It is increasingly obvious that Brexit is a Luddite project, one that will severely damage the existing productive systems which link Britain to the other members of the EU. Damage will result from new barriers to the movement of goods and services and, equally important, from the disruption of integrated control systems. Examples of the former include the likelihood of costly customs and other administrative procedures which will obstruct internationalised supply chains and cause losses to the British financial sector as the City of London moves outside the EU. Examples of the latter cover everything from veterinary inspections relating to meat imports from non- EU countries to the disorganisation of civil aviation as Britain ceases to be a party to the EU’s ‘Open Skies’ agreement.

It would be possible to mitigate the costs of Britain’s departure from the EU by pursuing a ‘soft Brexit’. In particular, membership of the European Economic Area would preserve Britain’s membership of the Single European Market. The Single Market is of great importance to Britain because it has unusually high net exports of services, especially, but by no means exclusively, of financial services.¹ However, such a move would be politically difficult: in general terms it would involve something analogous to colonial status for Britain – still bound by EU rules but no longer with a voice in EU decisions; specifically, it would prevent Britain from exercising full control over immigration from the EU, a very salient issue during the referendum debate.

Another possible version of ‘soft Brexit’ would be for Britain to retain membership of the EU’s customs union. Strictly speaking, Britain would form an additional customs union with the existing customs union. This, however, would also imply quasi-colonial status, in that Britain would have no control over trade with third countries – such control was a key objective of many supporters of Brexit and especially of those Conservative politicians who provided leadership for the ‘Leave’ campaign in the referendum.

If these ‘soft’ approaches are ruled out, what will happen to UK-EU trade? The default position in the absence of any agreement would be application of WTO rules. The tariffs this would entail would be the least of the consequent problems. Trade in services is often exempt from tariffs but subject to multiple non-tariff barriers which the WTO could do little to overcome. The application of customs procedures to EU-UK trade in goods, on the other hand, would be an administrative nightmare: the number of declarations to be processed would be multiplied by three or four.

The political decision to leave the EU in the referendum of 2016 and its acceptance by the May government took place without any serious examination of these costs. The negotiations with the EU to determine the conditions of departure and to agree on new trading arrangements are now making it clear that the British are magnificently unprepared for the radical economic disturbances that are approaching and have no clear view on how to cope with them.

There are sharp divisions in the cabinet between ministers whose goal is a complete and thoroughgoing departure from EU institutions and those whose main concern is to limit the economic damage inflicted by Brexit. Recently, a major concession made by the former to the latter is the acceptance of the need for a transitional period following Britain’s formal exit in March 2019. During this period, trading arrangements would continue as they are now. It is not clear whether EU negotiators will agree to such a period or, if they do agree, what they will demand in return.

The length of the period is a sensitive political issue. Pro-Brexit politicians insist that transition should be over and the definitive post-exit trading arrangements in place before the next scheduled general election in 2022. Otherwise, the terms of exit could become a central issue in the election and its outcome might be to reject the negotiated arrangements, perhaps in favour of British re-entry.

British objectives

How do the British negotiators envisage UK-EU relations after exit? The formula often used is a ‘new, deep and special partnership’. Although this is hopelessly vague it also raises a specific legal problem. WTO rules permit customs unions and free trade areas. But, except in the cases of customs unions and free trade areas, the ‘most favoured nation’ principle rules out ‘special’ treatment of particular trade partners; a ‘special’ deal for UK access to EU markets could be challenged by any other WTO members who consider that they are disadvantaged by it. A good source for the multiple dangers of a ‘hard’ Brexit is to be found, somewhat surprisingly, in the very Conservative Sunday Telegraph in the columns of Christopher Booker. No admirer of the EU, Booker is nevertheless convinced that a disorganised and hasty withdrawal could be catastrophic for Britain.

Although British ministers have repeatedly demanded that the discussion of future trading arrangements be brought forward, they have only in recent weeks produced a position paper on their own objectives. This is an astonishing document.² With almost no reference to actual experience or to empirical studies, two extremely speculative ‘models’ are advanced. The first might be termed the ‘technical fix’. It envisages the introduction of tariff and other trade barriers between the UK and the EU but would seek to minimise their impact on the flow of imports and exports using what are admitted to be untried procedures and as yet undeveloped digital technologies. ‘Streamlining’ and simplification of procedures will supposedly reduce the costs of obtaining customs declarations, permitting the British authorities to verify them and ensuring that tariffs are paid and regulatory requirements are met. Attempts will be made to move these procedures away from the borders themselves by allowing trusted enterprises to complete them from their offices. Waivers will be offered for as many types of product in transit and as many enterprises as possible.

