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LILICO Andrew

Andrew Lilico is Executive Director and Principal of Europe Economics.

Across the UK media, it is widely acknowledged that Theresa May is vague about her Brexit negotiating strategy. Some admire this, saying it’s important not to show all your cards before a negotiation. Others belittle it, saying the only reason that she won’t tell us what she’s doing is that she doesn’t know herself. Others still regard it as a threat or an affront, saying it’s crucial for Parliament to be involved or that she’s going to betray the Leave voters.

All, however, seem to agree that her strategy isn’t clear. Note that a strategy not being clear isn’t the same thing as its being wrong, or its being executed incompetently, or the Government acting in ways that are inconsistent with or counterproductive to its strategy, or the Government not understanding the significance of certain other decisions for its strategy. These might all be true, but none is the same thing as the strategy not being clear.

What is it that isn’t clear? She is going to end free movement and end UK laws being subject to the European Court of Justice and the EU decision-making process, and also have a new trade deal with the EU that leaves UK-EU trade as close as possible to its current conditions whilst leaving us free to negotiate new trade deals with non-EU countries. What isn’t clear?

Ah, people say, but she isn’t being clear about whether the UK wants to stay in the Single Market. How not clear? She says we’re definitely, one hundred per cent going to end free movement and our laws being subject to EU law. So we’re not going to be in the “Single Market” ,in the sense that being in the Single Market means (by definition) having free movement and being subject to EU law. That is crystal clear.

But, on the other hand, there are actually lots of “single markets”. There is the Single Market in Financial Services, the digital Single Market, the EU “internal energy market”, the Single Market in pharmaceuticals, and so on. She hasn’t altogether ruled out the possibility that we might want to be part of one or more of these, at least for some transitional period. And why would she? If we could arrange some involvement in some of these, such that we were not subject to EU law and did not have free movement, is it so very obvious that we would not want to be in them?

Again, people say she has not ruled out being in the EU’s customs union. But since she’s said we’re going to seek to negotiate new trade deals with Australia, the US, China and others, after we leave the EU, that means by definition that we are not going to be within the EU’s customs union, since being in such a customs union means agreeing to common external tariff levels, which is incompatible with changing our tariff levels as part of new free trade agreements. That is, once again, crystal clear.

On the other hand, her ministers have floated the possibility of establishing sectoral customs unions, with some unofficial chatter particularly about cars. In principle, one could be part of a customs union with the EU concerning cars and also have free trade agreements covering other sectors with non-EU countries.

It’s certainly the case that WTO rules tend to discourage sectoral-only trade agreements. Customs unions are supposed to cover “substantially all trade”. But many of those discussing WTO rules (as indeed many of those discussing EU Treaty obligations) talk of them as if the UK were purely a rule-taker and as if it had to obey. Neither of those things is correct. We’re one of the most important members of the WTO. If we said the rules needed to be adapted to cover a situation like ours in which we were leaving a customs union, but might not want to leave it in every respect, other WTO members and the WTO as a whole would have to think carefully about whether its rules should change. If the UK and the EU were to set up a customs union in cars, the WTO would struggle to prevent it. Perhaps the UK and EU would not want to defy the WTO in such a matter, but it is not obvious that that would be impossible if they really thought it was worth it.

Another point of vagueness on the Single Market and on WTO prohibitions on sectoral customs unions concerns whether these institutions will exist in their current form by the time Brexit actually occurs. The migrant crisis in Europe could potentially lead to the end of free movement in the Single Market. That’s unlikely, but not impossible. Or Donald Trump could withdraw the US from the WTO, destroying it. That’s unlikely, but not impossible.

One further thing. Another possibility is that in some sectors we might want to remain in a particular Single Market or set up a particular sectoral customs union as a transitional arrangement. Is a three-year customs union in cars really so implausible? Or a five year involvement in the Single Market in pharmaceuticals?

What May will get is very unclear, as yet. And one can criticise her strategy on many points (and indeed I do). But her negotiating strategy seems as clear and specific as one would want it to be at this stage. It can be summarised as:

  • We’re going to end free movement and subjection to EU law.
  • We’re going to substantially cut our financial contribution.
  • We’re going to try to stay as close to the current arrangements for trading as we can, subject to maintaining the ability to set our own regulations and taxes, and to negotiate our own trade agreements with non-EU countries.
  • We’re willing to consider some sectoral deals.
  • We’re willing to consider some transitional arrangements; and
  • We’re willing to contemplate putting some money into a pot.

What additional “clarity” do folk have in mind?

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