The UK will inevitably become a less attractive home for business after Brexit. The problem can be tackled, but only if politicians face up to reality

FOG in channel: continent cut off is an (alas apocryphal) newspaper headline that points to the innate British sense of superiority. Victory in two world wars and a long history without invasion has given Britain a sense of detachment from its European neighbours. As a result, it was always a reluctant member of the European Union.

Now that Britain is leaving, it must work out its own path to economic prosperity. The task is not impossible. But the superior attitude needs to be dropped. The Conservatives under Theresa May seem also certain to win the forthcoming election, with an 18-point lead on the latest polling average. Mrs May was a lukewarm member of the Remain campaign, and was only brought to power by the sudden demise of the government’s leading duumvirate, David Cameron and George Osborne. It clearly took time for her to decide on her negotiating strategy; the key Article 50 provision was not triggered until nine months after the vote.

One approach that the government could have taken was to agree a Norway-type deal with the EU, in which Britain stayed within the single market and customs union to ensure that economic ties were maintained. The idea was mooted by Leave campaigners before the referendum vote. And there was nothing on the ballot paper to say that Britain should leave either the single market or the customs union; just the EU itself. In political terms, however, Mrs May seems to have decided this was a no-no, since it would involve being subject to the EU’s rules, including free movement of labour, and continued budget payments. By opting for a so-called “hard” Brexit, Mrs May has had great political success; the UKIP vote has collapsed, with many of the party’s voters switching to the Conservatives.
In economic terms, that still raises the issue of the trading relationship between Britain and the EU after departure. Government rhetoric has veered off in several different directions. It has suggested the “best possible” access to the single market (it would hardly try for the “worst possible” deal) but it has insisted that it will not comply with the other rules of membership such as being subject to the rulings of the European Court of Justice. It has also suggested that it will be able to negotiate special deals for certain industries, such as cars. It has championed hopes of a special deal with the US even though the Trump administration has a highly nationalist approach and sees a bilateral trade deficit as a sign of cheating by other countries; Britain has a trade surplus with the US in goods (the measure Trump seems to see as most important) so can hardly expect an easy ride. The UK government seems to think that the EU’s bargaining power will be undermined either because a) the EU has a trade surplus with the UK and will not want to see its producers lose out or b) Britain can “do a Singapore” and become an offshore haven, luring away EU businesses.
The misunderstanding seems to be that the EU will put its mercantilist interest in favour of a bigger trade surplus ahead of its political interest in keeping the rules of the EU intact. Once unpicked, the four freedoms (movement of goods, services, capital and labour) might easily unravel. A favourable special deal for the UK would only store up longer-term problems. Without a special deal, the danger is that multinational fims will no longer find the UK quite so attractive a place. This is a particular problem for financial services where passporting requirements mean they need an EU base; the FT reports that more than a quarter of firms in the sector expect to move workers.
What about the idea of Britain as a globally open economy, even as a tax haven? The latter threat sits oddly with all of Mrs May’s other rhetroic about readjusting capitalism in favour of the “just about managing” families that she is courting for votes. And the whole idea is undermined by Mrs May’s obsession about reducing the net migration target to the tens of thousands. Leave aside the point that Conservatives, who often bang on about the free market, want to intervene in the ability of employers to hire who they want (or rather remember this point the next time they make a free-market argument). Jonathan Portes has done an excellent demolition job on the idea that the UK can exclude “unskilled” workers by imposing a minimum salary of £35,000.

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