Risk & Economy » Brexit » Brexit means trade-offs

The decision by the British people to leave the European Union in a referendum held in May 2016 followed an intense debate that primarily revolved around the potential economic impact of leaving the world’s single largest integrated area versus the concepts of British identity and sovereignty.

Despite various predictions pointing to the loss of economic output, employment and investment as a result of leaving the EU, a majority of British voters sought their enthusiasm with the prospect of a newly found freedom – the freedom for the country to control its own money, its own borders and strike its own trade deals with the rest of the world while continuing to benefit from unfettered access to the single European market through ‘friction-less’ trade.

Yet, as the prime minister secures yet another deadline extension and returns from Brussels, and despite a lot of background noise coming from all political parties and factions within those parties, nothing has really changed: we find ourselves in the same situation as we did the morning after the referendum. This is because three years on we face the precise same choices as we did then.

The referendum was won on the promise that we could take back control from Brussels while enjoying the benefits of full access to the EU market. We could have our cake and eat it. The reality is that Brexit is all about trade-offs.

Brexit is about trade-offs because we can’t have it all. The only question our politicians need to answer is what long-term relationship do we want to develop with the European Union? The EU remain our closest neighbour and most significant trading partner.

That question has never featured much in the pre-referendum debate, nor has it been addressed in in any meaningful way in the three years that followed the Leave vote. Yet, answering that question would enable us to move forward and assess the trade-offs involved.

Trade-offs

Despite the apparent chaos, the choices we face are surprisingly simple. How much control are we willing to cede in order to secure the benefits arising from EU market access? How much to give away versus how much to gain. In other words, to what extent do we want to prioritise economic security over our own sovereignty?

This is the only question we need to answer as a country, and by doing so we define the shape of our future relationship with the EU. The more control we want for ourselves, the reduced our ability to secure economic benefits. Controlling our borders involves rejecting the freedom of movement that underpins the single market. Securing full EU market access for goods and crucially, for services involves regulatory alignment with the EU and therefore, ceding control.

Our options

So despite yet another extension, we are in the same situation today as we were back then. Facing the same choices we’ve refused to make so far. There are reasons to be more optimistic than we were say, six months ago. First, we know there is little appetite among EU circles and the prime minister for a ‘no deal’ Brexit. The deadline has now been extended twice.

This considerably reduces uncertainty and the prospect of the ‘cliff edge’. Second, we know that leaving the EU in an orderly fashion requires approval of the withdrawal agreement. Without approval by Parliament of the agreement there won’t be an orderly Brexit. Third, we also know that the European Union is unwilling to renegotiate the withdrawal agreement, and therefore the discussion at home is now focusing on ways to tweak the political declaration that is appended to the agreement so it can secure approval in Parliament.

Hence the cross-party talks. Written in vague language, the political declaration looks beyond the two-year transition period covered by the withdrawal agreement, and can accommodate the prospect of a free trade agreement and that of a customs union. But making the political declaration acceptable to a majority of MPs requires an assessment of the trade-offs involved. In effect, only a handful of options are available to us.

Both a free trade agreement and a customs union involve varying degrees of control that the country will seek to repatriate from Brussels, and varying economic rewards. A free trade agreement is the most basic form of trading relationship. It involves the reduction or elimination of tariff and non-tariff barriers to trade between the two parties, with each side retaining its own tariff and non-tariff barriers on imports and other regulations regarding trade with third countries.

Under a free trade agreement, the UK would take back control of its own policies in most areas that matter to Leave supporters. It takes back control of its own money, with no contributions to the EU budget. It will also control its own borders, with no freedom of movement. It will also take back control of its own trade policy, with the UK able to negotiate its own trade deals with third countries.

A free trade agreement limited to the exchange of goods has the support of most Leave voters and Conservative MPs in favour of an orderly exit. But with full control of policy areas in Westminster British businesses will have few rewards to share.

Free trade agreements typically only cover goods, not services. The financial services sector the City relies on, like most services would be excluded from a trade agreement. The free trade agreement would only apply between the UK and the EU, and none of the third countries that have negotiated a trade deals with the EU.

A deeper form of integration involves a customs union. This is the prefered option for many in Parliament including most Remainers because it secures greater rewards and guarantees for the UK. But it involves giving away some control – most notably the ability to strike trade deals as our trade policy would be aligned to that of the EU.

The UK would also be expected to make some limited contributions to the EU budget depending on the specific schemes the country wanted to take part in. A customs union respects Leave supporters’ red line regarding the end of free movement of people, and the reward for British businesses includes preferential market access to any country that has negotiated a trade deal with the EU, in addition to EU market access. However, and crucially this would apply to goods only, not services unless the customs union is supplemented with an agreement on services.

There are more comprehensive mechanisms the country might, from an economic viewpoint be willing to contemplate. They include the single market option and the ‘Common market 2.0’ proposal that resurfaced in indicative votes in Parliament. While both would improve economic benefits, they also involve ceding greater control to European institutions, a red line for Leave voters. While both options were discounted by the government as politically unacceptable, they have gained some traction in Parliament.

The single market option improves the prospects for the services sector which would be able to trade with the EU in the same way as it does now, but implies financial contributions to the EU budget and acceptance of the four freedoms of movement that underpin the creation and operation of the single market – freedom of movement for goods, services, capital and crucially, labour.

The latter has been a red line for Leave voters. The UK however would be able to strike its own trade deals in the same way member states of the European Free Trade Association (EFTA) do through their membership of the European Economic Area.

The proposal for ‘Common Market 2.0’ originates from a cross-party panel of MPs. In essence it combines the benefits of a customs union with those of the single market through a commitment to join EFTA while benefiting from a derogation to enable the UK to negotiate its own trade deals. Both the customs union and the ‘Common Market 2.0’ have the greatest potential of securing a majority in Parliament.

Clouds on the horizon

At this late stage, there are clouds for those aiming for an orderly Brexit that protects jobs and secures tangible benefits for British business. As the prime minister returns from Brussels, she will face growing anger at home, most notably in her own party.

As long as she remains in power we can hope a compromise will be found in Parliament for a softer version of Brexit that encompasses one of the options mentioned earlier. This could be secured either through successful cross-party talks, or through the proposed round of binding, indicative voting in Parliament.

This will ensure the political declaration is eventually amended, making an orderly Brexit possible well before the amended deadline. However, there is growing acknowledgement that the PM is running out of time and goodwill and this opens up the possibility for her to be removed from power, either because her Cabinet turns against her or as a result of a general election.

And in this scenario, the chances of a Brexiteer succeeding her are real. Conservative MPs supporters of Brexit have increasingly turned in favour of a ‘no deal’ Brexit, acknowledging taking back control of our laws, money and borders are of greater value above that of EU market access. This paves the way for a disorderly Brexit that will cause a great deal of damage to jobs and investment back home.

The country does not need more time. The country needs a honest acknowledgement of the trade-offs involved. Do we really want to prioritise our own sovereignty at the expense of economic benefits? By answering this question we will define the scope of our future relationship with the EU.

Time alone won’t do it. The longer we refuse to answer that question and assess those trade-offs the greater the likelihood of a disorderly Brexit that will benefit no-one.