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Don’t panic – but remember Brexit will be a tough political process

March 15, 2017

Everyone benefits from free trade. For years now the UK has had a persistently large trade deficit with the EU, which by rights should make Europe more amenable to doing a ‘business as usual’ Brexit deal with us. If only life were so logical our Brexit negotiations would run smoothly and full future access would be assured to something approximating to the single market. Yet our European counterparts insist on the sacrosanct upholding of the four freedoms of goods, services, capital and critically, people to live and work anywhere in the EU.

In truth the imminence of domestic elections and the importance of holding the remaining EU-27 together mean that even in Brussels, yet alone Berlin, Paris and Rome, our precise EU departure terms do not feature high up their political agenda.

That is not to say that the smoke is not beginning to clear as to the broad framework of what negotiations might achieve given the UK’s own red lines – namely an end to both free movement of people and the jurisdiction of the European Court of Justice. In holding firmly to these two apparently non-negotiable opening positions Theresa May has accepted that the UK will not be able to remain members of the single market. Nor are UK financial services likely to take advantage of a detailed transitional deal or passporting – at least, as we currently know it.

However, it is worth noting that the EU already accepts that non-members may sign up to a legal, regulatory or supervisory regime equivalent to a corresponding EU framework. Naturally in my own role as the City’s MP I have been especially keen to explore opportunities that might arise for the financial and professional services to maximise their scope within the post-Brexit world. A key first step for any negotiation is developing a thorough understanding of the issues at stake for the EU and bargaining over the interests that lie behind them.

For the City a deal on regulatory equivalence hinges upon a recognition by both the UK and EU-27 of the importance of a competitive, rather than fragmented, European marketplace in an increasingly globalised economy. It was for this reason that at the end of last year Mark Carney warned that London’s position as the home for continental wholesale financial markets makes it critical that financial stability is maintained. This suggests the ideal process of our transition from the EU should be smooth, allowing continued access to the capital raising and other financial services that power the real European economy.

We shall hear much more in the months ahead about the UK ‘avoiding going over a cliff edge’. Critical now to much of UK business is certainty and clarity until and beyond 2019. Given that any transition arrangement for financial services will likely involve at least eighteen months of compliance its outline terms will need to be clear at the moment Article 50 is triggered.

My colleague from the European Parliament, Vicky Ford, has undertaken extensive high quality, detailed research on the issue of market access. Her conclusion, on a sector-by-sector basis, is that the superficially attractive option of the UK simply relying upon WTO rules and drawing up a series of bilateral Free Trade Agreements mirroring the model set out in the EU-Canada trade deal is simply unworkable. The UK’s sophisticated globalised economic sector strength requires a level of specialist market access that goes well beyond the tariff elimination that lies at the heart of WTO operations.

To take just a few examples: for digital entrepreneurs market access means having the benefit of full cross-border data flows; scientists need to access collaborative research across borders to share knowledge; pharmaceutical companies require a single approval mechanism the moment clinical trials have resulted in new medicines and applications. For the banking industry market access is best provided by allowing a regulatory test here to ensure that the financial products such as mortgages, loans and insurance can be marketed elsewhere – in short, a form of passporting. None of these are covered by the Canada trade deal – despite seven years’ intense negotiation. Vicky Ford’s conclusion is that the UK should aim to conclude market access deals for goods before turning to services. Her research also reveals that free trade deals are not only tortuous to negotiate and ratify, but are unlikely to provide key sectors of the UK economy with the basic protections they require.

Increasingly I suspect that the UK government in the months ahead will recognise that negotiating a transition deal will be as fraught and time-consuming as the final exit deal. As a result, an ‘off the shelf’ arrangement such as a short-term continuation of adherence to the Customs Union may prove the easiest way to exit the EU. Then the UK government would be able to buy itself some breathing space to make a realistic assessment of the practicability of striking free trade deals in the post-EU era.

Customs union membership means that the UK would not be subject to free movement or ECJ jurisdiction. Critically, however, it protects UK exporters from rules of origin checks, which would be burdensome in a world of transnational supply chains. In the case of automobiles, if we were to leave the customs union, cars purportedly manufactured here might then be deemed to be subject to costly rules of origin provisions on top of tariffs and quotas. Without second guessing the assurances provided to Nissan, it is difficult to see how the Japanese were reassured other than by a commitment by the UK not – for a period after Brexit at least – to come out of the customs union.

Closer to home a transition deal providing at the minimum for continued customs union membership would also enable the UK to avoid strict border and customs controls with Ireland, whose support in these fraught months ahead will be crucial.