Brexit: making the unpolishable sparkle

The economic logic of hard Brexit has always been a chimera, and our political class is finally waking up to the impossibility of delivering it in any meaningful sense

During the New Labour years, Peter Mandelson was regularly maligned for the infamous quote about being ‘intensely relaxed about people getting filthy rich’. This statement was often taken out of context, ignoring his rarely cited proviso: ‘as long as they pay their taxes’.

I was reminded of this as Boris Johnson resigned from the cabinet and described supporting the government’s ‘Chequers Plan’ as akin to ‘polishing a turd’. This may be true, but what he omitted to say was that you can certainly roll it in glitter. This is evidently what Theresa May is attempting to do.

Brexit means…?

Rather than doing any heavy lifting – commentary on the departures of both Johnson and David Davis has emphasized their lack of attention to detail, just as glib statements made by prominent Brexiteers like Jacob Rees-Mogg have been regularly debunked, including by their more knowledgeable counterparts who have lost patience – they have scarpered from the nigh-on impossible implementation of a destructive process they carelessly unleashed.

Part of the problem, aside from intellectual inadequacy, is that Brexit – like ‘Brexit means Brexit’ (or as May put it recently, ‘Brexit really does mean Brexit’) – remains largely about campaign sloganeering, not serious policy development. We have had £350 million a week for the NHS, ‘the easiest trade deal in human history’ and, as Priti Patel stated in typically vacuous language after Chequers: ‘there’s not just frustration but concern over our ability to go out there in the world, be the buccaneers, grasp free trade opportunities’. As if being part of the largest and most integrated market on the planet has ever hindered the ability of UK firms to grasp continental trade opportunities, or others facilitated by the EU’s numerous trade and cooperation agreements with dozens of countries (including 38 with the US).

In fact, the prospect of losing this means business is now starting to panic. Companies are enacting contingency plans, including the entirely predictable decision to offshore investment to cope with the potential of a disorderly exit, or simply leaving the single market. Small companies are especially vulnerable to going bust. ‘F*** business’ seemed an apt statement for Johnson to make, as part of a government that is actively planning (!) to destroy firms, stunt growth and make its people worse off.

There are fundamental misunderstandings at the heart of the Brexiteers’ account of both the EU single market, and trade policy in general: ‘free trade fallacies’ that I have written about previously. They still seem not to grasp that the former is essentially indivisible: you are either in the market or out. It cannot be cherrypicked, as it would cease to be ‘single’, and an EU-UK ‘trade deal’ is no substitute for membership of a transnational marketplace in which our firms are deeply enmeshed. Those companies do not just send finished goods to Europe from Britain, but undertake all manner of intermediate activities across Europe, with different nodes, doing different things, in different places, under different regulations and systems of certification, for a complex range of reasons. Extricating the UK economy from the single market is, therefore, as former Director-General of the WTO, Pascal Lamy has said, like removing an egg from an omelette. In terms of the latter, escaping the regulation of the single market will not generate more trade, but rather diminish it, because it is regulation which facilitates trade and investment within that space, something of which Britain has been a primary beneficiary (and architect).

Unanswered questions

This is but one of the many Brexiteer paradoxes, alongside wanting to leave the club and be free of its responsibilities while retaining all the benefits, which are now colliding with reality. As Chris Grey suggests, they are faced with ‘the irreconcilability of declaring that hard Brexit is the inviolable will of the people with the general political imperative of not following policies that do major damage to the country’.

