London Letter: Brexit effect produces political aftershock

Brexiteers this week hailed a record rise in Britain's services sector last month as evidence that pre-referendum warnings about the economic cost of Brexit were nothing more than doom-mongering.

On closer inspection, the record rise was simply a rebound from the record fall in economic activity immediately after the referendum, but it was enough for a couple of investment banks to rethink their predictions of a post-Brexit recession.

Brexit secretary David Davis warned against overconfidence when he addressed the House of Commons on Monday, but he was optimistic about the prospects for negotiating new trade deals after Britain leaves the EU.

Davis’s candour got the better of him when he told MPs that it was “improbable” that Britain would remain part of the European single market after Brexit, an assertion that earned him a sharp put-down from Downing Street the following day.

Preferential terms

Davis shares the confidence of many Brexiteers that Britain will be able to negotiate access to the single market on preferential terms even if it limits immigration from the EU. But a 15-page message from the Japanese government to the UK and the EU this week offered an insight into the pressure foreign investors will exert on British negotiators.

For Japanese companies to remain in Britain, the letter said, any post-Brexit deal must maintain the trade in goods with the EU with no burdens of customs duties and procedures; preserve an environment in which services and financial transactions across Europe can be provided and carried out smoothly; and ensure that regulations and standards remain harmonised between the UK and the EU.

Theresa May told MPs on Wednesday she would not be rushed into a negotiating position ahead of Brexit talks, but with opinion polls showing most voters expect some controls on EU immigration, it is hard to see how her government can avoid making that a red line. The prime minister has effectively ruled out an "off-the-shelf" option such as Norway's, which would see the UK staying in the single market after it leaves the EU.

So most of the chatter at Westminster points to a departure from the single market, with a view to negotiating "access" to it after Britain leaves the EU. But as a paper published yesterday by former Liberal Democrat leader Nick Clegg and former EU commissioner and Goldman Sachs chairman Peter Sutherland points out, securing such a deal is likely to be a long, difficult process.

Customs union

Among the first questions to be answered is whether Britain wants to remain part of the EU customs union after Brexit. Membership of the customs union obliges Britain to impose the EU’s common external tariff, so it cannot conclude any new trade deals until it leaves.

“Outside the customs union, all goods exported to and imported from the EU will need to be declared to the customs authorities. This will introduce delays, extra paperwork and costs for British businesses . . . It will also make continental businesses less willing to include UK-produced goods in their supply chains,” Clegg and Sutherland write.

“Leaving the EU customs union will require the introduction of new customs controls (a ‘hard border’) between Northern Ireland and the Republic, in order to prevent goods from crossing the Border in contravention of customs checks.”

Negotiating a new free trade agreement with the EU, which would have to be ratified by all 27 remaining member states, could take years. And Britain would not be able to strike individual deals with member states, because all trade agreements are negotiated on behalf of the EU as a whole.

Clegg and Sutherland pour cold water on the idea of any shortcut, such as dropping tariffs on imports from the EU to zero and challenging the EU to reciprocate.

“If we drop tariffs on EU imports to zero we will be obliged to do the same for every other country in the world. That would at a stroke undermine any prospect of securing favourable free trade agreements with third countries . . . we would have squandered our negotiating capital,” they write.

Besides, any such arrangement would not address non-tariff barriers, which are so important for British businesses and for foreign companies operating in Britain.