May’s starting point – regaining control of our borders means no Single Market membership

The non-negotiable baseline of Theresa May’s Brexit negotiating position is that we must regain control of our borders.  This means that we will no longer be members of the Single Market, since membership is incompatible with such control, as Christopher Howarth explained yesterday on this site.  “Let me be clear,” she told the Conservative Party Conference last October, “We are not leaving the European Union only to give up control of immigration again.”

“It is not going to a ‘Norway model’.  It’s not going to be a ‘Switzerland model’,” she added.  “It is going to be an agreement between an independent, sovereign United Kingdom and the European Union.”  What does she want it to look like?  The contours, contrary to so much wishful thinking to the contrary, are discernable.  We will leave the EU altogether.  We will seek to opt back, so to speak, into bits of it – but outside the ECJ’s authority.  This would mean Single Market access, based on a mutual recognition of standards and maintaining some present customs arrangements.  We would pay for access to some projects and for some services.  We would control our trade.

The deal she wants

An agreement of this kind would meet the aims that have already been set out: “bringing back control of our laws to Parliament; bringing back control of decisions over immigration to the UK; maintaining the strong security co-operation we have with the EU; and establishing the freest possible market in goods and services with the EU and the rest of the world”.  It would be in the mutual interest of Britain and our European neighbours.  Free trade and common security – what on earth could be wrong with that?

Nothing whatsoever.  But this may not be how other European Governments, let alone the European Commission, see the coming negotiations.  Some say that since the EU runs a trade surplus with us, it will not cut off its economic nose to spite its face.  Others counter that we have more to lose, since we export a larger percentage of our goods to the EU than vice-versa.  But whichever way you cut the argument, there is much more to life than economics, even when it adds up to mutual self-interest.  For many within the EU institutions, over half a century’s worth of faith is invested in the status quo (not to mention jobs, careers and pensions).

But she might not get a deal at all

There must therefore be a chance that May is thwarted, and that no deal is reached, especially since the timetable is very tight: the negotiation is unlikely to take place in earnest until the autumn, when this year’s cycle of elections on the continental mainland are complete.  That would mean that a deal on goods and services must be agreed in 18 months, unless all concerned agree an extension.  In a rational world, this would be straightforward, since we have tariff-free access to EU markets already.  But the world is not always a rational place.

The tactics which she will deploy must be marshalled carefully.  She must have a plan for getting trade talks on the table at the same time as the “divorce talks” about payments and pensions.  She must work out which matters, if any, require interim arrangements, since it may not be possible to agree all of them within the timeframe – but also weigh the danger of temporary fixes becoming permanent.  Above all, she must try to avoid the talks going down to the wire because, if there is no deal near their end, pressure will build on her to fold – or else seek to prolong the negotiations, thus risking propelling them into the never-never.

The minuses of WTO: finicky details and potential problems

But if the low road of tactics is fog-bound, the high one of strategy offers a clearer view.  May has first to work out how damaging to prosperity, jobs and investment not getting a deal might be.  There are certainly hazards if a settlement falls through and we are left with trading with the EU on WTO terms – Most Favoured Nation Status (MFN).  One of the most obvious is whether our customs would have the capacity to cope with the new conditions.  Then there the mass of finicky details that have the potential to add up to significant problems.

One of those most often cited is aviation – flight numbers, landing slots, and so on.  Another is the recognition of the licensing of medicines.  Separately, there is the question of how Britain and Ireland would handle customs, border control and citizenship.  The controversy over how important passporting is to the City rolls on.  But it is far from impossible to believe that, although the City won’t collapse, some jobs will leak abroad (though less to Paris and Frankfurt than to New York).  Some firms might take fright at tariffs, low though most of these will be, and seem to relocate.   Potential investors could look elsewhere.

The pluses of WTO: closer to a low tax, low regulation, Singapore-in-the-Atlantic

But the arguments do not all point one way.  David Davis maintained in a pre-referendum campaign lecture that “in the Single Market period our exports grew if anything slower than our OECD competitors, despite our membership”.  Some Ministers believe that, if Britain wants to become a kind of Singapore-in-the-Atlantic, a deal would be second-best, because it would draw us closer to EU tax and regulation norms than the alternative.  A clean break from the customs union would also maximise trade deal opportunities with the rest of the world.

Furthermore, those potential problems are not insoluble. As Lee Rotherham has shown on this site, MFN terms is a shorthand in this context for the 42 different types of arrangement which the EU has agreed with different states and regions.  We would be unlikely to end up with what might be called “hard WTO” – i.e: default MFN tariffs with no added agreements to smooth the path to easier trade.  And even if we did, what would ultimately count in terms of trade between Britain and EU countries isn’t whether goods from both are compliant with each others’ requirements, but whether they are so with international ones.

May’s message must be: no deal is better than a bad deal.

It is precisely because the MFN route is so fiendishly multi-faceted that few politicians have even begun to get to grips with it.  And the media has scarcely begun to do so either, largely because the Government’s March 31 deadline for moving Article 50 is still two months ago.  But the drift carries a risk for May.  If MFN terms are framed as a calamity for Britain, and a deal falls through, she will be left with nowhere to hide when it happens.  It is hard to see how her premiership could survive such an outcome.

One of her tasks during the next few weeks, therefore, is to frame the debate herself.  To do so, she must have a convincing message: namely, that what matters most for Britain isn’t getting a deal, but getting a good deal.  This would be, on balance, the best outcome – certainly the most problem-free.  But just as a good deal would be better than no deal, so no deal would be better than a bad one: that’s to say, limited access, an eye-watering bill – and border control unregained.  To that end, her gambit must be that she is prepared, if necessary, to take the MFN route.  It might not be the best road, but it wouldn’t be a bad one.  It would be the lesser of two goods.

Her counter-attack on critics: you want to defy the British people, and give up on immigration control

May will come under ferocious assault if she breaks off talks, or if they collapse, but she has a devastating counter-punch.  There is only one way of minimising the MFN downside, even if at the same time it also minimises the upside (such as new trade deals): namely, to stay a Single Market member.  Which means giving up on regaining control of our borders.  Besides, there will be no turning back once the talks have begun.  Article 50 will have been moved.  We will be leaving the EU.  The only way back in would require joining the Euro – and Schengen.

The logic of May’s electoral focus on “ordinary, working people” leads here: to her pointing out to them, in the event of Britain taking the MFN path, that the only alternative her opponents can offer is giving up on controlling immigration.  But for the moment, that prospect is hazy – and she might get that deal, after all.  Closer in view is her coming big speech on Brexit.  She does not have to say in it that she’s prepared to take the MFN option if necessary.  None the less, she will need to signal so before Article 50 is moved.  After all, you are more likely to win a negotiation if you’re prepared to walk away. But if you say it, you have to mean it.