Yet because the national debate has not moved beyond sloganeering, there are numerous questions that prominent Brexiteers have not been forced to answer whenever they talk vapidly about ‘trade deals’, including:

  • What are our major exporters demanding from such deals that they do not have already, and why will they both increase our export capacity and offset the (massive) losses from UK-EU trade?
  • Why do we want an ‘independent trade policy’ given that market power, technical expertise and negotiating capacity are crucial for successful trade diplomacy, three things the EU has in spades as a genuine trade superpower, and the UK does not?
  • What is it, exactly, that we can negotiate alone that the EU cannot negotiate on our behalf, particularly when we factor in the previous point and the fact that Brussels already has myriad agreements – or has started discussing them – with our mooted partners?
  • Where is the value in developing alternative rules – and the costly infrastructure to manage them – when Europe is already determining them at, or accepting them from the global level, and we will ultimately have to largely adhere to them anyway?
  • Why do Brexiteers place so much faith in Free Trade Agreements (FTAs) when they do not actually increase trade by that much, especially between partners thousands of miles away from each other, and were we to enter into an FTA with, say, the US or China, it would decimate sensitive sectors of our economy?

However, few journalists appear to have the basic technical knowledge (or undertake the necessary research) to actually ask such questions, preferring the ‘he said, she said’ personality politics parlour game.

Even basic fallacies pass the national media by, with political reporting reduced to Love Island in Suits. As the post-Chequers resignations got underway, former Conservative minister Grant Shapps said on BBC 5Live (here from 4:09:50) that May should not face a leadership contest because ‘we have exactly three months to negotiate this deal with Europe, or come to a no deal agreement’. A no deal … agreement? The interviewer did not notice, let alone contest the absurd implied idea that ‘no deal’ is a viable option, rather than an unimaginably horrific potential catastrophe, the likes of which the country cannot – because of the failure of the media to accurately inform them – possibly comprehend, and no responsible government would ever countenance.

Amongst the Brexiteers, it is Rees-Mogg’s European Research Group (ERG) and the questionable information that it draws from the Legatum Institute or the frequently debunked Economists for Free Trade, which enjoys most of the media spotlight. As such, knowledgeable voices without a platform get drowned out. That genuine experts from both sides – Remainers and Leavers alike – have voiced endless frustration about this attests to the scale of the problem, and the extent to which our journalistic elite, many of whom are paid many multiples of a university professor’s salary to not grasp basic details and their implications or challenge blatant lies, is bordering on a national scandal.

Before and after the referendum, for example, Richard North and others that orbit his ‘EU Referendum’ blog and the Leave Alliance published a series of thoughtful papers on how a strategic approach to Brexit might be completed. This came alongside their ‘Flexcit’ plan, which maps out in painstaking detail (407 pages) the options at every stage of the process, from withdrawal to the long-term reconstruction of UK-EU relationships across the gamut of policy areas. It is also continually revised and updated in response to developments in London, Brussels and at the global trade policymaking level. Whatever one might think of the objective itself, this is a serious and meticulous attempt to envision and realise a post-Brexit future. They have even produced impact assessments for key sectors of the British economy, precisely because the government itself has singularly failed to do so.

For Flexciteers, the fundamental problem was ever-closer political union, not the single market, which for them is an indispensable piece of ‘trade technology’. What they have argued throughout (including in this post-Chequers Twitter thread) is that leaving cannot happen overnight: it must be a long-term, carefully sequenced series of stages, lest massive unnecessary damage be visited on the UK economy. They look on today with horror at the over-optimistic certainties parroted by the ‘ultra zealots’.

All that glitters is not gold

In comparison to this kind of work, Theresa May’s plan, which is trapped somewhere between a hard and soft Brexit really is a turd, no matter how much glitter she sprinkles onto it. Ian Dunt described the government’s white paper as ‘cakeism-minus’, replete with ‘muddled thinking, desperation and fantasy’. The idea of Britain remaining part of ‘a’ (not ‘the’) single market in goods, but not services, is a logical impossibility, both because the two cannot truly be separated and (again) there is only one single market. The UK is also a fundamentally services-based economy: as Grey has suggested, the notion that, given our massive trade surplus in services, we should seek to exclude them from any deal ‘would be seen as crazy in any world other than the topsy-turvy one of Brexit’. Although the EU has provided May with a degree of cover to help her survive until autumn, it will undoubtedly either extract concessions on free movement of people and services or reduce the scope of her ambition.

