Soft Brexit is a mirage

Centrist politicians are hard-wired to look for a middle way when confronted with difficult problems. So after absorbing the shock of Britain's vote to leave the EU last June, it is only natural that so many have sought one on this most perplexing issue. It goes by the name of "soft Brexit", to contrast with "hard Brexit", which refers to an uncompromising break. But is such a solution viable?

This question revolves around one issue above all: membership of Europe's Single Market. The Single Market allows for the free movement of goods, and some services, across Europe's borders. This came into being in 1990 as intra-European trade was stagnating, and restored momentum. The problem was that Europe's free trading arrangements at that time did not go far enough. There were no tariffs, but plenty of scope for non-tariff barriers. There were many such barriers - I remember a particular story about all French imports of one particular type having to be sent to Poitiers to be inspected.

The Europeans had a clear model in front of them: the United States of America. This towering economic power was so successful  in large part because of its huge domestic market, which gave businesses time to develop products before having to tackle export markets. But here we bump into a famous trilemma, first articulated by US economist Dani Rodrick in his book The Globalization Paradox. People must choose between democracy, national self-determination and the benefits of global integration. You can have two of these, but not three. To achieve global integration means setting global rules. If nation states choose to participate in globalisation, they will sacrifice their voters' rights to change the rules. The only way to make it democratic is to make it so at the global level, which means losing national autonomy.

And so forming the Single Market meant that the members of the European Union sacrificed significant sovereignty - albeit with the creation of some democratic structures at European level: the European Council of heads of state, and the directly elected European Parliament. Critics of the EU say that it is undemocratic - but the only ways to address this are either to dissolve it and lose the Single Market, or strengthen its union-level democratic structures, undermining the nation-state further. The problem with soft Brexit is that it attempts have all three elements of the trilemma at once.

Brexit means British withdrawal from the European Council and Parliament, to say nothing of its influence in the European Commission, the EU's executive arm. But taking part in the Single Market, or even aspects of it, means leaving the rule-making to these European institutions. This cannot be acceptable. Norway, and to some extent Switzerland, suffer this indignity already. It is hard to see it working for such a big country as Britain. Voters would rightly ask what the point was in leaving the EU. "EU rules"  would still be the bureaucrats' excuse of choice for badly implemented regulation, alongside that British favourite "health and safety". Political suicide, surely?

Neither will it be easy to pick apart the structure of EU regulations so that the country opts out of bits of it. British politicians often assume that there is a deal to be done to limit EU migration into the UK. Businesses want to tackle EU labour regulation and various other things, like regulation of poisonous chemicals. The trouble is that the other EU countries will see this as trying to get an unfair competitive advantage - which could undermine the entire edifice.

And furthermore, Britain's bargaining position is weak. One of the key arguments made by the Brexiteers was that because Britain imports so much from the rest of the EU, the EU (German car makers, and French cheese makers in particular)  will be desperate to give us an advantageous deal. That looks optimistic. Take the motor industry. This has significant economies of scale, and a single national market, even the size of Britain or Germany, is not enough to sustain a domestic industry. Before the Single Market, Britain's motor industry was dying. After it Japanese and other carmakers invested in factories in Britain as an export base for the whole of Europe. Britain's car industry revived, though it is still in deficit. If Britain withdraws from the Single Market, this industry comes under threat. If it withers, then surely other EU countries will gain. Why should Volkswagen press for an easy trade deal that would save their Japanese competitors? Britain can't sustain its own motor industry, so it will have no alternative but to keep importing cars from its nearest neighbours in the EU - and perhaps in even greater quantities as Nissan and others are forced to divest.

I am tempted to suggest that angling for soft Brexit is just the bargaining phase of the five stages of grief from Remain supporters, coming after denial and anger. Depression comes next.

Of course the real situation is not as black and white as I am painting it.  But if Britain has to be outside the EU, its best bet is to start with hard Brexit, and then negotiate arrangements sector by sector - much as Switzerland does. Except that we would not go anything like as far as Switzerland. But we have to acknowledge that the UK will lose its comparative advantage in industries that benefit from the Single Market - like the motor industry. That will mean quite a bit of dislocation.

