Tuesday, December 6, 2022

Swiss mini-drama shows how far the Tory party is trapped

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It has been a feverish week in Brexitland. Since Jeremy Hunt delivered his Autumn Statement this time last week, the debate over the future shape of Brexit has burst into life again thanks to some injudicious comments about wanting to creep back closer to Brussels.

The Sunday Times report — corroborated by colleagues here at the FT — said that senior figures in the Sunak government (senior enough for the paper to put the story on its front page) wanted a “Swiss-style” deal with Brussels.

This produced a predictably furious reaction from Brexiters including Lord David Frost who, as UK Brexit negotiator, had done everything to cut the apron strings with the EU, and now thought they could hear the Sunak government sounding a retreat.

Of course (as Frostian Brexiters well knew) the Sunak government didn’t actually want a Swiss deal — ie, paying money to Brussels’ coffers, free movement of people and dynamic regulatory alignment — but it provided the perfect excuse to put down a marker.

The “senior source” was sloppy to use such language, when what they actually meant was an incrementally closer relationship over “the next decade”. To anyone seeing the mounting cost of Brexit to UK trade and investment, that might seem like an obvious thing to say.

Indeed Hunt, interviewed the morning after his Budget statement, said pretty much exactly that. He told the BBC he had “great confidence” that — despite being outside the EU single market — the UK will be able “to remove the vast majority of the trade barriers that exist between us and the EU”.

This is clearly for the birds. As indeed was the voice in that Sunday Times article saying that the EU would allow the UK to cherry-pick its way to a new relationship with the EU “because it is overwhelmingly in the businesses interests on both sides”. 

Some days it is like the last six years never happened. The EU has offered the UK a “Swiss-style” deal on agrifood alignment (to help with the Northern Ireland protocol) but for other areas, you can expect Brussels to apply the same balance of “rights and obligation” (and self-interest) as when negotiating the TCA.

Indeed the entire mini-drama was a vivid demonstration of just how trapped the Conservative party has become by a Brexit that is driven first and foremost by concerns on internal party management.

This, of course, was mismanagement. Whoever shot their mouth off about “Switzerland”, far from soothing the markets and looking sensible as they presumably intended, only reminded everyone the extent to which Tory Brexit purists have been allowed to drive this process.

They not only stirred up the ERG hornets’ nest, which will make it harder to do a deal to resolve the endless row over Northern Ireland, but also advertised the woolly and cakeist thinking that still — even now — hobbles serious debate about the future of EU-UK relations.

It’s not simply that if you plug in current Tory “red lines” on not paying money into EU coffers or accepting any EU laws and free movement, there is precious little you can do to ameliorate the current bare-bones trade deal; the Brexit malaise runs deeper than that.

Take the collective outcry over the so-called Retained EU Law bill, a reckless plan to “review or revoke” up to 4,000 pieces of EU-derived law that form the basis of great swaths of national and economic life, from conservation rules to child car seats.

The cast of organisations telling the government this is a bad idea is incredibly broad; from the Institute of Directors to trade unions and environmental and consumer groups. But the government says it will press on regardless, because it’s a talismanic piece of legislation for Brexiters.

In practice, the wholly impractical 2023 “sunset clause” for retained EU law will have to be extended, but in the meantime uncertainty persists for UK business, and damage continues to be done to the UK’s reputation for sensible and stable government.

The row over the Retained EU Law bill speaks to a deeper conceptual problem for Brexiters, which is that while they cling to the belief that regulating differently from the EU will lead to a productivity boost, much of industry simply doesn’t agree.

As Roger Barker, director of policy and governance at the IoD, put it: “Getting to grips with any resulting regulatory changes will impose a major new burden on business which it could well do without.”

This is a view you hear echoed across a very broad range of industries, and it appears to genuinely discombobulate Brexiters who are deeply wedded to the idea that UK regulatory autonomy is the route to a Brexit dividend.

In his Autumn Statement, Hunt played the familiar tune, saying that “Brexit freedoms” would drive a “supply side transformation”, promising to announce changes to EU regulations in five growth industries: “digital technology, life sciences, green industries, financial services and advanced manufacturing”.

And yet that very night, at the annual dinner for the Chemical Industries Association — an advanced industry that exports £50bn a year, half to the EU, and directly employs 150,000 skilled workers — the chief executive Stephen Elliott was warning against hasty deregulation.