And why would it not? There is, to use David Cameron’s ignoble words, a simple and inescapable choice: a Ukraine-style Association Agreement (AA) tied to a Deep and Comprehensive Free Trade Area (DCFTA) or single market membership via EEA/EFTA. Yet May is hoping for the best (or worst, depending on your view) of both these worlds. We might call the first option ‘Chequers-minus’ (i.e. hard Brexit). It would lead to substantial reductions in trade and investment, and it is unclear whether it could resolve the Irish border conundrum. The government has formally requested an AA of ‘unprecedented depth and breadth’. The reason this is unprecedented, though, is because it potentially represents the type of cherrypicking that the EU has continually made clear is not possible if the integrity of the single market is to be protected (and hence why the outcome would ultimately have to be less than envisaged at Chequers and in the white paper). Moreover, DCFTAs are usually used for countries entering the EU space, and are thus predicated on further integration over time. The Financial Times actually quoted one EU diplomat joking that the white paper appeared ‘more like a membership application’ than a divorce, such was the level of (again, implausible) continuity requested within an AA-DCFTA framework.

The second we can call ‘Chequers-plus’, and this is where logic dictates we should end up. It would be far less economically damaging, and would have the benefit – for vocal Brexiteers – of (potentially) leaving the customs union, and thus being able to set tariff rates or get rid of them entirely. But this could also create a nightmare on the Irish border, unless we found a currently hypothetical technological customs solution or did indeed reduce all tariffs to zero. Yet this latter idea is completely bogus: non-discrimination would mean extending it to every WTO member, and encouraging the decimation of our most protected sectors, like agriculture. We would also throw away our leverage for those fabled ‘trade deals’ we apparently wish to negotiate, calling further into question the point of pursuing them. It would also create serious problems vis-à-vis the single market as the UK would have to undertake arduous rules-of-origin checks on just about everything. Staying in the single market and customs union would satisfy most Remainer objectives, notwithstanding the debate – which is arguably a red herring in any case – about whether or not we would subsequently be ‘rule-takers’, in turn defeating the political imperative for Brexiteers of leaving (see below for more on this).

There is supposedly a third option: no deal (sometimes called the ‘WTO option’). This would precipitate instant economic Armageddon, and likely long beforehand. It is weird listening to government discuss preparing for this eventuality, when everyone knows that they are not, but rather just pretending to do so to placate the Rees-Mogg tendency. It cannot really be prepared for, and certainly not in eight months. The nearest analogy I can think of would be a Caribbean island preparing for a once-in-a-century hurricane, but that takes years, little can be done to stem the impact, and there is a horrendous amount of mess to clear up afterwards. In fact, no deal would be worse: rather than a single shock from which we then gradually return to normal, it would be a perpetual state in which Britain has become a Third Country overnight with no formal trading arrangements with Europe (and even worse access than others, including the US and China, which do have a panoply of agreements with Brussels). Everything would literally grind to a halt. No matter how much food one stockpiles, eventually it will run out. What then?

May nonetheless seems to want to leave the majority of EU institutions, or at least is saying so for now. However, she also bizarrely claimed to want to keep our standards as high and avoid a regulatory race to the bottom. The whole point of a hardish Brexit – from a swashbuckling Brexiteer perspective – is that it offers the opportunity to eviscerate labour, environmental and other standards in order to gain a competitive edge. This is both what Dominic Raab, her new Brexit Secretary is on record as standing for, and another fallacy, in that massive deregulation would – as I argued last year – generally exclude UK firms from participating in EU-wide production networks.