But it won't be the end of the world. Basic economics teaches us that where comparative advantage diminishes in one sector, it emerges somewhere else. The country may be poorer as a result, but it need not be a disaster. Where will this new comparative advantage lie? We cannot do a Singapore, a favourite of some Brexiteers  - which exploits its strategic position on key Asian trading routes. But industries that are not subject to Single Market rules will be at a relative advantage. This may help Britain's successful service industries - though making headway in this highly protected arena will be hard. The county's geographical position should help wind and tidal energy - though not solar energy, presumably. We also need to look for areas where EU regulations look badly implemented.

But just how big any short-term disruption will be is unclear. It is also not clear that the British public actually intended to sign up to it. If they didn't the only way back is to reverse the Brexit decision itself. That is the true alternative to hard Brexit. But that is another matter.

18 thoughts on “Soft Brexit is a mirage”

  1. The President of the German equivalent of the CBI said more or less precisely the same points on “Today” on Radio Four yesterday morning and made it clear that, in his view, German automobile manufacturers were not going to give way on freedom of movement, as many of them benefit far too much from it (e.g. Volkswagen’s investment over years in the Czech Republic and Poland – the clear implication being that such companies (most probably followed by the Japanese) would start to prioritise investment to such areas and, in time, scale back UK-based operations considerably.) I see no reason why other German companies (e.g. Haribo which has made huge investments in this part of England (Pontefract and Castleford) (and with the UK confectionery industry (once so great in the form of Cadbury’s, Terry’s, Bassett’s etc.) now being an accounting entry in some transnational conglomerate such as Kraft)) will not follow in the same direction if the UK abandons SEM regulations/quality guidelines.

    To echo your concluding thoughts, although it is of course being condemned by other parties as being “undemocratic”(*), the Lib Dem stance of (basically) rerunning the referendum (or disguising it in the form of a General Election with the “renegotiation” as the sole real issue) is the only one which makes sense. June saw people “getting it off their chest” (in England and Wales!) and it is now “the morning after” and the harsh reality of what many people actually voted for (e.g. in Sunderland (!) (surely THE classic example of turkeys voting for Christmas!)) will now need to be addressed and the limits of “democracy” as represented by referenda (the most primitive and senseless means of ‘expressing the will of the people’* in the book) confronted. (*How far 23 June was indeed “democratic” can, of course, in itself, be disputed: 16-18 year olds able to vote on independence or not in Scotland but not on what is going to affect the whole of their careers/working lives? By what right can England and Wales (the latter numbed by the steel crisis) drag Scotland and Northern Ireland in their wake? Why (on earth) should someone from a “Commonwealth” country (with about as much historical connection to the UK as Outer Mongolia!) like Mozambique or Cameroon have been allowed to vote but not WW2 British veterans living in Spain for health reasons or a French teacher married to a UK citizen and with two children who has taught in UK schools for decades and paid thousands in taxes/NI etc.? (Just confirms even further what an arrogant, totally incompetent pair of nincompoops were at the head of the Tory party in the form of Cameron and Osborne, the updated versions of Laurel and Hardy in political terms! (“Well, this is another fine mess…..”)

    1. Wouldn’t Brexit be a great opportunity to break out of the grip of the ar industry and make a wholesale move towards electric cars? Maybe a negotiation with Tesla to create a British factory? Maybe make it a goal to phase out all new private diesel/petrol vehicles by 2025?

      Hard Brexit should be viewed as an opportunity, albeit a challenging one.

      The elephant in the room is globalisation, i believe. It gets presented as a fait accomplis, but shouldn’t we in democracies have a choice? It is often said in the most general way that it makes us all richer, but it seems to lead to severe wealth distribution problems too.

      1. It depends on the economics of the electric car industry. I suspect that it may be similar to internal combustion engine cars – in which case we will end up by importing them. Still we could make a splash by investing heavily in the infrastructure needed to make electric cars work.

        But I think we need to be more radical than that. I am drawn to the idea of cheap, driverless cars that we hire rather than own, and which may well be electric. Many fewer cars parked doing nothing. And maybe fewer cars on the road too. More expensive cars is hardly the end of the world if it forces us to use them more efficiently.

        And yes, Hard Brexit brings opportunities. At some point Europhiles will need to focus harder on these -as well as thinking harder about the Europe we want to rejoin at some future date. It will need to change.

        And of course we shouldn’t view globalisation as an unalloyed good. We have just become rather dependent on it, and any move away will involve quite a bit of pain. We do need to rethink it!

