Iain Duncan Smith is a former Secretary of State for Work and Pensions, founded the Centre for Social Justice, and is MP for Chingford and Woodford Green.
We have just emerged from the most ridiculous farce following the conference, which did more to illustrate the gap between politicians and the general public beyond Westminster. Whilst some MPs see-sawed back and forwards with plots, denials, and accusations of villainy, the rest of Britain played bemused witness to scenes of tragic comedy straight out of Shakespeare.
As Theresa May got to her feet on Monday afternoon in the House of Commons, to the cheers of her backbenchers, I thought of Much Ado About Nothing and the words of Dogberry;
“Marry, sir, they have committed false report; moreover, they have spoken untruths; secondarily, they are slanders; sixth and lastly, they have belied a lady; thirdly, they have verified unjust things; and, to conclude, they are lying knaves.”
Amen to that.
All of that simply masked the most vital of issue facing the Government, which is still not fully settled. For following the Florence speech and the Prime Minister’s conference speech, there is a nagging question over which interpretation of the implementation period shall hold sway.
After all, the word ‘implementation’ means the process of putting a decision or plan into effect. That begs the question, what is the plan? Most commentators, having been taken into the confidence of the Treasury, know that the Treasury is at present working to a plan that leaves the UK inside the Customs Union during the implementation period. This would mean that although the UK leaves at the end of March 2019, almost immediately we would accept all of the common tariffs and regulations. This would make us rule-takers, as the EU would continue to hold the authority on all matters pertaining to the operation of the market, and imports and exports. I also understand that in the bowels of the Treasury, they still haven’t accepted that the implementation period should last for a maximum of two years. The talk is still of three or more.
A senior minister commented to me recently that the Treasury seemed locked into a state of permanent depression about the UK’s ability to get a deal from the EU. Much of this stems it seems from a fear that the EU and Germany’s plan is to punish the UK and make an example of us. Therefore, it follows for the Treasury (the architects of Project Fear) that we must have a very long transition in the hope that either the UK changes its mind on Brexit or that the pain could be spread out over a much longer period.
The problem at the heart of this is the Treasury’s economic model, which seems to have got it wrong on a number of occasions. Even the NAO has been highly critical of their key assumptions. They have good reason to be so.
Take, for example, the Treasury’s assumption that investment into the UK would fall after the referendum if the vote were for Brexit. In fact, the opposite has happened, with the OECD pointing to not only a surge in investment last year, versus 2015, but also that 70 per cent of this occurred after the referendum result.
Then there was their assumption on employment: that there would be some 500,000 job losses within a year of a vote to leave. In contrast, employment has risen sharply, particularly full-time employment. According to the Labour Force Survey, during May to July 2017 employment reached 32.14 million, with 75.3 per cent of people in work – the highest since records began in 1971 – and employment was 379,000 higher than a year earlier.
In fact, many economists are now openly critical of the Treasury model. Graham Gudgin, the Cambridge economist, said, “It is not obvious that these results can be applied to a well-developed open economy like the UK.’” Ryan Bourne went further, and pointed out what many now believe, that, “gravity models…are backward-looking and may simply not be well suited to analysing large long-term regime changes”.
The Treasury estimates that membership of the EU doubles the level of goods trade between EU members (and that leaving the EU will thus lead to a loss of 50 per cent of trade). These seem huge magnitudes when the average tariff is around three per cent and UK firms must already be compliant with EU non-tariff regulations. These estimates also take no account of currency depreciation, and for service sector economies like ours it is no longer clear that gravity models will be best placed to explain future global trade, where globalisation and technical change suggest that economic borders, as we understand them, are going.
The reality for us is different from the fears of some in government. It is that the UK is leaving the heavily protected EU at a time when the combination of globalisation, instant mass communication and broader technological change is transforming the shape of the global economy at an unprecedented pace.
The extent of the shift is brought home by Professor Danny Quah at the National University of Singapore, who has carried out a series of calculations to determine the world’s geographical ‘centre of economic gravity’ based on the changing GDP of various countries. In 1980, the ‘mid-point’ of the world economy was out in the Atlantic Ocean, reflecting the importance of both the US, UK and Western Europe. By 2008, when the global financial crisis hit, that centre had shifted to a longitudinal mid-point between Izmir in Turkey and Minsk in Belarus, reflecting the growing pull away from Western Europe and towards Asia. Professor Quah now calculates that by 2050, the economic centre of gravity will have shifted eastwards even more, to between somewhere between Urumqi in China and Calcutta in India -in other words towards the heart of the Indo-Pacific region.
The UK is well set on leaving, to take advantage of the enormous growth potential of these markets in the East, who it is believed will be responsible for the lion’s share of growth for the rest of the world. The UK will only be able to take advantage providing we do not find ourselves tied to the EU unable to set our own deals. We are in a very strong position; we shouldn’t be depressed about our prospects at all. That is why in the implementation period we must be out and not just in name only.
No, this is where the Government need to take a lead and send strong and simple signals to the EU that if they really do want to try and punish the UK (whilst punishing themselves) then we should know about it very soon. First and foremost is that the UK really does put the money and the time into ensuring we are ready to leave at the end of March 2019 without a deal and as such on WTO terms. So far it appears as though this is the subject in government that dare not speak its name. Yet there is no point in doing this unless the EU knows about it. We must prepare to let the EU know in no uncertain terms that this is happening and that unless the EU meets the Prime Minister halfway on the Florence speech and starts FTA negotiations then we must assume they do not wish to do so and that we will get on with our other plan.
I know that some civil servants will whisper into the Government’s ear that this would upset the EU and make it worse for us. However the EU negotiators whilst protesting would know we were serious and it would force them to a decision. This is what Alec Douglas-Home termed ‘limit diplomacy’. If the other side doesn’t understand that you have your own timetable, then they will feel free to follow theirs with impunity.
This is part of the problem with the discussion on this side of the Channel. It’s been dominated by those who fear what the EU might or might not give us. In businesses across the EU they are also beginning to ask what the plans are for the EU if the UK leaves without a trade deal. I have been talking to a number of businesses in Europe, and those that sell their goods to the UK are growing worried about the outcome. To put this in perspective, the UK, as the EU’s largest trading partner is a very compliant and profitable market for everything from machine tools to wine. Jobs and livelihoods matter just as much for them as for us.
That is why our negotiating tactic must be to publicly plan to leave the EU on WTO terms and force the EU to decide what they really want. If so-called ‘punishment’ is their plan then then this will become clear soon enough and we can act accordingly. However, if it is not, then when they realise that we mean business they will have to decide. Compression is a standard negotiating tool and quite legitimate.
I read over the weekend that some civil servants are recommending we go to Brussels and offer to give in to many more of their demands, such as accepting ECJ rulings after we have left, in the hope of discussing an FTA. That would be the worst mistake we could make. They will bank that and figure out that the UK has lost its nerve. They would be right.
At the end of March 2019 we will have left and as such must be able to get on with our expansion into the wider world. All that remains to be decided is if the EU wants to remain as a strong trading partners and friends. The ball will then definitely be with the EU.