But May’s post-Chequers statement was equally as fallacious, and begs many questions. First: why bother? If we are to cleave to EU standards, there is no benefit (in the hard Brexiteer sense) to be gained from leaving. Second, even if our standards do match EU ones, it does not mean we will be able to trade on the same terms: as North has recently argued (here and here) the specific standards we apply matter less than whether we are party to the myriad treaties, conventions and agencies that govern and manage different economic sectors. Plenty of firms and countries mirror EU standards, but they do not necessarily enjoy mutual recognition of them or get to participate freely in the single market (even though they may have some access in terms of exporting some products to it). A simple way of illustrating this is that I play football regularly under FIFA rules, but cannot turn up at Old Trafford and demand to play for Manchester United in the Champions League.

Or, as Peter North (another Flexciteer) has noted: the single market is ‘an integrated system to preserve standards integrity’. So, even if May’s ‘common rulebook’ could be designed (unlikely) and we could somehow diverge from some EU standards while maintaining mutual recognition (also very unlikely, and arguably even a logical impossibility) rules, he says, cannot ‘work independently of the regulatory system they were designed for’. Were the unachievable achieved, it would also create enormous amounts of expensive and complicated new bureaucracy, the very thing Brexiteers have spent decades wanting to jettison, and all for a sub-optimal outcome that offers a worse trading relationship than at present.

Delusional complacency

The bigger problem, then, is that many Conservatives do not understand what the single market is or why it matters. Writing the day after the Davis/Johnson resignations, Malcolm Rifkind said:

It is true that we will have to live with, at least for some years, serious limitations to deregulating some of the laws affecting industry, and negotiating new trade agreements with third countries … As the dust settles, and as British industry adapts to us not being in the EU, we will be able to assert greater freedom even if, over the longer term, we sacrifice some automatic access to European markets. It might take five or 10 years but what is that in the life of a nation?

This is astonishingly, dangerously complacent, and it can be unpicked on every count. To return to my earlier question: which laws do we wish to deregulate that ‘are affecting industry’? Can we even name any that are worth exiting the single market for? It is, to repeat ad finitum, regulation that permits trade to happen, and industry has been pretty vocal about this. If we diminish our environmental or safety standards – the dreaded ‘red tape’ that ensures products do not kill – firms will be shut out of EU markets. There will be no competitive boost, only a net loss.

What if, in Rifkind’s brave new world, British business does not ‘adapt’? Those firms which are, to use Henry Yeung’s words, ‘strategically coupled’ with investment across Europe and therefore rely on cross-border harmonisation of rules will, again, be shut out. They have two options: shift to within the single market, or close down. Seriously, that is the only choice: as one trade expert described it, ‘it is literally a matter of life and death for British businesses’, and therefore jobs.

What is ten years in the life of a nation? In the contemporary global economy, it is everything. Trade policy today is no longer about ‘trade’ in the classic sense (i.e. exporting goods) it is about securing investment, and that is generally embedded somehow in those value chains and production networks. This competitive environment is so intense that it effectively functions as a zero-sum game: if the UK loses an opportunity, it does so forever. The consequences for key sectors seeking to remain at the innovation frontier, and thus the country’s broader patterns of technological upgrading would be characterised by relative developmental decay.

We have already suffered a ‘lost decade’ with the slowest recovery on record in which levels of inequality have skyrocketed, and wages have atrophied. Do we really need another one, in which we fall further behind, and are thus less able to catch up? In sum, a Britain that eschews the single market faces the real possibility of the kind of decline that has previously only been faced by large middle-income developing countries. We simply cannot take chances with the fickle sources of international investment that are desperately needed to shore up our capital base.

Yet the most egregious of Rifkind’s comments was about sacrificing ‘some access to European markets’. This, again, highlights the lazy thinking that infuriates trade experts. First, there is one market, the single market, and you are – to reiterate – essentially either in or out. Second, it is not a question of access, or degrees of access, it is a question of membership, which is absolute, not relative (notwithstanding the very partial opt-outs enjoyed by Norway, Switzerland etc.). Third, being in the single market is the very thing that allows Britain to attract large swathes of external capital, to be invested in our international-facing, globally mobile industrial and services sectors (at least until recently when investors began to take fright, a worrying portent of what may be to come).