        1. “It depends on the economics of the electric car industry. I suspect that it may be similar to internal combustion engine cars – in which case we will end up by importing them.”

          I don’t agree – that’s equivalent to saying that if another country makes electric cars cheaper and better than we do, then we have to buy their cars. That’s not an inevitability, it’s a choice.

          I also suggest that moving away from globalisation would not cause pain equally to all people, just as it’s advance has not given universal benefits – I believe we need to unpack this a bit.

          Thanks for the article, by the way, it really helps to have thoughtful views on Brexit (still an emotional topic for me!)

          1. There are good an bad choices, and countries that choose to make their own cars rather than buying cheaper and better one from elsewhere don’t generally look to have made good choices. Better to focus creative energies elsewhere.

            And there’s a lot of unpacking to do on globalisation. The answer is surely not a simple yes or no.

  2. These notions of hard and soft have only emerged since the referendum. Maybe I missed them, but I don’t remember any arguments from either side, prior to the 23rd June, that a vote for Leave would be, in itself, an indecisive outcome and that further clarification would be later required.

    If result had gone other way, we would equally have had to decide if we wanted hard or full membership ( fully embracing the idea of EU integration, ever closer union, complete with adopting the euro etc) or the kind of soft membership (half-in, half out) we had before.

    I really don’t see the point of either soft membership or soft Brexit. We should either be fully in or fully out. There’ll be a lot of huffing and puffing in the next few years but the EU, and the Germans in particular, would have to be crazy to allow any deliberate harm to come to their best European customer. There’s only the USA which is bigger.

    http://tinyurl.com/kop3xcs

    1. Actually there was quite a bit of discussion about this, without using those exact words. People talked about “Norway” and “Switzerland” as models. It was a recurrent them in my blogs. Of course it didn’t suit the Leave campaigners to provide clarity. And Remain were incapable of moving beyond rather abstract scaremongering – so the more subtle debate was drowned out.

      Your comment on Germany is rather revealing – we aren’t their second biggest market, because we are smaller than the rest of the EU. The Germans have been rather skillful in developing the EU as a single market. After Brexit they may be faced with a conflict between two markets – Britain and the rest of the EU. Britain comes second there. And if they are going to be hard headed, they might understand that might have something to gain from a damaged Britain, if our motor industry takes a hit as a result, for example.

  3. I probably should have explained myself better. The net trading position of Germany viz a viz the UK is a surplus of Euro 51bn. For the USA it is Euro 54 bn. Whichever way you cut it the importance of the UK market to German exporters is huge. That’s not going to change anytime soon.

    Just why the Germans are so keen on supplying the ROW with more goods and services than they receive in return is another question. But, that’s what they seem to like doing and that’s how they’ve geared up their economy to function.

    That’s not going to change anytime soon either! But I would agree that maybe it should.

    1. The Uk is certainly important to Germany, but so is the rest of Europe, both as a market an a supply chain. They will be wary of putting that at risk. And they won’t shed too many tears if Nissan and Honda factories (and even BMW if you are VW or Daimler Benz) start to flag.

  4. This the interview given by the Head of the BDI (German equivalent of CBI). In it, he makes it abundantly clear that German car manufacturers will NOT fulfil the wishful thinking of Brexiters and fantasists like Boris Johnson and endanger their dealing within the SEM just for the sake of retaining the UK market. He also draws attention to the resentment felt towards the UK for its incessant pressure for the UK to grow and grow, in particular absorbing the ‘new countries’ of Eastern Europe and then moan and whine when faced with the consequences of this in terms of people coming to work here (not least due to our barmy system of benefits which other countries (like Spain) would never have dreamt up in decades!)

    https://www.theguardian.com/politics/2016/sep/29/german-business-leader-warning-brexit-trade-uk

    1. @Charles,

      I seem to remember similar predictions of doom some 14 or 15 years ago when the Blair/Brown government made the decision to stick with the pound rather than join the euro.

      Politically, if the UK was serious about the EU project that would have been the right thing to do. But, economically, I doubt anyone still thinks that would have been a good idea.

      So, essentially, Brexit started around 2001/2002 and the UK has been hanging around on the margins since then. The 2016 referendum is just the latest step in the saga. Once everything is finally complete, things that were said will be very likely be forgotten. There will be nothing more to be gained by bluff and bluster. Cold hard reason will prevail.

