Liam Hal­li­gan and Gerard Lyons on the truth be­hind Soft Brexit

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

The Sunday Telegraph - Money & Business - - Front Page -

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.


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 “rule­taker” – 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

‘The Soft Brex­i­teers sense this is their mo­ment, they are pro­mot­ing an un­ob­tain­able out­come and sow­ing po­lit­i­cal chaos’

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 – cher­ryp­ick­ing 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 “cliffedge” 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 longterm 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.

For all Euro­pean pres­i­dent Jean­claude Juncker’s fiery rhetoric, a Clean Brexit would ben­e­fit both sides. Theresa May and David Davis are seek­ing a free trade deal but ex­perts have warned that ‘no deal is bet­ter than a bad deal’. Be­low, work­ers at a Bur­gundy vine­yard. The French wine in­dus­try re­lies on UK ex­ports so would favour a tar­iff-free deal

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