Theresa May’s Brexit will bring about a diminished Britain

Theresa May finally clarified what sort of Brexit she wants. Her speech on Tuesday made clear that Brexit means hard Brexit: the UK will leave the single market, it will leave the customs union, it will cap the numbers of Europeans who are allowed to come to the UK. While touting its supposedly free-trading character, May’s Britain has lowered its ambitions to simply aiming to avoid tariff walls with the rest of Europe, blithely welcoming the return of the non-tariff barriers Margaret Thatcher did so much to remove.

Free Lunch readers will not be surprised at this. Once one decides to interpret the vote to leave the EU as a vote to end the free movement of people or to withdraw from making, adjudicating and enforcing common rules together, then hard Brexit follows. As I wrote on June 28, the “best bet” was for a Canada-style trade relationship — that is to say, no tariffs on goods and a modicum of open trade in services. In July, we explained why “whatever Brexit means, it entails leaving the EU’s customs union”. (And be clear that May’s prevarication on this — she says she wants a customs “agreement” — does not change it. This can, at most, mean technical solutions to make the customs border she is about to introduce as unobstructive as possible.) By September, Free Lunch concluded that “the die has been cast decisively against a close post-Brexit trade relationship with the EU” and that hard Brexit was a fait accompli.

That raises the question: what took her so long? Those who thought she was refraining from spelling out the logical conclusions of her broader statements to gain some sort of negotiation advantage were clearly too generous. Either she could not bring herself to decide sooner between competing factions of her own cabinet, or it took her this long to trace out what she was logically committed to. Either way, the cost was six months in which the civil service could not prepare for its biggest task since the second world war and even the loss of some of its most experienced members. This poor use of time and resources bodes ill for the coming negotiations.

On the other hand, better late than never. It is welcome that the UK government now sees clearly. And the fact that it has set its sights on such an unambitious post-Brexit trade settlement means, paradoxically, that an agreement may be easier to reach. Agreeing to maintain zero tariffs on physical trade (that is, in goods) is the stuff of run-of-the-mill free trade agreements, and it only requires agreeing to maintaining the status quo on tariff rates. But is that “bold and ambitious” enough for May and the UK government?

The answer to that must relate in two ways to May’s warning that “no deal is better than a bad deal”, widely seen as a threat to walk away if the UK doesn’t get what it wants. First, we must understand how bad a deal May’s demands amount to. Tariff-free trade is a far cry from frictionless trade. Research confirms that simply avoiding tariffs secures much less trade in goods, and especially in services, than the removal of non-tariff barriers achieved by the single market. Brexit is a lose-lose situation, and saying that it’s in everyone’s interest to agree not to introduce tariffs is true only because it’s in everyone’s interest not to lose too much compared with the status quo ante. To spin the UK’s proposal as win-win is either deceptive or deluded.

Second, how bad does the agreement have to be before it’s actually worse than no deal at all? In particular, is a deal on tariff-free trade in physical goods, but no special access for services, bold and ambitious enough? Or would May “walk away” — ie return to the World Trade Organisation default of moderate goods tariffs — if the UK can no longer sell its service sector surpluses to the EU on the same terms as before? It is not, by the way, necessarily the EU that will be the obstacle to continued integration of services markets: it is the UK, after all, that does not want to be bound by EU financial (or any other) regulations. May was vaguely titillating about the possibility to “take in elements of current single market arrangements in certain areas” such as finance. But that’s hard to square with withdrawing from all EU rules.

The clue may be in the rider “on a fully reciprocal basis”, which sounds like aiming for an acceptance of formal equivalence of EU and UK financial regulations. But she should know that equivalence is brittle (it can be withdrawn at short notice), is not provided for in many financial subsectors, and must keep up with changing rules. And be in no doubt: it is the UK’s rules that will have to continuously adapt to the EU’s, not the other way round.That is because of something you would not have guessed from May’s speech: the rest of the EU’s economy is six times larger than the UK’s.

This is what made May’s endless repetition of the word “partnership” seem so misplaced. Everybody wants friendly relations, of course, but as May uses the term it drips with the attitude that so defines British Euroscepticism: the sense that the UK should be treated as an equal partner to the entire rest of Europe, rather than the equal partner (and then some) inside the EU that it has been for 44 years.

This chimes with the elegy to Britain’s supposedly unique global tradition, and with many Brexiters’ unrealistic perception of all the gains waiting from trading more with the rest of the world. That nostalgia for grandeur, the surest mark of Little England-ism, is set to produce the opposite reality of the UK’s diminished stature.

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