customs clearance should not frighten British industry. The two most effective borders for customs clearance are those between the US and Canada and Australia and New Zealand. These are both part of free trade areas, not Customs Unions.

In reality, EU countries clear products from non-EU countries very quickly, so this poses no problems for trade from outside the EU: just ask the US and Chinese exporters who form two of three largest exporters into the EU.

By contrast, continuing with the Customs Union in any form takes the entire Brexit dividend off the table, because our other trading partners will become skittish about whether we will in fact be able to negotiate within any reasonable time-frame.

What about immigration? Last week, William Hague suggested (£) that to make things easier, we should allow EU citizens to come to the UK if they have jobs, and that this would be an easier immigration plan to implement.

However, Britain ought to be well capable of implementing a sensible needs-based immigration system – and it is imperative that we do not discriminate in favour of EU citizens at the expense of our other allies such as the US, the Commonwealth countries and others.  They too should be the talent pool from which we draw.

There is another concern here, which is the continuing linkage between the EEA and free movement.  We should accept that one of the EU’s hard red lines is that being a member of the EEA includes the concept of EU citizenship – which enables anyone in any EEA member to move freely among any other.

If our logical end state is indeed a free trade agreement, then we are no longer talking about being members of the EEA – and free movement of people is irrelevant.  We will certainly want movement of labour in the context of services deals (so-called mode 4), but this is something that anyone who is considering a free trade agreement with the EU would want.

It may be permissible in the context of very specific interim measures (for example equivalence interim measures for financial services) to agree something for a two-year period along the lines that Lord Hague suggests. But this should not be the end state.  As an end state, it imperils our ability to have a sensible needs-based immigration policy.

Such a policy is, as its name suggests, based on need and not on numbers.  And to be fair, it should be agnostic about where people come from (and certainly should not unduly prefer EU citizens over others).  Yes, given Britain’s trade flows, the likelihood is that such a mechanism will be used disproportionately by citizens of the EU member states – which is fine, as long as a preference is not locked in by law.

The Prime Minister cannot be expected to give away her cards before the negotiation has even begun. But by focusing the public’s mind on the potential prize that is available, and the versions of Brexit that would imperil that prize, we can do much to reassure markets, investors and the public.

Shanker A Singham is Chairman of the Legatum Institute Special Trade Commission and its Director of Economic Policy