Henry Newman is Director of Open Europe.
Last week reports circulated claiming that Philip Hammond was launching a ‘soft Brexit’ offensive, perhaps in conjunction with others in Cabinet who voted Remain last June. He was, we read, supposedly plotting to keep Britain inside key EU arrangements, such as the Customs Union. Either those reports were over-egged or he has since softened his position. Speaking on the Andrew Marr Show, this Sunday, the Chancellor did not obfuscate, saying: “we’re leaving the EU and because we’re leaving the EU we will be leaving the single market. And by the way, we’ll be leaving the customs union”.
In his delayed Mansion House speech, delivered yesterday, Hammond went further, outlining the need to agree “frictionless customs arrangements to facilitate trade across our borders – and crucially – to keep the land border on the island of Ireland open and free-flowing”. He talked about the need for “new technology”, saying “therefore we’ll almost certainly need an implementation period, outside the Customs Union itself, but with current customs border arrangements remaining in place, until new long-term arrangements are up and running”. The Chancellor is right to warn of the need for some transitional arrangements. Open Europe has previously backed a transitional period of a year or two to ensure the required technology is in place to prevent blockages at ports and borders as we leave the Customs Union.
Several months ago, Open Europe learned that HM Treasury was considering a parallel tariff arrangement. Under this proposal, the UK would leave the Customs Union but levy tariffs identical – parallel – to the EU’s Common External Tariff (CET) on imports. By agreement with the EU, goods destined for the EU would be considered customs pre-cleared by the EU – with the probable proviso that duties collected by the UK would be largely sent to Brussels. In our report, Nothing to Declare, we considered that this scheme would not be suitable as a long-term arrangement. But it could make sense as a transitional position, if the EU was willing to agree to it. A key question would be whether that set-up would allow the UK to get on with negotiating its own free trade deals.
More generally, what we have seen since June 9th is a revitalised Treasury. While it is generally true that too much power in Whitehall is concentrated in Number 11, a weak Treasury is not healthy. The first short year of Theresa May’s term of office saw the Chancellor side-lined and ignored, humiliated after a major fiscal event, in an open briefing war with the Prime Minister’s team of the likes not seen since the “TB-GBs”, “not quite” locked in a cupboard for the general election, and slated for the chop afterwards. Treasury officials despaired, and looked back on the Osborne era with fond nostalgia. Now the Treasury seems to be getting its mojo back. Hammond needs to tread carefully: he’s under significant pressure to relax public spending; he has lost several able advisers, and has a Chief Secretary – who although intelligent and determined – has been demoted into the role.
Several commentators claimed that the Chancellor supposedly had nothing positive to say today about Brexit. That seems somewhat unfair. It would be somewhat out of character for Hammond to become a Pollyanna or a Brexit cheerleader, and his speech did end with a reasonably positive vision. He also specifically mentioned “new opportunities for trade and investment”. But he will need to be careful in future not to be seen to talk the economy down.
In their speeches, both the Chancellor and the Governor laid out a passionate case for free trade, which should be welcomed whole heartedly. Hammond called for a “new phase of globalisation”. He noted that this would have to deliver “clear benefits for ordinary working people”. The Chancellor also proposed that Britain should “lead a global crusade for liberalisation of services”, noting that this was a particular area of strength for the UK. What he didn’t note was that the EU Single Market offers low tariff trade in goods, but limited access for services, and that the EU’s regulatory requirements also restricts our ability to negotiate services access to other markets.
Both speakers also fired warning shots at an EU tempted to restrict the City or impose protectionist controls over Euro clearing. Mark Carney noted that “fragmentation” of financial markets – i.e. the EU imposing territorial, jurisdictional, or currency controls, could substantially increase costs. He noted that “a single basis point increase in the cost resulting from splitting clearing of interest rate swaps could cost EU firms €22bn per year across all of their business. Those costs would ultimately be passed on to European households and businesses”. The Governor’s tough language is almost all the more potent given his partisan position in last year’s referendum.
Hammond is right to speak up for business and the City. He’s also right to back calls to “manage migration” but not “shut it down”. There’s an important opportunity now for the Government to shift its position on Brexit and to shift its tone. That should not mean a watering-down of Brexit and promises to leave the Single Market and the Customs Union, but rather a commitment to keep Britain as an open, liberal country, a passionate defender of free trade and responsible capitalism. It also means avoiding the sort of own-goals we saw at last year’s party conference, when the Prime Minister was seen to have picked a fight with metropolitan Britain, and the Home Secretary floated an idea which one senior Number 10 source later admitted to me was seen as the equivalent of requiring foreign workers to wear yellow stars. If one consequence of the election result is a more assertive Treasury, which helps shift some of the language and policy on Brexit, it’s to be – cautiously – welcomed.