To everyone’s relief, the economic impact of the Brexit vote has so far not been as bad as many – including me – feared it might be. Well, perhaps not everyone, for there is nothing quite as galling as to be proved wrong. For many of those who warned of catastrophe, a recession is still greatly to be desired – so as to punish voters for their own stupidity, as it were.
This is a natural enough reaction, but it is not at all constructive, particularly when it comes to business, where success depends on the ability to adapt and respond opportunistically and optimistically to any change in circumstance.
It’s still far too early to make firm judgements, obviously, and there have already been a number of not entirely welcome consequences of Brexit, not least a 10 per cent devaluation in the pound, one of the sharpest ever of such losses in relative national wealth.
Even so, the early signs are encouraging.
Yet remarkable though this comparative calm might seem, it shouldn’t altogether surprise, for as yet, nothing has changed. Britain is still in the EU, and is highly likely to remain so for at least the next two years. Beyond the devaluation, there has been little sustained shock to financial markets. That leaves uncertainty about Britain’s future relationship with the EU as the only genuinely new threat to growth and jobs that did not exist before the vote.
Still, for many companies, this uncertainty is unsettling enough, weighing on hiring and investment decisions. It is therefore vital that it is removed as quickly as possible.
There are essentially two approaches to Brexit that must instruct the Government as it attempts to gauge – in discussion with business, finance, elected leaders and the nation as a whole – what Britain really wants from this now-certain divorce.
Neither of them conforms exactly with any of the models widely discussed during the referendum campaign – whether it be the Norwegian, Swiss, Canadian or even Albanian relationship with the EU. Britain must have its own, uniquely British model.
At one extreme lies what might be called the Singapore approach to trade with the outside world. Singapore is, in essence, just one giant “Export Processing Zone”, which means that business, and to a lesser extent citizens, enjoy tariff-free access to whatever the world has to offer. This is a country with remarkably few free trade agreements, but even so, relative to its size, it manages to be hugely successful in export markets. If other nations seek to impose tariffs on its goods and services, so be it; Singapore has few of its own. Why would it tolerate such lack of reciprocity in a world that seems to be increasingly afflicted by tit-for-tat protectionism?
The answer lies in the relative advantage of cheap imports; Singapore’s industries are able to source unencumbered from wherever offers the best value. This gives a competitive edge that compensates – at least in part – for the tariffs imposed elsewhere, a point which Donald Trump, the Republican nominee for US president, seems quite incapable of grasping. He promises to tackle America’s trade deficit by unleashing a massive trade war. And that’s the problem. Too often, trade is seen as a form of warfare. In fact free trade makes everyone richer, even when unreciprocated.
Patrick Minford, professor of applied economics at Cardiff Business School, is one of those advocating what is in essence the Singapore approach for Britain. It worked back in the 19th century with repeal of the corn laws, dramatically improving people’s lives, so why not now?
Theoretically, unilateral tariff disarmament has much to commend it. On a practical level, too, it would make sense to set up a number of regional “Export Processing Zones” once the UK is free to trade as it wishes. But even by Prof Minford’s own admission, the transitional challenges of applying it nationally as part of a “big bang” approach to Brexit would be extreme, wiping out great tracts of manufacturing and agricultural industry before the new stuff got going. What works well for a country in its development phase has drawbacks for an already advanced economy.
At the other extreme lies the approach favoured by much of the UK business and financial community, which essentially is to remain a part of the EU’s single market, but with immigration controls, sovereign trade arrangements with other parts of the world, and much reduced budgetary contributions. Since these two aims are incompatible, there has to be a trade off – either less market access or freer movement of labour. Precisely where the balance lies is a matter for negotiation.
In any case, it is overwhelmingly in the EU’s interests to reach such an accommodation. If, on the other hand it plays hard ball, and like Trump treats trade as warfare, then inevitably it will be faced with its worst nightmare: Britain becoming a souped-up version of low tax, free trade Singapore, sucking in European investment and talent, right on its own doorstep.
At a glance | The David Davis Brexit Blueprint
* Britain would start the process of leaving the European Union by the end of this year, after consulting with administrations in Scotland, Wales and Northern Ireland and other business groups and unions
* Britain to leave the European Union finally by December 2018
* UK should seek to strike a deal with the EU based on a “liberalised” existing trade arrangement with Canada to eliminate all customs duties and not allow uncontrolled immigration into the UK
* Britain should seek new free trade agreements with “the biggest prospective markets as fast as possible”
* The UK should “accelerate” the agreement of the controversial Trans-Atlantic Trade and Investment Partnership deal with the US
* Britain should prioritise trade deals with the rest of the world focusing initially on China, USA, Canada and Hong Kong then others like Australia, Brazil, India, South Korea, Japan, Mexico and South Africa
* Britain should start to wean itself off grants from Brussels well before the UK finally severs its links to the EU and instead pay grants directly to farmers and fishermen