Finding a Sensible Brexit

The union flag is arranged before Theresa May and Jean-Claude Juncker speak to reporters on 8 December. Photo: Getty Images
The union flag is arranged before Theresa May and Jean-Claude Juncker speak to reporters on 8 December. Photo: Getty Images

For many who campaigned for Remain, the UK government’s offer last week to ‘maintain full alignment’ with those EU single market and customs rules that will avoid a hard border in Ireland re-opens the prospect of a ‘soft’ Brexit. The logic is that if Britain cannot remain in the EU, then the next best economic deal is to negotiate a way to remain inside the EU’s single market and customs union.

This may be true from an economic perspective. But a soft Brexit would be a bad political outcome.

Letting go of soft Brexit

A soft Brexit would undercut British sovereignty in ways that membership of the EU currently does not. It would give British companies unfettered access to the single market, but without the government having full rights to design the rules governing the EU market or its own. The same goes for membership of the customs union. The UK would have to abide by the terms of the EU27’s future trade deals, potentially to the UK’s relative disadvantage, but without Britain having a full say in their design. And the UK would not regain control over the movement of labour from the EU.

It has become clear in the past two years that economic outcomes are not always the dominant drivers of public opinion. The vote for Brexit was a political act, and a revolutionary one at that, to take back full control over immigration, domestic law-making and trade policy. However misguided this decision may seem to those who voted to remain in the EU, the response should not now prioritize economic continuity over the demand for political change, and certainly not at the expense of severely curtailing British sovereignty. To do so would be highly corrosive of the already low levels of public trust in Britain’s political institutions.

Taking this option would also exacerbate popular and political resentment towards the EU, thereby undermining the UK’s most important bilateral relationship in the coming years. The idea of a soft Brexit only makes sense as a stepping stone to the final destination.

Instead, the government needs to engage now in the hard graft of designing a sensible Brexit, in which the UK retains the best possible levels of access to the EU’s single market, but secures the return of those sovereign rights that lay at the heart of the Brexit vote.

Such a deal may be on the cards, but delivering it will be very difficult.

Regulatory layer cake

In a little-remarked section of her Florence speech in September, Prime Minister Theresa May hinted at a new regulatory framework to govern the UK–EU economic relationship. This framework would seem to mix regulatory independence, equivalence and subservience.

The implication is that the UK could: (1) take back control of domestic regulation in areas which have little or no bearing on the EU–UK trading relationship, such as workplace safety or air and water quality; (2) set its own domestic rules in areas where the UK has comparative advantage and regulatory expertise, such as financial services or climate change mitigation, but ensure these rules are equivalent EU rules in their effect; and (3) commit to ‘full alignment’ with EU regulations in sectors that are heavily dependent on the EU market, such as agricultural produce, pharmaceuticals, chemicals, aviation and cars, but with British courts enforcing the EU rules. This would enable UK-based companies to retain privileged access to the EU market, while negating the need for a hard border between Northern Ireland and the Republic of Ireland.

Reflecting support for this approach, cabinet ministers have indicated that the UK would like to retain its membership in some key EU regulatory bodies that are supervised by the European Court of Justice, including in the areas of aviation, energy and telecommunications.

If the EU27 were to accept this sort of a framework, then the result would be the UK having a layered regulatory arrangement with the EU that goes far beyond the scope of the EU–Canada trade agreement, and that is more akin to Switzerland’s current diverse set of treaties with the EU.

Mutual reservations

In theory, this approach seems attractive. But it would pose important problems for both sides. The EU27 could counter the British proposal by insisting on free movement of labour, as the Swiss had to accept in their deal. More generally, by relinquishing its membership of the single market and customs union, Britain cannot escape paying tangible economic costs.

The UK would become a ‘rule-taker’ rather than a ‘rule-maker’ in numerous important economic areas, constantly having to weigh up whether to adapt its domestic law to new EU regulations. Even if trade remains integrated in those areas where British regulations either shadow or emulate those of the EU, UK-based companies will be tempted to place more of their investment within the boundaries of the EU27, so as to be able to exert some influence over the EU’s standard-setting processes.

In essence, the UK would be ‘engaged in a perpetual state of negotiation with a perpetually evolving EU’, as a European diplomat recently described it. And, once it has paid its exit bill, it will do so from a position of greater weakness. Leaving the EU will inevitably carry costs, as many EU27 members insist it must.

But even so, the EU might reject this approach. Some EU27 governments and some in the EU institutions will see this as British ‘cherry-picking’ – applying EU regulations in the UK market only where it serves British economic interests, while other British services and goods take advantage of looser domestic regulations to compete with EU companies at home, in Europe and around the world. Recent comments by British cabinet ministers that future British governments will not be bound by a future UK–EU deal will heighten these EU concerns.

If UK and EU27 regulatory approaches do diverge in the future, the EU could also find itself unable to block British imports without becoming enmeshed in a never-ending series of regulatory challenges and court cases in whatever dispute settlement forums the two sides establish. The EU has demanded a fundamental change to its regulatory arrangements with the Swiss for precisely this reason. Being in constant litigation with a major economic power such as the UK would be an even less palatable prospect.

The EU27 might therefore prefer to negotiate a ‘Canada plus’ agreement, i.e. including a greater number of service and agricultural sectors and an expanded set of regulatory mutual recognition procedures, but within the framework of a more traditional trade agreement. This might also be what other trade partners of the EU demand for the UK.

A sensible Brexit

Leaving the EU in March 2019 without any agreed framework for its future trading relationship would be the most damaging outcome for Britain. But the most politically damaging outcome for the future of UK–EU relations would be a soft Brexit in which the UK remains tied into the rules of the single market and customs union without a full say in the rule-making.

Fortunately, other options are available. Whether EU and British negotiators negotiate a traditional trade agreement (the ‘Canada plus’ approach), but with far greater sectoral coverage and continuing UK involvement in some EU programmes, or one where the UK continues to align many although not all of its current domestic regulations to those of the EU in return for privileged access to the EU market (a ‘Switzerland plus’ approach), delivering a sensible if costly Brexit is feasible, although far from inevitable.

Dr Robin Niblett CMG, Director, Chatham House.

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