Under Theresa May, Brexit Britain will clearly be leaving both the Single Market and the Customs Union

Ruth Lea

Ruth Lea is Economic Adviser at Arbuthnot Banking Group.

---

When I heard the Prime Minister’s Brexit speech at the Conservative Party Conference on 2nd October, I had little doubt that this was one of the most important speeches any British Prime Minister had given for decades.

It was crystal clear that Brexit really did mean Brexit; Leave really did mean Leave; and  Britain will pass its own laws and govern itself.

Several weeks on, I thought it worth taking a few moments to analyse her words a little more closely and consider their significant economic implications.

The title of the speech set the tone: “Britain after Brexit: a vision of Global Britain”. This was positive, outward-looking and forward-looking. And it reflected the ambitions of the pioneering think tank “Global Britain” as well as “Global Vision”, the research organisation established by Lord (Norman) Blackwell and myself back in 2007. We realised then that the global economy was changing radically and irreversibly. Europe was irrevocably in relative decline as the emerging market and developing economies powered ahead. Such a trend is now even clearer it was then.

In addition, the EU is beset with fundamental problems of which the migration crisis and the ongoing problems in the Eurozone are the two most obvious. After the existential crisis in 2012, the Eurozone appears to have stabilised. But this most unwise of currency unions is immiserating the weaker economies in the bloc and is inherently unstable. There is no doubt that Britain in the 21st century needs to refocus its trading and investment activities away from the sluggish EU towards the growth markets. Granted, this recalibration is already happening, the EU share of our exports is declining on a secular basis, but well-chosen trade deals should serve to accelerate this process.

The Prime Minister’s speech warmed to the theme, referring to a Britain “…in which we look beyond our continent and to the opportunities in the wider world” and a Britain “…in which we win trade agreements with old friends and new partners”. And, even though she did not mention exiting the Customs Union explicitly, it is absolutely clear that this country will leave it.

If we stayed in the EU’s Customs Union we would still be unable to negotiate our own trade deals. Moreover, we would still be tied to the Common External Tariff, unable to decide our own tariff rates. Given that the EU protects its agriculture and clothing and footwear industries with high tariffs, this is clearly sub-optimal for the British consumer. After Brexit, the Government could give a real boost to living standards (especially for the lower income groups) by slashing these levies.

It was equally clear that we will not be staying in the Single Market with its “four freedoms of goods and services and capital and labour”. The Prime Minister was firm: “…we will decide for ourselves how we control immigration”. This would not be consistent with staying in what must be the most over-rated economic bloc ever. As the Customs Union removed tariff barriers (on goods), so the Single Market was meant to remove non-tariff barriers. But it has proved a major disappointment, not least of all in services where this country has a competitive edge (and, yes, I am aware of the “passport” in financial services). Moreover, the notion that we must be in the Single Market to enjoy the “privilege” of trading with it is risible – not least of all because we have such a huge deficit with our EU partners.

So we will be out of both the Customs Union and the Single Market. But what will our relationship be with the EU post-Brexit? The Prime Minster observed “…I want it to involve free trade, in goods and services. I want it to give British companies the maximum freedom to trade with and operate in the Single Market – and let European businesses do the same here.” And it will, rightly, be a bespoke deal. But beyond this she said “…we will not be able to give a running commentary or a blow-by-blow account of the negotiations”.

As much as it would be helpful to overseas banks, for example, to know more about her plans for the City, she is surely right. I do not know the Government’s priorities, but mine would be on the continuation of tariff-free trade on goods and an agreement on “regulatory equivalence” (to replace the “passport”) in financial services. Most of the rest really doesn’t matter. If our EU partners are economically rational they would surely agree to such a deal, as it would be in their interests as well as ours (if not more so). We can only hope they will be economically rational.

Suffice to say rest of speech, including the triggering of Article 50 and the “Great Repeal Bill” was the stuff of history in the making. The die is cast. Brexit is happening. Leavers and Remainers should now co-operate to make sure it works for us all. Let us remember the British people voted to leave the EU. And no-one, but no-one, has the right to try and subvert the will of the British people.