“We are not in the market for any regulatory bonfire,” he said, noting as an aside that the cost of the UK’s post-Brexit scheme to duplicate the EU Reach chemicals safety database was now expected to exceed £3bn.

No doubt it frustrates Brexiters, but the cost-benefit analysis of a bespoke or lighter-touch UK regulatory regime for companies that, in any case, need to register in the EU and US to sell their products at scale is very likely to be negative.

The government — as Hunt did — points to advanced industries, such as life sciences or agritech. However, this week I spent a day in Oxford talking to several start-ups in these fields and they were repeatedly clear: what they want from regulation is consistency, not divergence.

They also warned that it will take time for UK regulators such as the Medicines and Healthcare products Regulatory Agency, for example, to build credibility in the global marketplace, so that UK validations actually have clout with other, larger regulators in the EU, US and China.

All this is obvious to business, and yet it still provides the future hope to which even Remainers like Hunt must cling in order to justify a Brexit that is clearly having negative impacts on UK trade since it came into force nearly two years ago.

Adding to the UK’s Brexit bind, is that while industry largely rejects the government’s big sell on “Brexit freedoms”, that same promise of deregulatory divergence contradicts the search for those “Swiss-style” fixes that the sensible wing of the Sunak government is seeking.

As Anton Spisak, the trade and EU specialist at the Tony Blair Institute for Global Change, observed to me this week, bilateral agreements to reduce current frictions — a deal on agrifoods or chemicals, say — would require elements of ECJ jurisdiction that the party cannot accept.

It goes without saying that none of this helps the UK’s investment climate, when even a “sensible” government finds itself clinging to Brexiter legislation — like Dominic Raab’s Bill of Rights discussed in a previous newsletter, or Jacob Rees-Mogg’s Retained EU Law bill — that is so deeply and widely derided.

Brexit in numbers

Step back for half a second and it really shouldn’t be controversial to say that Brexit has hurt the UK economy. Erecting all non-tariff barriers to the single market on our doorstep that takes nearly half of UK trade was clearly going to have a negative impact.

And yet remarkably some Brexiters still remain in denial, choosing to cite headline EU-UK export statistics without accounting for inflation, or post-Ukraine oil and gas exports or compare performance relative to other peer economies facing the same global headwinds.

One of the clearest ways to measure how Brexit has impacted UK trade is to look at “trade openness”. This takes total imports and export volumes and then divides them by GDP volume as an expression of how open a country is to trade. 

Today’s chart from Stephen Hunsaker at the UK in a Changing Europe think-tank shows that the UK was towards the top of the pack for the majority of the last decade, but by the end of the Brexit transition period on Jan 1, 2021, the UK dropped to the lowest of the G7.

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As Hunsaker explains:

What we are clearly seeing is that it was not Covid-19 that caused the UK to lag behind the rest of the G7, in regards to trade openness, but the leaving of the EU on 1 January 2021. It is clear that a promise of non-EU trade supplementing a decline in EU trade has yet to materialise.

The Resolution Foundation, in its Big Brexit report published in June this year compared the UK trade openness to France, which is a country with a similar trade profile to the UK. It found the UK had experienced an 8 percentage point fall in trade openness since 2019, compared to a 2 per cent fall in France.

So much for “Global Britain”. The research also found that the UK lost market share across three of its largest non-EU goods import markets in 2021: the US, Canada and Japan.

UK government ministers can keep blaming “global factors” all they like — and politically perhaps that’s understandable — but until there is honesty with the public about why Brexit is hurting the UK’s long-term prospects, there is little realistic prospect of meaningful fixes.

And, finally, three unmissable Brexit stories

  • Forget about Leavers and Remainers, argues Robert Shrimsley in his column. The key Brexit divide in British politics is now between those who want to make it work and those who have no interest in doing so.

  • At the annual CBI conference, the director-general Tony Danker floated ideas to boost business confidence, including measures to soften the impact of Brexit, such as fixed-term visas for foreign workers. But Keir Starmer’s comments on the need to end Britain’s reliance on immigration underlined the political restraints both Labour and the Conservatives face — to the disappointment of business leaders

  • Fresh figures from the ONS show net migration to the UK rose to a record high of more than half a million people in the year to June 2022. Greg Thwaites, research director at the Resolution Foundation, said the data suggested that migration patterns had “fundamentally shifted post-Brexit”, with more EU citizens now leaving the UK than coming to the country.

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