Garvan Walshe is a former national and international security policy adviser to the Conservative Party.
Michel Barnier got his orders on Tuesday. They are the product of three years of a negotiation in which all trust has been eliminated. If I were a Brexteer who wanted maximum divergence, I’d open the champagne. But if I had shares in British-based manufacturing industry, I’d get on the phone to my broker.
The Commission and EU member states have instructed Barnier to make three main demands that this Government will find it very difficult indeeed to acept. He has been told to obtain the UK’s agreement –
- Not to lower the level of labour regulation below that which will obtain at the end of the transition period
- Not to lower the level of environmental protection below the same level; crucially, he is required to get the UK to apply the precautionary principle in such regulation, which excludes alignment with American environmental standards
- To apply European “Union State aid rules to and in the United Kingdom”.
This is not all. The EU has also taken care to include demands for “enforcement arrangements” binding in UK domestic law. It is doing what the stronger party always tries to do in negotiations, and transfer the risk, in this case of the UK trying to compete with the EU through deregulation, as Economists for Brexit argued during the referendum campaign that the UK should, and many others including the Prime Minister have repeated since.
Though there is in practice little chance of environmental or labour deregulation at the moment, the UK committed the Bond Villain fallacy of announcing its plan for world domination in advance, lulling the EU into a false sense of insecurity.
State aid, admittedly, is a more serious risk as long as the techno-Gaullist Dominic Cummings is around. Large dollops of it will be needed to deal with the cost of tariffs ocaused by an “Australian-style” – that is, non-existent – trade deal. It seems strange to me to leave the EU to implement the policies of Francois Mitterrand, but what would I know? I campaigned for Remain on the grounds that European integration was a capitalist conspiracy.
The EU’s determination to apply conditions for the elimination of tariffs places limits on the UK’s economic policy, though not ones that are in themselves too onerous. The British economy is, after all, dominated by services, not manufacturing. The application of tariffs on manufactured goods does not hinder the financial services sector, higher education, or the english language media market. The UK’s incentives for tech startups are among the most generous and easiest to access.
And even the elments of manufacuring that have the highest value added, namely the conceptualisation and design of products are, as the economist Richard Baldwin argues, essentially intangible. And even though EU freedom of movement, which had been essential to staffing the high value service sector has ended, the new points-based system can be adapted to ensure adequate labour supply for jobs like these. A high technology service oriented UK doesn’t necessarily require a zero tariff free trade agreement.
The dilemma that such an outcone would cause the Government is rather social and political. It would increase the weight in the economy of the tech and financial sectors, while making significant parts of the manufacturing sector, which is dependent on a European network of supply chains, unviable.
The extent to which different parts of the country would suffer from different problems would increase. In London and the South East, pressure on house prices and space would increase. In the Midlands and North, the decline in employment quality, as industrial jobs were replaced by low skill service sector employment, would feed into local wages and living standards, even if national averages disguised this divergence.
Fiscal transfers justified as befitting a One Nation Conservative Government could reduce this inequality – but would have to be paid for. How long a globally oriented service sector would be sustained under a high tax burden is very much an open question.
The nature of the Government’s majority makes this dilemma starker still. The election delivered Conservative MPs located precisely in these industrial areas that are vulnerable to the Government’s own policy of divergence. If divergence is indeed chosen, means will need to be found to compensate the losers. Infrastructure sounds like a good idea, but takes years to plan and build, and requires planning objections to be overcome. Its benefits accrue slowly, and over the decades of its lifetime.
In any event, people with the right skills will need to be found to build it. There is not in fact a pool of easy-to-employ people available, and employable people were not in fact displaced by an immigrant work force. In reality, not only did immigrants not “take our jobs”, but the other side of the coin is that there aren’t British people available to do the jobs from which they were supposedly displaced, because they weren’t displaced.
The Government has got its Brexit. Now it needs to make the painful choices that come with it.