The document refers to the ongoing replacement of the existing customs software, CHIEF, by a new system, CDS, intended to be operational in January 2019, that is, two months before it will be needed in the event that a transitional period is not agreed. Previous experience with the government’s introduction of complex new IT systems does not encourage confidence that the promised streamlining and simplification will have the desired impact on the costs of trade.

One can already see an erosion of the restored autonomy which Brexit supporters promised. How can regulatory enforcement be simplified? Clearly by aligning British regulations as closely as possible with those in the EU. The same applies to other ‘non-tariff barriers’ such as taxes and technical standards – the imperative of reducing frictions in EU-UK trade will militate strongly against any particularist British stance on these questions.

A similar erosion is taking place in terms of trade in services. Chancellor of the Exchequer Philip Hammond, the minister seen as most explicitly aware of the dangers of Brexit, has suggested that Britain’s financial sector, although it will necessarily be outside the Single Market, may continue to sell financial services in the EU on the basis of regulatory ‘equivalence’. How can such equivalence conceivably be achieved except by the British simply replicating the regulatory structures of the EU? If the governance of one of the largest and most important sectors of the British economy is essentially determined in Brussels, what is the price of reasserting ‘sovereignty’? One of the many ironies of Brexit is that it has undermined the growing influence of the City of London within the EU financial system. The project of a Capital Markets Union, whatever one’s view of its prospects of success, clearly accorded great importance to the British financial sector which was seen as central to the less bank-dominated and more security-market-oriented system which EU leaders, anxious to accelerate economic growth and disappointed by the recently cautious performance of the banks, intended to construct. The status accorded to the City was suggested by the appointment of British Commissioner, Jonathan Hill, to lead the drive for CMU. Hill resigned immediately following the British referendum which clearly called into question London’s future role in EU finance.

The whole ‘technical fix’ trade scheme depends on the good offices of the EU. A very large fraction of UK trade with countries outside the EU does not pass through British ports but through Rotterdam and other ports on the continent. The goods concerned enter or leave Britain on lorries crossing between Dover and Calais. Thus the ‘facilitation’ of UK trade with third parties would hinge on the active participation of customs administrators across the EU.

But the inadequacies of the ‘technical fix’ pale into insignificance when compared with Britain’s alternative model of future UK-EU trade, the ‘new customs partnership’. Here Britain would ‘operate a regime for imports that aligns precisely with the EU’s external customs border, for goods that will be consumed in the EU market, even if they are part of a supply chain in the UK first’. This would ‘remove the need for the UK and the EU to introduce customs processes between us, so that goods moving between the UK and the EU would be treated as they are now for customs purposes’. At a stroke Britain has its cake and eats it – no barriers to trade between EU and UK but complete autonomy for Britain in its trade with third parties. Some complex tracking of imports from other countries after they enter the UK is clearly going to be necessary to ensure that those bound for the EU do not benefit from easier, UK, entry conditions – if the goods in question are part of a complex supply chain into both EU and UK markets enforcing the distinction could be quite a challenge. The necessary reciprocity from the EU is not mentioned but also bears thinking about: just as Britain would impose EU tariffs and conditions on third party goods entering the UK but destined for the EU so EU members would have to impose British tariffs on Britain-bound goods entering the EU. If they declined to do so the goods trans-shipped to Britain via the EU would cross the English Channel tariff- free, subject to the EU’s commercial policy not that of Britain. If, on the other hand, EU countries did agree to act as a customs agent for the British they would have dismantled their own Single Market. At present, goods are either entitled to be in the EU or not, and if they are so entitled they circulate freely throughout. In the future there would be two classes of goods – those entitled to circulate freely and those admitted only because they are destined for Britain. This phantasmagoria was published as the negotiating position of the British government.

