Why we must all now ready ourselves for no deal – and WTO terms

Posted on 5th March, 2018

This article was first published on Conservative Home on 5 March 2018.

By any measure, the Prime Minister’s speech at the Mansion House last Friday was a remarkable achievement. In my book, it was the best she has made, better even than Lancaster House last year.  A measure of its strength was that it was welcomed from across the spectrum of Conservative opinion, receiving praise from both Jacob Rees-Mogg and Nicky Morgan.

The speech was notable for its realistic appraisal of the negotiating challenge that the UK faces in securing the sort of “deep and comprehensive” free trade agreement it seeks with the EU, whilst striking the optimistic tone that many Brexiteers feel has hitherto been absent from Government messaging on the post-withdrawal future.

The Prime Minister was clear that the UK will leave both the single market and the customs union and cease to be subject to the jurisdiction of the European Court of Justice, all essential elements of the restoration of parliamentary sovereignty. At the same time, she acknowledged that compromises will have to be made if a trade deal is to be secured.  Access to the single market would necessarily  be less extensive than presently enjoyed.  The UK would probably align many of its regulatory standards to those of the EU, seek associate membership of some EU agencies and be prepared to make a financial contribution to their running costs.

The speech went into considerable detail about alternatives to the customs union, the first being a “customs partnership”, under which the UK would mirror EU duties for goods ultimately intended for the EU market, and the second a streamlined arrangement relying heavily on technology.  Refreshingly, there was an acknowledgement that a fudge might be necessary for SME trade between Northern Ireland and the Republic, allowing smaller companies to operate as they do at present, with no further restrictions.

The Prime Minister was keen to point out the strengths that the UK would bring to any future trade relationship. The British medicines regulator currently assesses more new medicines than any other member state.  The UK provides around 30 per cent of the broadcast channels available in the EU; and UK-located banks provided more than £1.1 trillion of lending to the rest of the EU in 2015 alone.  She made clear that looking only at precedent when negotiating the new  relationship would inflict  injury on both parties.  We need to be imaginative, and look at new solutions.

It was an intensely British speech, full of pragmatic common sense.  It deserved the approval it has attracted from across the parliamentary Party.  To that extent, it was a success, for which the Prime Minister deserves the fullest praise.

The question remains whether the second audience to which it was addressed will have reacted as warmly to the speech.  The Prime Minister went out of her way to say that she “understood the EU’s principles”.  I have no doubt that she does, and will therefore know just how big a sell it will be to convert the speech’s proposals into an agreement.

Initial reactions from the EU have been mixed.  The ultra-Europhile Guy Verhofstadt criticised the speech for its lack of “serious proposals” and accused the Prime Minister of simply “putting a few extra cherries on the Brexit cake”. He made the entirely otiose observation that “the EU is a rules-based organisation” and that there was little appetite to renegotiate the rules of the single market.  Michel Barnier, however, welcomed the clarity that the UK would leave both the customs union and the single market, and also the recognition that trade-offs would be necessary.

It is Verhofstadt’s comments that are perhaps more indicative of the likely response from the EU.  The structures of the Union are regarded as sacrosanct by most member states, not least, and most significantly, Germany.

I recently had a discussion with a very senior German diplomat, during which I pointed out that Germany exported around a million cars annually to the UK.  Surely, I said, Germany would want to avoid the imposition of 10 per cent duty on each one of those cars, which would be the case if no  trade deal were done.  The consequences for the German motor industry would be devastating.

The diplomat politely demurred; I should understand, he told me, that preserving the integrity of the European Union was a greater priority to the German Government than protecting the interests of the country’s motor manufacturers.

He could, of course, have been bluffing. However, I strongly suspect he wasn’t.  EU politicians speak in almost catechismal  terms about  the supremacy of the Union’s institutions, the sanctity of the four freedoms and the inviolability of the duty of sincere cooperation.  We should not underestimate the extent to which our decision to exercise our treaty right to leave has been regarded as blasphemy.   Our proposal for a new relationship may well be dismissed as heretical.

We must hope that it is not, and that the sensible terms proposed in the Mansion House speech will be taken up by the EU as the basis of a comprehensive trade deal.  If however, they are rejected, then it will not be for the want of goodwill on the part of the Prime Minister.

And, given that the PM does understand the EU’s principles, I have no doubt that she is ensuring that all necessary steps are now being taken to ensure a smooth departure from the EU and an inevitable future trading relationship on WTO terms if the trade deal proves impossible. That means commissioning physical and digital infrastructure and recruiting necessary personnel. It also means offering tangible reassurance to business that such work is being done.

As the Prime Minister observed, change is not to be feared, as long as we face it with a clear-sighted determination to act for the common good. The Mansion House speech was an eloquent expression of British goodwill.  Whatever the EU response, we have made clear our determination to pursue  a new, global future, ideally on the best of terms with our European neighbours.

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