Whitehall prepares for battle
Britain risks becoming choked by trade bureaucracy
The Brexit vote was a shock. It shouldn’t have been, given how unevenly the spoils of globalisation are distributed, with the rich and skilled gaining while the poor, young and unskilled lose.
Now we need the best possible exit strategy and the government’s negotiating aims must take account of what is achievable. In September, the Treasury Select Committee went to Berlin and Rome for discussions with politicians and officials.
Panglossian claims such as those made by Boris Johnson, the Foreign Secretary, that: “It does not seem to me that it would be very hard to do a free trade deal very rapidly indeed,” and by Liam Fox, the Secretary of State for International Trade, that we live in a “post-geography trading world,” are more than a little misplaced.
Property prices are shooting up in Frankfurt as people anticipate an exodus from the City. In Italy we were told that a good Brexit deal simply wasn’t the political priority for other EU member states. Over and over again we heard the same word—“precedent.” For the other member states, with the possible exception of Ireland, they have their own domestic political worries. Merkel is looking over her shoulder at the right wing Alternative für Deutschland party; the Italian political system has to deal with the Cinque Stella movement; and France the threat of Marine Le Pen’s Front National—all three are anti-EU parties and no one wants it to look as if leaving is rewarded.
The UK’s domestic political need to end free movement of EU citizens undoubtedly means our membership of the single market will end. But the focus on this tension between immigration policy and the single market has obscured what for large swathes of industry, especially manufacturing, could be more important—whether we also leave the customs union.
The customs union was set up in 1968; it’s what we joined in 1973 and reaffirmed in the 1975 referendum. It’s what most people call the Common Market and it’s pretty popular. Perhaps a majority do feel the European Court of Justice over-reached itself and immigration is out of control, but they like the Common Market.
The customs union levies a common external tariff on imports to the EU, but within it, goods move freely and the Commission negotiates external trade deals. If we leave the customs union in order to pursue our own trade deals with China or the US or the Commonwealth, when we export into the EU market we will have to comply with the Rules of Origin—a bureaucratic procedure to show where all the components in a product come from. It’s designed to stop the third countries from cheating. For example, my constituency contains the last manufacturer of televisions in the UK. Lots of their components come from China. If we leave the EU they’ll have to show what proportion of the final product is British and how much is Chinese, so that each part is charged the correct customs duty.
It is well known that Norway is in the single market but outside the customs union. Some Norwegian exporters have found that complying with the Rules of Origin is so costly that it’s cheaper to pay the tariffs. If your biggest export is oil this isn’t too disastrous, but for the UK it would be catastrophic. After 40 years in the EU, we have highly integrated supply chains. Parts move back and forth across the EU: notwithstanding the recent fall in sterling a 5-10 per cent tariff on all those goods would be very problematic. Given that 44 per cent of our exports are to the EU, accounting for three million jobs, the new deals with third countries would have to be stupendously better to be worth the cost of crippling our EU exports.
Apparently, the Treasury is waking up to this problem and fighting a reargued action. This is welcome, but it will involve the prime minister in her first major U-turn.
I don’t believe that when the Prime Minister formed her new government and set up a department for International Trade, she intended to signal the UK’s departure from the Custom’s Union, or that she even knew the ramifications. She’s been buried in the Home Office for six years. But where was the Cabinet Secretary? Jeremy Heywood has told the Public Administration Select Committee that senior officials were preparing for the possibility of Brexit, so he should have been at her right hand when she was setting up the new departments, explaining the issues.
Everything is set for a Whitehall battle royal, one that the Treasury must win. Undoubtedly, Liam Fox is delighted to be back in the Cabinet, but one politician’s career must not put three million manufacturing jobs at risk.
On the 17th of January 2017, Prospect hosted a roundtable discussion with the contributors to: Brexit Britain: the trade challenge. This report is designed to act as a guide for parliamentarians, officials and businesses with a stake in the UK’s changing relationship with the world following Brexit. The discussion was chaired by Tom Clark, Editor of Prospect. Participants included Tasmina Ahmed-Sheikh MP, Miriam González and Vicky Pryce.
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