Towards a soft Brexit

The inexorable logic – which has probably been the case since the outset – is that the end point of this mess is some kind of ‘soft Brexit’ whereby we effectively stay in the single market, but perhaps with some cleverly constructed language that calls it something else and a few minor opt-outs or fudges like those enjoyed by the EEA/EFTA states. Moreover, despite the screams of ‘betrayal’ and the deep irresponsibility of large parts of the media – The Telegraph, which long ago gave up being a serious newspaper of record, asked after Chequers whether May had ‘committed treason’ – this would surely be a fair compromise given the divisions that exist in the country at large.

Brexit was, as Simon Wren-Lewis has argued, always a ‘fantastical project’. However, a question I keep asking myself is: why did the Thatcherites, whose hero was a key intellectual force behind the single market, not simply pursue some kind of eminently negotiable solution à la Norway with perhaps some opt-outs on, say, fishing and agriculture, along with a tightened free movement regime, which they could have sold to their constituents? Many even advocated for this during the referendum. The scary answer is perhaps that they are no longer Thatcherites, but rather, to use Naomi Klein’s words, disaster capitalists (a point also made by Flexciteers). We should thus be wary of those advocating no deal, since a crisis can be a great opportunity to make clever investment gains for those who precipitate it.

There is a critique of Labour to be made at this juncture too. Perhaps Keir Starmer has been clever to demand the impossible: i.e. the ‘exact-same benefits of single market membership’ which he knows cannot be delivered without staying inside it, yet still advocating broadly unworkable solutions. This, as I wrote last year, presages a potential disaster. Labour evidently expect that May will indeed eventually acquiesce in a variant of single market membership, so why risk taking the blame for ‘betrayal’ when the Tories will have to anyway? But what if this analysis is wrong, May fails (or falls) and hard Brexit is back on the table? Or is the logic of Corbyn’s position to actually oppose soft Brexit on principle: i.e. is he really a hard Brexiteer? How will Brexit be viewed, not in March 2019, but in 2022, and who will get the blame? The ‘innocent bystander’ approach may have run its course: if Labour is a government-in-waiting, it needs intellectual coherence, leadership and a long-term strategy, not short-term tactics.

The broader irony of the Chequers proposals is that, as Grey has suggested, ‘Brexit in its nature is divisive, but it’s quite an achievement to have alienated every shade of opinion’. Or, as Fintan O’Toole put it: ‘the best possible Brexit outcome is now the worst of both worlds’. Another way of looking at this, though, is that May could have succeeded in rolling her turd in just enough glitter to satisfy sufficient numbers of people. This would then give her the space to make the now-expected concessions to Brussels in the autumn, and brings to mind another paradox: if what we are actually witnessing is Brexit in Name Only (BINO) could some Brexiteers now travel full circle to an effective ‘remain’ position? As in: might they now realise that, if we cannot leave in the way they imagined, and want to retain a strong voice within clear institutional mechanisms where we can exercise it, staying in the EU might be far preferable to a de facto soft Brexit outcome?

This all probably means that we are now facing two broad possible futures. Either May does succeed in achieving some kind of soft Brexit and we can collectively finally begin to move on. It would help, for the good of the country, if Labour bowed to the inevitable and came round to endorsing customs union and single market membership to assist her with this. However, if a crisis is precipitated, a second referendum becomes more likely, probably with the two stark (and only) options: remain or hard Brexit. On that basis, given demographic changes, the dawning realisation that the public cannot have the unicorns that were promised to them in the previous plebiscite, and a country exhausted by years of the relentless public playing out of a highly indulgent Conservative party psychodrama, the former would hopefully win handsomely. But really, who knows? As Will Davies says, amidst all of this, ‘someone has to keep governing’.