The ‘opportunities’ of Brexit

If Brexit goes ahead, substantial impairment of British trade with the EU in both goods and services cannot be avoided. Trade frictions will also tend to be followed by declines in investment since free access to the huge market of the EU has been until now of considerable advantage to both domestic and foreign investors in Britain. Are there any benefits from British withdrawal to compensate for these very concrete and increasingly understood costs? Some Conservative politicians continue to insist that there are important advantages to enter on the asset side of the Brexit balance sheet.

Without undue simplification the political supporters of Brexit can be divided into two broad groups. The mass support for the Leave campaign in the referendum tended to come from older voters, with less than average formal education, and lower than median wages. They were found especially in areas which had suffered most from industrial decline. Although Leave voters were in the majority in every region of England outside London the decisive factor was ‘the six million Leave votes cast in England’s historic industrial regions’.³ Migrant workers from the EU, seen as pushing down wages and putting pressure on public services, were to some extent a scapegoat to these voters, although in reality it has been the outward movement of industrial capital, not the inward movement of labour, which has undermined the economic position of Britain’s industrial workers, while public services have suffered essentially from the priority accorded to tax reductions over the last four decades. There are clear similarities with other revolts against the political establishment, for instance in the US.

However, there was another important component of the Leave campaign – ultra-liberal Conservative politicians provided many of its leading figures. Although they shared with the mass Leave supporters a concern for British sovereignty their actual goals were very different. Nigel Lawson, Chancellor of the Exchequer during the Thatcher governments, spoke for this group when he wrote that Brexit makes it possible to complete the Thatcher revolution. Conservative figures such as John Redwood and Iain Duncan Smith, both former cabinet ministers, see the EU as imposing regulations which distort markets and impair the competitive process. Within the present cabinet, Liam Fox, now secretary of state for international trade, is a leading representative of this tendency. The group sees a principal benefit of Brexit as a recovery of UK control over trade policy, making it possible to strike trade deals with partners outside the EU.

These two groups of Leave supporters may well come into conflict as Brexit takes place. On the issue of immigration it seems inevitable that the mass of Leave voters are doomed to disappointment. In formal terms post- Brexit Britain will have regained control over immigration policy, but in practice high levels of immigration will continue because migrant labour has become a material necessity for the British economy and several sectors – agriculture, construction, hotels and catering – would be in serious trouble without it. Reassurances to employers in these sectors have already been given. Some post-Brexit restrictions on immigration from the EU would be politically unavoidable, but it is unlikely that they would be drastic, and no restrictions at all are envisaged for the near future.

On the other hand, the social consequences of ‘completing the Thatcher revolution’ would surely be to exacerbate the frustrations and discontents which led to the Brexit vote. At least in principle Prime Minister May has acknowledged this in several speeches condemning the rise in inequality. There is a government commitment – it remains to be seen how binding it will be – not to use Brexit to weaken labour market regulation or employment rights. Now, a strong flow of inward investment is surely a key objective of the ultra-liberal Brexiteers: if immigration is reduced, even partially, and deregulation is ruled out while a question mark is placed over British access to EU markets, then Britain will have difficulty in offering either lower wage costs or better sales prospects to potential investors. Abundant FDI seems improbable in such a context.

As for trade deals around the world, it is difficult to see how Britain on its own can secure better terms from third countries than it could obtain as part of the world’s largest trading bloc. The EU has recently negotiated trade agreements with Canada and Japan. What conceivable advantage would either of these countries offer the UK above those they have conceded to the EU?

A customs union requires its members to adopt a common trade policy towards outside countries: this eliminates the need for internal borders but by the same token subjects the participating states to supranational control over their trade policies. Hence the determined rejection of continued customs union membership by the neoliberal Brexiteers. On the other hand, free trade agreements require rules of origin. For example, the NAFTA establishes free trade between the US and Mexico, but the US still has to control imports from Mexico to ensure that they are, indeed, of Mexican origin and not, for example, Chinese. The multiplication by the UK of bilateral free trade deals would require rules of origin of increasing complexity. Meanwhile EU exports to its own free trade partners would risk restriction if there was a significant British component since, Britain no longer being in the EU, they also could fall foul of rules of origin.

In terms of non-trade barriers – regulations, safety standards, technical specifications, etc. – the situation appears to militate against the vision of a Britain trading freely with partners around the planet. To defend its EU markets, Britain will have to comply with EU rules in all these aspects – its rules, that is, will have to mirror those imposed by the despised Brussels officials and enforced by the hated European Court of Justice. Imports into Britain from third countries will thus have to observe EU rules just as though Britain was still a member. In this and many other respects departure will fail to bestow the promised independence on the UK authorities.

