Yahoo Finance The biggest problem with Soft Brexit is that it's not attainable
In the first of two extracts from their new book, Liam Halligan and Gerard Lyons say the commonly held belief that Britain would be better off inside the single market and customs union is misconceived
There has been much talk of “Hard Brexit” versus “Soft Brexit”. Such labels are ubiquitous during these Article 50 negotiations – used freely by the broadcast media – yet they are partisan and deeply misleading. Hard Brexit makes leaving the European Union sound extreme and damaging, suggesting isolation and a bleak economic future. Soft Brexit, conversely, conveys a comfortable, ongoing relationship with the EU, with Britain still “part of the club”.
Leaving the single market and the customs union isn’t Hard Brexit – even if the name is deliberately coined to sound painful. It is simply Brexit. Staying inside the EU’s two main legal constructs, meanwhile, isn’t a harmonious Soft Brexit. It amounts, instead, to a deliberate and cynical failure to implement the 2016 referendum result.
A political narrative has developed that Britain would clearly be far better off staying inside the single market and customs union. As such, anyone wanting to actually implement Brexit, by leaving both, is seen to be obsessed only with sovereignty and immigration – and prepared for the economy to suffer, as long as they get their way.
Remaining a member of the single market and/or the customs union, in contrast, is presented as an enlightened “Soft Brexit” compromise, a balance between the Leave side’s “hard” ideology and Remain campaigners’ common sense. These are the terms of the UK’s Brexit debate, as viewed by much of our political and media class as we enter the autumn of 2017 and these EU negotiations heat up. Yet they are wrong on every level.
Soft-headed
Many Parliamentarians say they “respect the referendum result” but want “Soft Brexit”. Attempting to negotiate such an outcome, though, would seriously damage the UK, the EU and the vital ongoing relationship between them.
Soft Brexit would leave Britain in a dangerous halfway house. Inside the single market, the UK would become a “rule-taker” – still subject to rulings of the highly politicised European Court of Justice. We would be bound by huge restrictions on our economic and political freedom, but no longer able to vote on or influence those rules, even if they were changed to Britain’s disadvantage.
And, of course, single market membership would mean continued multi-billion pound annual payments to Brussels and “freedom of movement”. This isn’t Brexit – and would be viewed by millions of voters as an affront to the referendum result.
The economic benefits of single market “membership” are, anyway, wildly overstated and may even be negative. Membership means all UK firms – including the 95pc that don’t export to the EU – must comply with often unnecessary and expensive EU rules. Also, the single market in services barely exists, despite much rhetoric to the contrary. Many EU nations refuse to drop barriers to imports of certain services – which severely penalises the UK, the world’s second-largest services exporter.
We don’t need to be “in” the single market to trade with the EU. The US conducted almost a quarter of a trillion dollars of EU trade in 2016 from outside – without accepting ECJ jurisdiction, freedom of movement or making large annual payments. The UK can do the same. If Britain cuts an EU free-trade agreement, tariff-free trade can continue.
If not, we can trade with the EU under World Trade Organisation rules, paying relatively low tariffs – as does the US, China, Japan and every other major non-EU economy.
Since 1999, the share of UK trade with the EU has fallen from 61pc to just over 40pc. If the single market is so good for the UK, why do we trade less with the EU than with the rest of the world? Why is our EU trade shrinking and our non-EU trade expanding? Why do we have a large deficit on our EU trade, but a sizeable surplus on our trade outside the EU?
Being inside the EU’s customs union is also wrongly presented as economic nirvana. Membership means the UK must charge tariffs on non-EU goods. So British shoppers are paying more for a range of imports, including food, often to shield uncompetitive producers in other EU states from cheaper global prices.
And because 80pc of these tariffs are sent to Brussels, and the UK does more non-EU trade than any other EU member, Britain accounts for an unfairly high share of the EU’s combined tariff revenues. Again, this burden is shouldered by consumers.
Customs union membership also prevents Britain from striking trade deals with nations outside the EU – countries accounting for four-fifths of the global economy. This is a serious disadvantage for the UK, given our deep cultural and historic links with a wide variety of nations. As the global centre of economy gravity shifts decisively east, it is vital for the our future prosperity that Britain engages more with the world’s fastest-growing and most populous markets.
