Trading places

18th November 2016

It took Napoleon’s arrival in Venice in 1797 to end nearly 1,000 years of La Serenissima’s preeminent position as the trade capital of Europe.

That moment shook the economic order in much the same way that we are seeing the EU of the 28 fractured by the UK’s referendum decision to exit the Union.

The exit of the third largest EU Member State and second largest European economy will impact EU policy-making, although, beyond Brexit, the rise in nationalism and protectionism across Europe will also impact on the EU’s ability to promote ambitious international trade policy. And that is without the Donald Trump effect, whatever that turns out to be.

What’s certain is that trade policy will be a critical factor in the future relationship between the EU and the UK. 

As things stand, the EU dominates trade policy. Since the Single European Act of 1986, the EU operates as a Single Market in which all goods, services, capital and people can move unhindered between the Member States.

The UK alone conducts more than £500 billion (€580 billion) worth of trade with the bloc, accounting for around half of overall trade.

Leaving the Single Market means accepting non-tariff barriers (such as discriminatory regulations for physical goods and financial instruments, and loss of “passporting” rights) which could hurt financial services exports in particular.

The UK thus faces a dilemma: the Single Market is popular with businesses and with the general public, while free movement of people across EU Member States is arguably the leading reason the UK voted for Brexit.

UK Foreign Secretary Boris Johnson’s spat this week with Italy’s Economic Minister Carlo Calenda over prosecco exports encapsulates the trade dilemma: businesses in the EU27 may lose access to the UK market in the event of a hard and hostile Brexit. Britain will lose access to 27 markets. The stakes are high.

Prime Minister Theresa May has said that she intends to secure an end to the free movement of people, and the best possible access for British business to “trade with and operate within” the Single Market. She has also said that the UK will no longer be subject to the jurisdiction of EU courts, which rules out Single Market membership.

As things stand, it looks like the UK Government is asking for something that isn’t on the table.

Resolving this will require sophisticated lobbying by businesses operating across the EU.

A recent leaked UK Government memo said the private sector could be readying to “hold a gun to the head” of the Government over Brexit terms.

That is probably putting it a little too strongly.

However, what businesses must do is a build a case that works as strongly for the Governments in Berlin, Paris and Rome as it does for the pragmatic wing of Theresa May’s administration.

The best lobbying will equip ministers with red lines and bargaining chips to deploy in detailed negotiations. But it will also emphasise that, when it comes to Brexit terms, what’s good for Britain is good for the EU27 too.

The Prime Minister and her advisers, the Chancellor of the Exchequer Philip Hammond and his ministerial allies and the Business Secretary Greg Clark are the best targets for engagement.

Both May and Hammond campaigned for a Remain vote, and they, and key figures around them, want to avoid a so-called “hard Brexit”, which would see the UK leave the Single Market and Customs Union entirely.

Hammond in particular has already begun organising meetings with groups of business leaders to hear their concerns. They will try to negotiate special concessions for the UK with the EU, to maximise the level of market access available.

It will be a messy deal given the nature of the EU and its record of external negotiations, but that provides an opportunity for businesses to secure specific exemptions and special support. Witness Nissan.

Different businesses have different views about what kind of settlement will work for them.

What is important is that these views are heard in Westminster and Brussels within the debate on the UK’s future with the EU. Otherwise, the risk is that the final outcome will be dominated by political horse-trading rather than the best deal for UK jobs and investment.

For more insight on Brexit as it unfolds, read our Public Affairs blog