Economists for Free Trade

This is the new name for the group, ‘Economists for Brexit’. What are we to make of the Brexiteers’ promise of multiple, highly advantageous, trade deals with countries around the world? A recent paper from Patrick Minford, doyen of the UK’s neoliberal economists, provides both a more convincing view of what might be possible in this respect and at the same time a reductio ad absurdum of the global free trade position.

Minford is not particularly concerned about a drop in British exports as a result of Brexit; nor does he care much whether Britain is actually able to secure deals which stimulate exports. For him the prize is more and cheaper imports – it would be nice if the reduction or abolition of tariffs and import barriers by Britain were reciprocated, but this is by no means necessary, unilateral trade disarmament will underpin Britain’s future prosperity:

The basis for this insouciance about exports is Minford’s very abstract conception of trade. It is true that a unilateral liberalisation of imports benefits domestic consumers. By the same token it harms domestic producers. Under certain assumptions it can be shown that the (static) gains of the former outweigh the losses of the latter. The key assumption, nearly always counter- factual, is that the labour displaced by cheap imports is smoothly and rapidly redeployed at close to its previous levels of productivity. Minford implicitly makes such an assumption but goes further – he supplements neoclassical logic with Schumpeterian dynamics – to claim that the pressure of competition from imports, even if disruptive, will promote higher productivity in response: ‘Now, think about what happens if we reduce our trade barriers on imports. We reduce the prices ofimports to consumers, and this creates both a gain to them and more competition with our homeproducers, forcing them to raise productivity.’

For logical completeness one should amend this to, ‘… forcing them to raise productivity or to accept permanent reductions in their incomes’. It is an additional irony that, had this vision of competition been valid, there would have been no vote for Brexit. In the 1980s a very high exchange rate for sterling exposed much of British manufacturing to severe competitive pressure in both home and foreign markets. The same view of the salutary nature of intense competition as is expressed today by Minford was then the prevailing view. In many regions, particularly in the industrial North of England, there was no Schumpeterian dynamic in response – hundreds of thousands of workers were thrown on the scrap-heap; unemployment remained high for decades, cutting into employment standards, undermining economic security, and promoting growing inequalities between those lucky enough to find a place in the economy after the Thatcher revolution and those marginalised by it. The deep and bitter resentment of communities treated as expendable instruments in the drive towards a neoliberal order is what produced the referendum result of 2016.

Minford’s paper has however the great merit of making clear the kind of thinking that lies behind the rhetoric of the ultraliberal Brexiteers. As he writes, ‘… when we talk about global free trade we mean getting rid of our own trade barriers against all of the rest of the world’. Brexiteer optimism for Britain’s new global trading role thus rests on a usually unstated conviction that intense market competition will eliminate the leaden weaknesses of the British economy and bring about a golden transformation in its performance.

… But if exports do matter

Without participating in ‘project fear’ one could seek a somewhat more balanced view of the withdrawal process from the National Institute Economic Review.⁵ The studies published there are in accord with Patrick Minford’s main point. In their piece on trade negotiations, Holmes, Rollo, and Winters declare: ‘The major economic benefits from trade come from opening up domestic markets to imports. Lower prices, higher quality, new products and technologies all benefit both consumers and producers, although opening markets also creates “losers” and thus generates political resistance at home.’⁶ However, they do not think that the loss of exports to the EU is a trivial issue. The anticipated loss of Britain’s market share in the rest of the EU would correspond to reduced demand for British output and thus for British labour. The large scale of UK-EU trade compared with UK trade with other partners, even with the largest of them, the US, means that it will be difficult to make good such losses.

To compensate for a one per cent reduction in exports to the EU because of reduced market access, exports to the USA, for example, would have to increase by nearly four per cent. […] Services trade liberalisation is inherently more difficult than goods liberalisation, as it can entail conflict with domestic public policy objectives (especially in health and education). Yet services are the area in which the UK specialises.