Outside the customs union, the UK is no longer part of the EU’s trade deals with various nations – often presented as a huge sacrifice. Over the 60 years since the EU was founded, though, Brussels has failed to cut a deal with any of the world’s top economies. The EU has no trade agreement with the US, China, India or Japan. (The recent, very preliminary agreement with Tokyo was little more than a press release). The EU’s 50 or so trade deals cover less than 10pc of the global economy, being mostly with tiny countries.
The EU is not well placed to negotiate trade agreements, comprising of numerous member states, often with conflicting objectives. The deals it has struck have also generally favoured French agricultural and German manufacturing exports, rather than UK services. Nations acting alone – such as Switzerland, Singapore and South Korea – have secured far more important trade deals, covering a much bigger share of the global economy, than has the EU.
In 2013, Switzerland struck a trade deal with China after three years of talks – the UK can do the same. Far from being “at the back of the queue”, Britain is well-placed to reach an agreement with the US. And India has shown great interest in a UK trade deal. The sizeable nations that do have EU trade agreements – including Mexico, South Africa and South Korea – have also indicated they want UK-equivalent agreements, providing an opportunity for Britain to modify existing agreements to our advantage.
While Soft Brexit is often presented as liberal and progressive, the single market promotes the interests of producers over consumers while entrenching the advantages of large corporations – which are far better able than smaller rivals to handle the complex regulation. Freedom of movement rules provide big firms with a ready stream of cheap, easily exploitable labour, while suppressing the wages of the UK’s most financially insecure workers. The single market also facilitates large-scale corporate tax avoidance.
The customs union, meanwhile, is a bad deal for UK consumers. On top of that, the EU’s tariff wall, particularly on agricultural goods, combined with the ghastly Common Agricultural Policy, severely hinders the development of many of the world’s poorest countries.
Perhaps the biggest problem with Soft Brexit is that it is unobtainable. Back in December 2016, the EU’s chief negotiator Michel Barnier said: “The single market and its four freedoms are indivisible – cherry-picking is not an option.” Yet this is precisely what the Soft Brexiteers are attempting, breaching EU rules by seeking single market membership along with a special dispensation from freedom of movement that no other country has.
That’s why “Soft Brexit” will actually end up being “Messy Brexit”. Pushing for this outcome puts the UK in direct and absolute conflict with the EU’s core principles – which, if seriously breached, could tear the bloc apart, as others demand the same deal. The most likely Soft Brexit outcome would be a diplomatic stand-off, along with chronic uncertainty for citizens, investors and businesses, risking serious economic and political damage.
In late July 2017, this point was made with devastating clarity by Fabian Zuleeg, a policy analyst closely linked to the European Commission.
“What is missing in these discussions is a real appreciation of the view from the other side of the Channel,” said Zuleeg. “Allowing cherry-picking of benefits would act as a signal to others that a Europe à la carte is obtainable, opening the Pandora’s box of disintegration.”
That’s why Theresa May did the right thing in her Lancaster House speech in January 2017 – confirming from the outset that Britain wants to leave both the single market and customs union. We call this approach “Clean Brexit”.
This allows the UK quickly to take control of sensitive issues relating to our borders, laws and trade – because we are not negotiating over such issues in a bid to stay inside any EU legal construct. Knowing we will be outside both the single market and customs union from the outset also gives Britain time to prepare ahead of March 2019 when we leave the EU – creating new facilities for cross-Channel customs clearance, for instance.
By avoiding cherry-picking, Clean Brexit is better for Britain, the EU and their broader relationship – with the UK not trying to upend EU rules, increasing the chances of ongoing UK-EU co-operation across a range of headings. Soft Brexit, in contrast, attempting to trade off single market membership against freedom of movement rules, would maximise “cliff-edge” dangers and business uncertainty – and could result in a disastrous diplomatic stalemate, while risking a systemic crisis.
