Stephen Booth is Director of Policy and Research at Open Europe.
After a short hiatus, Brexit will be back at the top of the political agenda in the coming weeks. The Government faces crunch votes on the Withdrawal Bill in the Commons, we are due a White Paper setting out the Cabinet’s Brexit policy in greater detail and, at the end of June, Theresa May will meet with EU leaders for another showdown in Brussels.
However, there doesn’t yet appear to be a way through the current stalemate. All the while, time is slipping away and EU negotiators are turning the screws on Britain. Businesses don’t know what to plan for, which is dampening UK growth. The Prime Minister needs a plan for our future trade with the EU that can command support in Parliament and Brussels, and quickly.
Today, Open Europe publishes a blueprint for a pragmatic deal that could break the deadlock. Broadly, our proposal is that the UK should seek continued deep integration with the EU for trade in goods and greater freedom to go its own way on services. This type of relationship would reflect the existing pattern of UK-EU trade and the nature of the UK economy.
Of the major European economies, the UK is uniquely orientated towards services. They make up around 80 per cent of our GDP, nearly half our exports, with well over 60 per cent of those exports destined for non-EU countries. The UK cannot afford to be a rule-taker from Brussels over such a large swathe of its economy.
Reportedly, the Bank of England is deeply concerned by the Treasury’s willingness to countenance significant EU influence over UK financial services regulation under a Brexit deal. The Bank is right that the UK must have responsibility for setting its own rules in an area in which UK interests have often clashed with those in other EU states. There is also little chance of the EU agreeing to the UK’s most ambitious proposals for financial services access.
Services may dwarf manufacturing in terms of UK output, yet goods still make up just over half of UK exports. And, whereas only 37 per cent of UK services are exported to the EU, 48 per cent of our goods are. UK manufacturers of complex products such as cars and chemicals have become increasingly integrated into pan-European supply chains, which would be difficult to substitute for more distant partners.
The time devoted to seemingly circular arguments about customs partnerships or “max fac” belies the fact that the costliest barriers to trade are likely to be regulatory. In order to minimise barriers to trade in goods, the UK should maintain the EU’s existing rules on goods and agree broadly to follow future rules. Some Brexiteers might wince at this prospect, but there is limited benefit from regulatory divergence in these sectors – companies in non-EU states often choose to follow these rules anyway.
Equally, as a non-EU member, the UK could not be forced to adhere to a future EU rule deemed to be particularly intolerable. However, a decision by Parliament to depart from EU regulations could lead to retaliation and a diminution in market access. The costs and benefits of such an approach, and inevitable row with the EU, would need to be weighed by future governments and parliaments.
Meanwhile, Remainers should accept that it is not possible or desirable to recreate the existing economic relationship with the EU from the outside. First, with some exceptions, the Single Market in services has largely been a disappointment. Second, UK demands for an unprecedented level of services access from outside the Single Market would surely be met with an unacceptable EU counter-demand for the UK to relinquish control over so-called “level-playing field” issues. It would not be sustainable for the UK to mirror all future EU regulations over the domestic economy including on taxation, employment and labour rules, and so on.
Giving up some control – or sovereignty – over goods regulation, is a price worth paying for strong market access. In other areas, it makes little economic and certainly no political sense. This is a compromise that should win support amongst pragmatists on all sides of the debate.