Now a further NIER paper, by Monique Ebell, based on a statistical estimate of the impact of trade agreements on trade volumes, suggests in qualitative terms that the trade creation from ‘deep’ agreements such as the Single Market is very great so that the losses from leaving it might be severe, and in quantitative terms that the reduction in Britain’s EU exports could be very large.⁷ If Ebell is even approximately correct about orders of magnitude the UK is facing a substantial fall in export demand and thus in employment. One consequence might be a further depreciation of sterling, which could certainly help to stimulate exports but which would more than eliminate any increase in living standards from cheaper imports – they would be cheaper in international terms but not from the point of view of British consumers.

Investment losses might also be significant. The advantages of the Single Market to investors, and especially to the big corporations, are unique – the lack of any corresponding gains for the majority of the population is exactly why the EU is so open to criticism from a democratic point of view. The ‘four freedoms’ allow companies to move money, goods, services, and labour anywhere in the world’s largest economic zone. If any political authority attempts to restrict these freedoms the companies affected have justiciable rights which will be upheld not only in the European Court of Justice but in the national juridical systems which are subordinated to it. The result is a high degree of certainty which it will be impossible for the UK to replicate once it has moved outside EU jurisdiction. The uncertainty alone is likely to discourage both domestic investment and FDI in post-Brexit Britain. Shortly after the referendum, Nissan, which manufactures automobiles in the North-East of England, threatened to cut back its investments in Britain. It received assurances from the government which led it to withdraw the threat. The nature of the reassurances and whether they would be extended to other corporations in the automobile or other sectors are being kept secret.

Labour’s Brexit dilemma

The reorientation of the British Labour Party since the unexpected election of Jeremy Corbyn to its leadership has inspired hope across Europe for a radical challenge to the neoliberal consensus which has seen mainstream social- democratic parties accepting ever-widening inequalities and undermining social provision in the interests of the big corporations whose investments, it was promised, would regenerate western economies and spread prosperity across them. The ‘adjustments’ required by the neoliberal agenda – in pressure on popular living standards, increasing insecurity and precarious employment, erosion of the welfare state, and reductions in benefits – proved never-ending. The failure to achieve the promised outcomes was only ever treated as evidence that even more ‘flexibility’ was needed. The logical outcome was a decline in electoral support for social democracy.

Promising a radical break with this pattern, Corbyn survived determined attempts to displace him by other Labour MPs and by the managers of the party, easily winning the endorsement of the membership in a second leadership election. This came in defiance of the most intense vilification in the press and his dismissal as an inevitable loser by virtually all political commentators.

In the referendum campaign, the labour movement as a whole supported the Remain position but did not play a major part in the debate which was dominated by opposing forces on the right. Corbyn was heavily criticised after the defeat of the Remain campaign for failing to endorse the EU more enthusiastically. It is however difficult to see how someone with a socialist position could enthuse about the actually existing EU which completely subordinates social objectives to its competition rules and restrictive macroeconomic stance. The Remain arguments of the left were necessarily based on the EU as the lesser evil – better to fight for deep changes in the European project than to abandon it for what would certainly be a very right-wing neoliberal and xenophobic – alternative. It may be that Corbyn was personally in favour of British withdrawal or that he regarded it as an issue of little importance – if that were so there would be more difficulty because British withdrawal would be economically damaging and contrary to the interests of most British people.

In any event, Brexit is the main cloud darkening what are otherwise sunny prospects for Corbyn-led Labour. After the referendum, most politicians declared that Brexit must take place to respect the popular will. Theresa May, replacing the now discredited David Cameron as Prime Minister, made a determined and ‘hard’ Brexit her central policy. Convinced by the virtually unanimous view that Corbyn was an electoral liability, May called an opportunistic election, confident of a substantially increased majority.

The outcome of the election, however, which took nearly everyone by surprise, may come to be seen as a turning point in British and even European politics. Labour under the ‘unelectable’ Corbyn made the biggest advance of any British political party since the epochal triumph of Labour in 1945.⁸ A central feature of the result was the strong support Labour won from young people and the enthusiasm of much of the younger generations for its promise of a radical change of direction. Although the Conservative Party emerged with the largest vote and the largest number of MPs it lost its overall parliamentary majority and suffered a perhaps fatal loss of prestige as the Conservative government made an agreement with Northern Ireland’s Democratic Unionist Party to help push through its Brexit-dominated agenda.