A strong hand
Despite widespread negativity, the UK has a strong hand to play in these Article 50 negotiations. Our £69bn EU trade deficit represents profits and jobs across tens of thousands of EU firms. Germany ran a UK goods surplus of £32bn in 2016. Powerful business interests have much to lose if Britain imposes tariffs on such exports. The BDI German employers’ union says it would be “very, very foolish” for the EU to impose high trade barriers against the UK. BDI represents around 100,000 companies, employing one fifth of the workforce.
France is sometimes portrayed as wanting to “punish” the UK for leaving the EU. President Macron has described Brexit as a “crime”, vowing to take an uncompromising approach to deter other member states from “killing the European idea”. Yet, for French farmers and winemakers, the UK is a huge market. Numerous French firms, and the French government itself, have strong commercial interests in Britain, with investments across sectors including transport, automotive manufacturing and nuclear power. The Netherlands will also want a zero-tariff deal with Britain so Rotterdam, Europe’s largest port, remains a UK trade hub.
While European president Jean-Claude Juncker beats his chest and issues fiery rhetoric, influential business groups are determined to limit trade restrictions between the UK and the Continent. By declaring Clean Brexit, maintaining we’ll be outside the single market and the customs union, Britain benefits from powerful EU business lobbies urging their governments to strike a favourable UK trade deal, knowing they’ll otherwise face reciprocated WTO tariffs.
Ideally, the UK will agree what Theresa May has described as a “deep and comprehensive” EU free trade deal during the Article 50 period. Yet, settling a complex, multi-sector agreement with 27 governments, which must then be ratified by national parliaments and the European parliament, is probably impossible ahead of March 2019. That’s why the UK must prepare to trade under WTO rules, reoccupying our seat at the Geneva-based trade court and adopting our own tariff schedules.
Trading under WTO rules is often portrayed as a disaster. Yet most trade across the globe is conducted largely under WTO rules. The US and other leading economies trade with the EU on this basis, with each side paying tariffs that are generally very low. As such, it is by no means essential for the UK to strike a free-trade agreement with the EU ahead of March 2019. Failing to grasp this amounts to a major strategic error.
“No deal really is better than a bad deal.” The UK should state this clearly and often. “No deal” simply means we don’t strike an EU free trade agreement before March 2019 – which actually brings benefits. Under “no deal”, Britain’s EU trade deficit would generate substantial net tariff revenues, which could be used to compensate UK exporters.
More fundamentally, negotiating up against a hard deadline means the terms of any resulting agreement, which we must live with for years, would be far worse than a deal settled under less time pressure – once the Article 50 deadline has passed. Unless “no deal” is seen as a viable option, though, the UK’s negotiating hand will be seriously undermined – so all preparations must be made now to trade under WTO rules.
WTO rules are portrayed as “crashing out of the EU” to pressure the UK to accept an unfavourable trade deal before Article 50 expires. Yet “no deal” is an entirely coherent position and satisfactory outcome for Britain. Trading under WTO rules will provide a platform to strike a better long-term EU trade agreement, on our terms and in our own time, after Brexit has happened. The EU has even more incentive to do that than Britain, given its large UK trade surplus.
Accepting “no deal” on trade is not the same as “just walking away” – which means failing to settle administrative issues such as the mutual recognition agreements on goods that facilitate trade. No one is advocating this. It is unthinkable that existing and uncontroversial EU protocols granted to countless other non-EU members would not apply to the UK, not least as we leave the EU fully compliant. For Brussels to deny Britain such rights would breach both WTO and EU law, while incensing EU businesses and voters by threatening billions of euros of profit and countless EU jobs.
The UK will, of course, continue to trade and collaborate with the EU extensively after Brexit. Complaints that we are “cutting ourselves off” or “pulling up the drawbridge” are infantile and absurd. With a hung parliament, though, and the Conservatives vulnerable in the Commons and the Lords, the Soft Brexiteers sense this is their moment.
Far from “respecting the referendum result”, they are promoting an unobtainable outcome and sowing parliamentary chaos. Their aim is nothing less than to reverse the June 2016 referendum and, in doing so, topple the Government.
'Clean Brexit - How to make a success of leaving the EU' by Liam Halligan and Gerard Lyons is published by Biteback Publishing at £20.00. To order your copy visit books.telegraph.co.uk
