Why Open Europe is proposing a compromise Brexit blueprint

Why Open Europe is proposing a compromise Brexit blueprint

Yesterday BrexitCentral ran an article by Jon Moynihan which – among other things – responded to a paper, Striking a Balance, which Open Europe put out on Monday. Jon made lots of arguments in favour of free trade and deregulation, many of which have merits. But, ultimately, I think he rather missed the point of our paper. For those who didn’t see it, Open Europe put forward a blueprint for the future UK-EU economic partnership, which was explicitly a compromise position designed to break the current Brexit deadlock both in Westminster and with Brussels.

Given it was a compromise, we didn’t expect it to please everyone on both sides of the Brexit debate. Some Leavers – and perhaps many BrexitCentral readers – may want something looser. Simply put, Open Europe’s argument is that the UK should maintain its alignment with the EU’s rules on goods in return for a wide-ranging mutual recognition agreement, essentially to allow us to trade goods without regulatory checks. This would be akin to the status Switzerland has, where it participates in the Single Market for goods, but is outside a customs union (so can sign its own trade deals). But, unlike Switzerland, we would not be bound by the EU’s free movement rules. On services we take a different approach, arguing that we need the freedom to diverge, given the dominant size of that sector for the UK.

Jon kindly offered us a “much-needed refresher on Free Trade”. Firstly he pointed out that the Single Market in services “barely exists”. That’s something of an exaggeration, but we do at length address in our paper the very point to which Jon was referring – that the Single Market for services is far from complete. We detail the various barriers to trade in services between European countries, for example the requirements on architects in Germany to have certificates from national regulatory bodies – which don’t exist in Sweden, for example.

Jon noted that we “appear not to have developed much” our views on the benefits of staying in the Single Market for services. Again, that’s not quite accurate. What we don’t do is model the economic impact of leaving the Single Market. Open Europe addressed some of that before the referendum in our What If paper. Our argument in this paper is different: we agree with the Bank of England (and disagree with the reported views of HM Treasury) that the financial services sector is too important to be a rule taker from Brussels. We also point out that although the Single Market in services is most developed for financial services, just 37% of UK exports in that field actually go the EU. Given that we are already globally orientated, we don’t think it makes sense to tether ourselves to EU rules. So it will be a question of managing how we diverge.

Jon went on to complain that our proposal “ignores the simple point that around the entire world, every country exporting to the EU has to obey Single Market rules for the products it sells to the EU”. Except… we didn’t. That was another central point we made in our paper. Our argument is that many industries will choose to follow EU goods rules anyway – for both exports going to the EU and for other products. That’s the case with, for example, the US-based major international company Dow Chemical. Jon points out that the EU represents only a small fraction of global GDP. Yes. But it is also our nearest neighbour and it accounts for around half of our goods trade. It’s possible to argue that distance (gravity in economics jargon) matters less than it used to do, but it’s still important for goods trade.

In an ideal world the UK might totally restructure its trade towards a much more global outlook. But it’s hard to imagine that happening overnight. And it’s hard to see the current UK Parliament supporting a plan premised on the level of disruption that would entail to businesses, such as the automobile or airline industries, whose supply chains currently criss-cross the European Union. If many of these companies will likely follow EU rules anyway on goods – and there’s unclear political support for diverging – why not get the credit for agreeing to follow them?

Jon then refers to Economists for Free Trade analysis showing that goods prices are 20% higher in the EU than outside, which I assume is a reference to the findings in Patrick Minford and Edgar Miller’s What shall we do if the EU will not play ball? which notes that achieving those savings would depend on the UK “abandoning the EU protectionist barriers” as well as removing all tariffs. It may be fair enough to argue that the EU’s regulatory structure inflates prices. But it’s also important to explain that deflating these prices would entail not just unilateral free trade (abolishing tariffs whatever the effect on industries or domestic producers) but the sort of wide ranging deregulation for which I currently see little political – and indeed public – support.

I’m interested in lots of what Jon argues overall and am myself in favour of more liberal trade. But what Open Europe was trying to do was put forward a position which we thought was politically viable – both in the UK and with the EU. After all, politics is the art of the possible. We knew that some Leavers would not like our plan – and Jon evidently is one. That’s fair enough. Open Europe’s blueprint may not be perfect but it responds to the current shape of our economy and our trade patterns as well as to contemporary political dynamics: a hung Parliament with unclear support for the sort of Brexit Jon would favour – and the UK over halfway through Article 50 with no Cabinet decision on a clear end-state. If someone has a better plan to get through the current Brexit impasse then it’s time to bring it forward. But meanwhile, critics need to reflect on whether a dogged pursuit of the perfect might endanger the good.