The optimal Brexit strategy is really quite simple – if Britain leaves the Customs Union
Discombobulate means to confuse or disconcert. It’s a word which is likely to become very apt as politicians and the media struggle to define the Brexit strategy between now and the end of March – the deadline for initiating Article 50.
For the life of me I can’t work out why everybody seems to be in such a spin about Brexit strategy. It’s really quite simple. The focus of our attention needs to be on the Customs Union, not the Single Market. So let’s get back to basics.
There are three economic elements to our EU membership. First, the Customs Union. Second, the Single Market. Third, budget contributions. Within the Customs Union there are three elements as well, namely import tariffs, export tariffs and the ability (or not) to negotiate free trade deals as a sovereign nation.
Within the Single Market are the familiar four freedoms (goods, services, people and capital), and the impact of EU product and labour market law – in the case of employment law, applying across the whole economy not just the EU tradable sector. Budget contributions are the final element, with the net amount around 0.5 per cent of GDP.
Read more: "Brexit means Brexit" means something very different to what people think
So with regard to the Customs Union, the ideal economic scenario is for the UK to trade at world prices with zero tariffs on goods imported into the UK. This most important element is totally within our control. If we leave the Customs Union, we can unilaterally – under WTO rules – impose zero tariffs on imports.
It would be nice, of course, to have zero tariffs on UK exports to the EU. But this isn’t a necessity. Outside the EU the 0.5 per cent of GDP budget contribution could, theoretically, be allocated to specific sectors (e.g. £1bn to compensate car exporters for a 10 per cent tariff) or more generally in a sharply reduced rate of Corporation Tax.
The idea that we have to be in the Single Market, at all costs, is nonsense. Leaving aside the political reality that Brexit will require an end to the free movement of people, there is the added factor that EU law and regulation is a cost that applies across the whole economy.
Read more: Why the Single Market is the problem – not the solution
Moreover, each passing day seems to add to the news that the threat to the City has been way overblown. My prediction is that within months the consensus will have shifted – to Brexit being a net positive, not negative, for financial services. Throw in the fact that there isn’t a Single Market in services and all the fuss, while not much ado about nothing, is heading in that direction. Those who point to a competitive stimulus from the Single Market need to remember that the greatest competitive stimulus comes from the greatest market i.e. trading at world prices.
If the Customs Union is central, and within our control, it begs the question: could Brexit negotiations happen much quicker than we think? Leaving the Customs Union and implementing free trade under WTO rules does not require a great deal of negotiation – an email with a big zero on it should suffice. The lengthier process would arise from leaving the Customs Union and regaining the sovereign right to undertake trade negotiations. But free trade agreements are a secondary not primary consideration in this free trade strategy.