We need to stop making such a meal of our exit from the EU and make a clean break. Gerard Lyons tells Merryn Somerset Webb how we might do it.
You've heard of "soft Brexit". You've heard of "hard Brexit". And if you are a regular reader you will have a rough idea of what both these things mean by now (see our pre-Christmas Brexit explainer issue). But might there be something better than either of these? Some of you, I know, will have instantly thought "no Brexit", but that isn't, I'm afraid, what I'm thinking. How about "clean Brexit"? That's the suggestion made in a new paper from MoneyWeek roundtable regular Liam Halligan and my interviewee this week, Gerard Lyons (see below).
According to them, we are making far too much of a meal of Brexit. We should be explicit not just about leaving the single market (Theresa May has made it clear that we will be doing this), but also about leaving the EU's customs union. Only by doing both of these things can we be free of our "multi-billion-pound payments to the EU", of the EU freedom of movement rules and of the jurisdiction of the European Court of Justice.
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Leaving the customs union means we will be once again able to "cut our own UK-focused trade agreements" outside the EU. Once the UK leaves, some 85% of the global economy will be outside the EU and, as even the EU itself says, 90% of the growth in the global economy in the coming decades will come from outside the club. Leaving will also mean we no longer have to charge the Common External Tariff (CET) set by the EU on all goods coming into the UK, something that could well make food, in particular, significantly cheaper ("great for poorer households", says Lyons).
Once we've left, we should then offer the remaining 27 members of the EU a deal to carry on trading with us (and us with them) under our existing tariff-free arrangements but also "make it clear" that if they aren't into that we are totally happy to take back our seat at the World Trade Organisation and trade with the EU under those rules just as China and the US do.
Wouldn't that be pretty damaging to our exporters, I ask: after all, while the tariffs most of them would face would be small, there would still be tariffs where there had previously been none and that's before you even start on the logistical problems of creating customs borders (and policing them). Not so, says Lyons. Everyone says that going to WTO rules would be "hugely damaging" for the UK. But the tariffs are both "relatively low and falling" and it is worth remembering that the proportion of our trade already taking place under WTO rules forms not only the biggest part already but is growing fast and actually "records a surplus" (we export more than we import).
OK. But what of the sectors where the tariffs are genuinely high on the way into the EU? I'm thinking of course of cars the UK is the headquarters for seven of the world's main car manufacturers as well as eight premium manufacturers, six design studios, 13 R&D centres and more than 100 specialist brands and agriculture. The WTO rules will give us a firm base, says Lyons, and a good negotiating position.
If we have made it clear we are more than happy to fall back on them (that is, everyone knows, as May says, that no deal is better than a lousy deal), we don't have to spend the next two years striking a "complex, overarching UK-EU trade deal" that may well not be the best one possible. However we are still free to discuss sector-based free-trade agreements (FTAs) with the EU if they are up for it. (And they should be one for cars, for example, would most definitely benefit them.)
While we are discussing all this with the EU, says Lyons, we should be insisting that we are going to negotiate FTAs with the rest of the world even before 2019. That makes sense to me of course we should. But what of all the muttering about not being allowed to talk to other people about trade before we are officially out? Nonsense, says Lyons. It's true that we can't bring any into force, but there are no rules against talking during our two-year exit period. There is also no particular hurry "beyond symbolism": 17% of our exports go to the US and our third biggest market is China. We have no deals with either at the moment (the EU has failed to negotiate them on our behalf). "You don't need a trade deal to trade."
This brings me on to that two-year period. Why bother with it? If we know we will likely be going the WTO route, why not do what Professor Ingrid Detter de Frankopan has suggested on the MoneyWeek website and skip what are obviously going to be very trying years? Why not just go? Right now? "Politically impossible," says Lyons. It would be too quick for too many people.
Everyone needs time to grasp that it is really happening and to prepare. We also need time to put our border technology in place two years goes very fast! Leave too fast or indeed go for the brinkmanship of a "messy" or soft Brexit (negotiating without a stated fall back to WTO position) and you really could end up with the chaos predicted by Remain before the referendum and an awful lot of bad policy.
The future of UK sectors such as agriculture should not end up being "subjected to chaotic decision making or last-minute horse trading". Let's not forget that while a good deal should be in the EU's economic interests, its "political fragility" means negotiating with it is "full of risk". We also need time to get the "Great Repeal Bill" sorted: this needs to be passed soon and ready to apply the second we leave: that way there would be no major "cliff".
Finally I ask Lyons about this week's Supreme Court judgement that Brexit would have to be approved by parliament. This won't affect the government's process or its thinking, but it might just make everything take longer than it would otherwise. Wouldn't it all be quicker and easier, I ask, if we take the moral high ground and just go for full free trade? In theory, yes. But it would also be "pretty politically naive". Pure free trade should lower prices but it would also rob us of a pretty important negotiating stick (being able to offer to remove the WTO tariffs for EU imports). Not good.
So let's say that Halligan and Lyons get all they want from Brexit (and the prime minister's plans don't seem to be that far from theirs) what will it mean for the UK economy? Their paper is designed to move the debate on (finally) from Leave vs Remain to Clean vs Messy, but it has little to say about the short-term economic effects on the UK of either. The point to remember here, says Lyons, is Brexit will not be any more able than Gordon Brown was to abolish boom and bust.
Before the vote Lyons said that he expected to see a weaker pound (something he, along with most other economists, felt the UK needed anyway), lower interest rates and a strong economy in the second half of 2016. He was right. But, he says, at some point the economy will slow "just as the US or Chinese economy will slow". That isn't happening yet thanks to the fall in the pound the UK has "received a huge competitive boost and is even more attractive to international investors" than it was. But leaving the EU does "constitute an economic shock it is not easy to leave something you have been in for more than 40 years".
The path for the next couple of years depends on how the interaction between "fundamentals, policy and confidence" plays out across the country. And that's hard to predict. However, whatever the short-term problems might (or might not) turn out to be, "Brexit is a fantastic opportunity to address the problems of an imbalanced economy highlighted by the financial crisis of eight years ago and to reposition the UK globally". Change isn't just about Brexit we need to make it a real Brenaissance (my word, not his) by looking at it alongside our domestic economic and industrial agenda. If we get all this right and cleanly done it won't be too long before we see "clear long-term economic benefits".
Fact file: Gerard Lyons
Gerard Lyons is chief economic adviser at the Policy Exchange think tank and chief economic strategist at Netwealth Investments*. Prior to this, he had 27 years' experience in the City in senior roles with leading international banks,including Standard Chartered, DKB International and Swiss Bank. He sits on the advisory boards at both Warwick Business School and the Grantham Institute at the London School of Economics and Imperial College.
His first book, The Consolations of Economics, was serialised in The DailyTelegraph, and his new ebook, The UK Referendum: An Easy Guide to Leaving the EU, is available on Amazon. You can download the Policy Exchange report mentioned in the interview from PolicyExchange.org.uk.*Disclosure: Merryn sits (unpaid) on Netwealth's advisory board and is a(very) small shareholder in the business.
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