James Arnell is a partner at Charterhouse. He writes in a personal capacity.
In this, my final article, I seek to provide some pointers to the Government when it comes to the direction in which to take the UK economy in a post-Brexit era. My reflections will apply regardless of whether there is a deal. However, in the event of Brexit discussions breaking down, there will be a serious bout of jitters, so the Government will need to come out fighting. And it will need to bolster its internationalist credentials as it does so.
The rights we intend to give to EU citizens in the UK and those we expect for UK citizens in the EU
On EU citizens’ rights, we need to get real, and I suspect that our politicians already have. We have the lowest unemployment rate for decades and we have millions of EU nationals working in the UK. It is obvious that we therefore need to retain EU workers in the UK. There are detailed quibbles about rights, but there are no deal breakers there, other than jurisdiction of the ECJ, which we should continue to reject. I don’t think EU nationals will leave just because their rights are only enforceable in the UK courts.
Our future immigration policy
Going forward, I think there are plenty of options already on the table for an immigration system for the future: points, seasonal quotas, and so on. I won’t add to the list. But the Government urgently needs to speak to employers, understand their needs, and compare these with their political objectives: to improve productivity, to improve wages and, most importantly, to reassure voters. And then tell us what the system will be so that businesses can plan their post-Brexit HR strategy.
Taxation and international competitiveness
On taxation, it’s easy. If we are leaving the EU with no deal, we are going to have to work very, very hard to retain companies and their activities in the UK. That means a low corporate tax rate. The Government prides itself on its flagship policy of reduction of corporate tax rates in recent years, and rightly so, but it should consider going even further and it should also consider much more aggressive tax breaks for research, to support export efforts and to encourage capital investment to drive productivity. Brexit can be used as a reason to be bold. A tax holiday may be part of that. In the immediate lead-up to and aftermath of Brexit, companies will be doing a lot of work against a backdrop of continued uncertainty. They may decide to relocate activities out of an excess of caution. Would a temporary reduction in Corporation Tax encourage them to retain their activities here, giving them time to work through the complexities and decide to remain in the UK after all?
On personal taxation, the pill may be bitter to swallow, but we need to hold onto our non-doms in order to hold on to the City, so we need to reverse the changes to their tax treatment. It may not play well, but it will play better than a market crisis.
Many Remainers see Brexit as indicative of an insular, small-minded mentality. There are plenty of Leavers who fit this description, but the Government, and Liam Fox and Boris Johnson (when he was in Government) in particular have been very clear that we aspire to be an outward facing, free trading nation.
Upping our export game
The problem is that the UK is not particularly good at exporting.
UPDATE: Since this article was originally published, I have reviewed export flows to the top 20 export destinations of the UK and Germany. These top 20 destinations account for circa 80 per cent of our respective exports. The UK exports, each year, 0.96 per cent of destination country GDP to its export markets. Germany achieves 2.2 per cent. The Germans are more than twice as good at exporting as we are.
There are many reasons for this, I am sure, but I have experienced the following over the years:
- We don’t bribe as much as others;
- We have not understood the importance of regulatory standards (and the hijack thereof) in developing new markets;
- We don’t invest for the longer term – we are impatient when developing new markets;
- We don’t get the right support – government is not set up to support exporters properly;
- We don’t convert R&D skills into new products and get them to market quickly;
- We have not developed ‘Brand UK’ broadly enough;
- We don’t adapt well – our language skills are poor, and our cultural integration limited.
We can fix a lot of these, with a lot of hard work, but two are going to cause us real difficulties: bribery and regulation.
Contrary to popular belief, and contrary to most studies conducted by institutions who never seem to get under the surface of the international export machine, the country in which bribery is most endemic and the culture of bribery is most deep-rooted is Germany. It is an open secret among major exporters: German companies bribe systematically to win international business.
I am not suggesting for a moment that we seek to expand our international trade footprint by increasing bribery. But it is not enough for us to control bribery by our own companies. We need to call it out wherever we find it. We need to drag other countries’ business practices into the light to help to create a level playing field. That should be part of a Brexit plan. Germany knows full well that Volkswagen and Siemens are the tip of an iceberg. We should be clear that we intend to support – and, if necessary, found – the institutions to stop these activities.
The second tricky area is regulation. Good exporters use regulation. They work through trade and industry associations in their home market to establish standards which then determine whether a particular product is approved for a particular use. Other markets may adopt their own standards, but a lot of effort is made by successful exporters to encourage the target markets to adopt common standards – the same as the exporter’s home country rules – so that they have a competitive advantage.
My perception is that the UK has never been very good at this: we do not invest in our trade associations to the same extent as others. Perhaps we have an inbuilt preference for less regulation. We have not “captured” the rule-setting bodies to the same extent as other countries within the EU; we have focused more on deregulation within the EU. And now, leaving the EU, we lose all influence over those standards and yet, realistically, our manufacturers will need to continue to produce to EU standards as the EU will remain a vital export market for some time to come, and many other markets around the world will follow the EU’s standards. So, how to react?
I don’t have an answer, but the Government’s Brexit plan should include one. Perhaps we should focus on new, dynamic digital sectors where the flexibility of the English law can give us the jump on clunky EU legal systems. By way of example, he who develops the legal and insurance framework for autonomous vehicles gets an advantage if he can make that a global standard. Perhaps we should consider shifting to US standards in some segments, so that we can access different markets around the world. Perhaps we should identify those sectors where we are genuinely globally market-leading and invest heavily in the trade association regulatory channel to develop our standards faster and better than the EU, to drive our global presence. UPDATE: the Chequers plan effectively rules this out. As a rule taker on goods, the Government has essentially accepted that we cannot improve our performance in this area and, worse, it has condemned us to applying future EU standards to domestic goods.
Continuing down the list of barriers to the UK becoming a successful exporter, a Brexit plan needs to inspire confidence within the UK and around the world that the UK is going to engage internationally and be a force for good. A Brexit plan should highlight new initiatives to support exporters, with export guarantee facilities underpinning bids, tax credits on R&D and overseas investment. We need to demonstrate that we are serious about trading globally and not just say it.
Talking the talk
As a last indulgence at the end of this series, please permit me to suggest one last initiative for a post-Brexit UK. In my business life, I have always been amazed how much appreciation you get for speaking other languages and showing an interest in other countries’ culture, sport, politics and current affairs. This should be commonplace, but the reaction I see tells me that it is all too rare.
I have always struggled to understand why this is: perhaps the ubiquity of English as a second language leads us to believe that we don’t need to make the effort. But, for all Boris’s rousing speeches, we are only going to succeed internationally if we change our mindset fundamentally and commit to learning foreign languages and culture. So, my last suggestion for Steve Baker’s (UPDATE: now Dominic Raab’s) contingency plan is to give the clearest indication that the UK is serious about being an outward-facing nation: make it clear that every degree course in the UK will include a requirement to learn a second language.
I can hear a collective groan, but think about it: tens of thousands of young minds deploying across the globe, building friendships and networks and, in time, winning business. Google Translate is great, but it’s not as good as the real thing.