Labour is pulled in opposite directions by the Brexit issue. Most of the constituencies which delivered big majorities for Leave, such as those in the industrial (or deindustrialised) North of England are traditional Labour seats. To block Brexit might be seen by their voters as a political betrayal as well as anti-democratic. On the other hand, the political dynamic of the June 2017 election tends to cast Labour in an anti-Brexit role: in constituencies which had voted Remain in the referendum there was on average a 4% swing to Labour; in those which had voted Leave there was no change in the relative strength of the two main parties.

A resolution of this problem, allowing Labour to draw on both oppositional forces – uniting the demands of the deindustrialised regions with those of the radical younger generations – would both virtually guarantee electoral victory and provide the basis for deep socio-economic reforms under the following government. Failure to do so, and the alienation of support which might follow, could either lead to defeat or encumber a Labour government with an acute post-Brexit crisis.

Conclusion

The Brexit negotiations with the EU are not going well for the May government. The cabinet is bitterly divided on the appropriate negotiating stance and indeed on whether the basic goal of the British negotiators should be to achieve maximum independence from the EU or to minimise the disruption to UK-EU economic relations. The new demand for an ‘adjustment period’ of two years or more, so far dismissed by the EU negotiators who are aware that they hold the whip hand, would postpone the evil day when the British economy is faced with the ‘cliff-edge’ of departure. At the same time the call for an adjustment period, endorsed by both arch-Brexiteer Liam Fox, occupying the new position of International Trade Secretary, and Chancellor Philip Hammond, identified as deeply sceptical about the Brexit agenda, permits a veneer of unity to be temporarily maintained. There are reports of intense dissatisfaction among the civil servants required to support and document the chaotic negotiating process.

The metaphor of a cliff-edge is rejected by the Brexiteers who insist that there need be no sudden disturbance to existing economic relations. But their position is hardly convincing. Former Chancellor George Osborn points out that, if Britain leaves the EU in March 2019, according to the schedule laid down in Article 50 of the EU Treaty, no customs regime will be operational and there will be no new agricultural regime ready to replace the Common Agricultural Policy (CAP).

The problem of replacing the CAP (British farmers have been promised complete compensation for any related losses) is linked to that of Northern Ireland. If, as British consumers have been promised, food prices are lower following Brexit, then the prices of beef, cereals, milk, and butter may well be lower in the six counties of Northern Ireland than in the rest of the island. What flows of agricultural produce will then take place across a border which all parties agree must be kept free from checks and controls?

The border between Ireland and the UK, the payment Britain must make into the EU budget, and the status of EU citizens in the UK after Brexit are the three first issues to be handled in the negotiations. None has yet been resolved, in spite of humiliating concessions by the British side of which the logic seems to be always to reduce the possibility of genuinely autonomous policies after Brexit.

Given the fragile majority of the May government and the fact that most MPs are hostile to Brexit there is a permanent possibility of a political accident whereby a vote in the House of Commons could undermine the entire negotiating process. However, most commentators remain persuaded that Brexit, in a relatively thoroughgoing, ‘hard’, form, will indeed take place. The probable consequence would be serious economic damage to Britain not compensated by any substantial widening of the scope for independent economic policies.

Notes

1. On the costs of leaving the Single Market see, Carl Emmerson, Paul Johnson, and Ian Mitchell, The EU Single Market: the value of membership versus access to the UK, Institute for Fiscal Studies, 2016.
2. HM Government, Future Customs Arrangements: a future partnership paper.
3. Tom Hazeldine, ‘Revolt of the Rustbelt’, New Left Review 105 (May/June 2017).
4. Patrick Minford, From Project Fear to Project Prosperity: an Introduction, at http://www.economistsforfreetrade.com/.
5. See the collection of articles on Brexit in National Institute Economic Review 238 (November 2016).
6. Peter Holmes, Jim Rollo, L. Alan Winters, ‘Negotiating the UK’s Post-Brexit Trade Arrangements’, National Institute Economic Review 238(2016), pp. R22–R30.
7. Monique Ebell, 'Assessing the Impact of Trade Agreements on Trade', National InstituteEconomic Review 238(2016), pp. R31–R42.
8. See, on the BBC website, the lecture by Vernon Bogdanor, ‘Brexit: one year on’, at https://www.youtube.com/watch?v=L9edfG1utRg.