What would be the cost to the UK of regulation by a foreign power and major competitor?

What would be the cost to the UK of regulation by a foreign power and major competitor?

One of the most extraordinary things about current parliamentary debates over Brexit is that while there has been much heat generated about the immediate economic impacts of Brexit on trade, there has been almost no discussion of the other side of that coin. What would be the economic impact in the years after Brexit of the UK economy, the fifth largest in the world, of being subject to regulation by a foreign power which is an economic competitor?

Opponents of Brexit talk about the need to maintain continuity of trade with the EU. In reality that is an illusion. We will continue to conduct large amounts of trade with the EU, just as we did before we joined the EU. But the way in which we trade will not be the same as it is now for two very important reasons.

First, because we are leaving the EU and therefore not merely the Single Market and Customs Union, but also the EU decision-making processes such as the Council of Ministers and European Parliament. That is enormously significant because the UK has historically acted as a moderating influence on EU zealotry. Just as Harold Wilson famously said that the British Labour Party owed more to Methodism than to Marx, so the current status of the EU owes much to the UK’s pragmatism and emphasis on free market competition. Remove that influence and what the EU will be like in future is a great unknown. But one thing which is certain is that the pattern of UK-EU trade will not be identical to now.

Which brings us to the second reason why it is illusory to think we can maintain continuity of existing UK-EU trading patterns. Not only will we lack any decision-making influence on EU regulations after Brexit, but these regulations will be decided by what will then be a major economic competitor to the UK. Anyone who doubts that after Brexit the EU will fashion its regulations to gain a competitive advantage over us, only has to look at how the EU is conducting the current Brexit negotiations, particularly over the Irish border. The EU’s primary objective there is emphatically not the Good Friday Agreement, but to protect the EU Single Market, which is why Michel Barnier told the Irish Government in February that border checks will be unavoidable as the UK is leaving the Single Market and Customs Union.

So, what do we actually know about the economic costs to the UK of subjecting ourselves after Brexit to rules created by one of our main economic competitors? A month ago I submitted the following Freedom of Information request to the Treasury asking if they had carried an economic assessment of this:

  1. Have the Treasury  carried out assessments for the a) short b) medium and c) long term of the economic impact on the UK for i) Jobs ii) GDP of the UK after Brexit continuing to be subject to existing and new EU regulations whilst having no influence over those regulations?
  2.  What were the results of those assessments?

The Treasury civil servants eventually replied stating that they would neither confirm nor deny that the Treasury has done such as economic impact assessment, claiming exemption from doing so on three specific grounds in the Freedom of Information Act:

  • S.27 to protect the UK’s interests abroad and its relations with other states and international organisations such as the EU.
  • S.29 as this would prejudice the UK’s economic interests.
  • S.35 to protect the formulation and development of government policy.

Two things are particularly interesting here:

  1. None of these justifications could reasonably be said to apply if the Treasury has i) done an economic impact assessment – and ii) concluded that being subject to EU regulations, either directly (Single Market/Customs Union membership) or indirectly (alignment) would have a positive economic impact.
  2. The Treasury said that all three justifications for not responding actually do apply, rather than simply that they could apply. As the table below shows these justifications could only reasonably apply if either i) The Treasury had not done any an impact assessment of the cost to the UK economy after Brexit of being subject to economic regulation by a foreign power, or ii) they had done such an assessment – and the impact was negative, in at least the medium or long terms.

The economic impact of subjecting our economy to regulation by a major foreign competitor was presumably one of the key reasons Theresa May early on rejected the idea of staying in the EU Single Market or Customs Union, a stand which was reinforced by the 2017 Conservative manifesto.

Chancellor Philip Hammond seemed to at least acknowledge this as well when he told the audience in his recent Mansion House speech that some of the proposals currently being considered by the EU had “everything to do with an ambition to force the location of business into the Eurozone”. However, in the same speech the Chancellor talked of his “vision of a future…were we remain highly aligned and deeply interconnected. Even though we will be outside the EU.”

In other words, in all but name outsourcing the regulation of large parts of the UK economy, the fifth largest in the world, to a foreign power, which the Chancellor himself recognises is already intent on taking whole sectors of business away from us.

The question of what assessment the Treasury has made of the impact on the UK economy of being subject to regulation by what, after Brexit, will be both a foreign power and a major economic competitor should surely be urgently addressed by the Treasury Select Committee. If the Treasury has not done such an economic assessment, that would be an act of reckless incompetence. However, if it has done one and it has a negative impact on the UK economy beyond the short term, then clearly that needs to inform the Government’s position in trade negotiations with the EU.

It is therefore imperative that the Treasury Select Committee ask the Chancellor some tough questions about this. That may not be a role that the Committee Chair Nicky Morgan finds particularly comfortable. But now is clearly a time to put the national interest and parliamentary scrutiny before any partisan views she holds in relation to the Government’s Brexit strategy.

Don't doubt that the EU will fashion its regulations to gain a competitive advantage
It's illusory to think we can maintain continuity of existing UK-EU trading patterns