      There’ll be nothing to be gained by outbursts which are fuelled by any sense of spite. I suspect its more frustration than anything else on the part of our EU trading partners. They’ve put up with British whingeing long enough and they really would like us to get on with doing what we have to do.

      Our behaviour reminds me of our pet cat. He’ll miaow and pester to be let out but when the door is opened he’ll just sit there looking at it!

      1. There may be quite a bit of “cold hard reason” in Herr Kerber’s remarks, to go along the “bluff and bluster”.

        And as for those predictions of gloom and doom in 2001, they weren’t necessarily so wrong, given what happened in 2008/09. Perhaps further integration with Europe, and a less buoyant pound would have made the mess smaller. I don’t regard Britain post 2001 as an economic success story – probably only flood of east European immigrants saved it from crashing to a halt earlier than it did. Politically of course you are right. The UK was not ready for the Euro, and the half-hearted support for Europe from British politicians started the slide to Brexit.

        Still I would not underestimate the impact of the Single Market (Mrs Thatcher’s brainchild), and the level of industrial integration that followed from it – including the revival of the British motor industry. That will surely now go into reverse, and that surely reshuffles the comparative advantage pack, and that will lead to an industrial restructure. How painful and how quick remains to be seen. I am not as optimistic as you!

        1. I still don’t quite follow the logic of the single market argument – at least as far as car manufacturing is concerned. Hopefully we can agree on a tariff free zone with the EU. But say we can’t. Suppose both sides impose a 5% tariff. The first point to make is that the effect on prices will be around half of the recent 10% fall in the pounds value. Significant but hardly disastrous.

          If EU motor industry exports are to the UK are higher than UK motor industry exports to the EU (as they are) then the UK government will receive more revenue than EU governments.

          I’m not sure what the WTO rules are on this point, but in principle the UK government could impose a negative tariff on exports to the EU which would precisely compensate for any tariff imposed by the EU and still have money to spare.

          1. As my OP tries ot make clear, the Single Market is about a lot more than tariffs. We were tariff free in 1973, but trade growth had run out of steam by the 1980s – which is why Mrs Thatcher was happy to go to the next phase of integration, the Single Market, and dramatic extension of EU-level powers that went with it – indeed the birth of the EU itself (as opposed to the EC). Many trade economists feel that non-tariff barriers are often more important tariffs (though that depends on how big the tariffs are!). But if EU governments think that Britain’s bonfire of regulations post-Brexit is designed to get an unfair advantage, then no doubt they will want the right to apply tariffs.
            There is a second level of argument too: economies of scale. This applies to mainstram motor industry (VW, Nissan, et al) and white goods (washing machines, etc). That puts British-based manufacturers at a disadvantage, because to maintain critical mass they must export most of their output. French and German manufacturers are fishing in a much bigger pool so it is much easier for them to sustain critical mass without the UK, than it is for the UK without the rest of the EU. It follows that tariffs and non-tariff barriers will hurt UK based industry more than EU based industry, even if HMG makes a killing on tariff revenues. Incidentally, 5% is quite a sizeable chunk to take out of profit margins for this type of business. And I doubt if currency fluctuations make quite as much difference as you think – direct labour is a lower proportion of the finished product, and many other inputs, capital and components, are imported.
            Some kind of tariff-free arrangement with the EU for goods is still odds-on, I’m sure. But our EU partners may well impose extra bureaucracy to ensure compliance with Single Market standards on the stuff we export – and that could cost time and money.

  5. Maybe the economics of scale is something that can be revisited. Tesla is a new player in the auto industry, and it seems to be able to make an impact through innovation. Modern manufacturing may allow smaller-scale runs, and more bespoke ordering, also using high-volume components that are not brand-specific. I am thinking about the rebirth of a British car industry, mostly for the home market.

    1. True. Scale economies are a function of technology and consumer preferences, and they don’t apply to everything. They are most important in mature technologies – which is by no means electric cars. But I would be surprised if they didn’t come to visit electric cars at some point – which would certainly enhance their ability to displace conventional cars. Tesla fits the pattern in one respect – it still needed a sizeable domestic market (the US) to get started. Actually since we are used to very high levels of productivity in manufacturing, scale economies are becoming less significant to the economy as a whole – as highly productive industries employ rather few people!

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