Not so much “clean” Brexit as “quick and dirty” Brexit

The politics of Brexit seem all-engrossing, a carnival of revolutionary destruction threatening to make 2017 the UK’s ironic centenary of the historic events in Russia in 1917.

The grisly spectacle grabs the attention, pulling it away from the substance of the commercial realities that matter to investors, workers and consumers.

What will businesses face two years after the UK government starts the firing gun on negotiations by making its Article 50 notification when the EU Treaties shall cease to apply?

We know the UK won’t be part of the internal market.

That was always the consequence of the desire to restrict the free movement of EU workers and escape the jurisdiction of the European Court.

What Brits call the ‘single market’, Brussels calls the internal market – the trading environment inside the EU. From day one, even if the UK continues to apply the whole body of EU legislation, it will be on the outside. EU member states will be able to check if UK goods and services conform to EU rules.

In heavily-regulated areas – food, pharmaceuticals, chemicals, medical devices, motor vehicles, financial services – verification could soon become very complex. If EU countries want to manipulate the system to the advantage of their own producers and providers, they no longer face the threat of being taken to the European Court by London.

Nor will the UK have a seat at the table in the negotiations on new or modified standards. Even with the voting power of a large Member State, the UK has had to negotiate skilfully to protect its interests. And much of what actually bites on businesses, like tighter safety and environmental standards, or vital details of external trade arrangements, is decided in the hard-to-penetrate world of delegated legislation.

Even if there is still someone in Whitehall tracking all this, a herculean task, the UK won’t be bound to adopt any of it, and surely won’t, otherwise what would be the point of leaving. The gap between the UK regulatory regime and that of the other 27 EU countries will soon start to widen.

Meanwhile the UK will be picking out the bits of EU legislation it wants to get rid of.  Some of it, I agree, may seem no great loss. There could be small-scale benefits from simpler and smarter regulations than those made in Brussels. But every step away from EU rules will be a step away from the internal market. Sooner rather than later the UK will be seen as giving itself an unfair advantage by undercutting EU standards.

Anxiety about this, fuelled by threats from the UK Chancellor to make the UK a deregulated offshore tax haven, will make the 27 remaining EU members cautious over the terms they offer.

Something will be needed to avoid the nightmare of the ‘cliff-edge’, in which the UK simply tears itself away into an administrative limbo. This is to the benefit of neither side. So we can imagine a short-term fix to avoid immediate disruption while the systems for treating the UK as a third country are put in place.

Beyond that, two other crucial issues affect the prospects for what the UK wants – the UK-EU Less Free Trade Agreement (LEFTA), since the UK is leaving the world’s most developed free trade area. These are the Customs Union and the UK’s much-vaunted trade deals with third countries.

If the UK wants to give third countries preferential trade terms, it can’t retain the EU’s Common External Tariff, and will have to notify its own tariff schedule to the WTO.  On day one that might be identical, with a special zero-rate for all EU imports, provided the EU accepts a zero tariff on UK exports. But in exchange the EU would likely demand strict rules on third-country content in its imports from the UK. Cue more intrusive bureaucracy for UK-based companies.

How long would this setup last once the UK started offering the USA, India and China much freer access to the UK market? At the very least, content rules would have to be even tougher to assure the 27 EU countries that the UK’s trade deals did not breach its tariff walls. The EU might decide the only safe course would be to apply the common external tariff to UK exports from Day One, with LEFTA to be negotiated once the terms of the UK’s deals with third countries were known.

At the same time, the UK government seems to be looking for special arrangements for certain sectors, such as automotive and aerospace, where highly-developed supply chains mean components criss-cross national boundaries multiple times during production.

Regimes of ‘inward processing’ might be put in place in these sectors to prevent multiple import duty liability, with the EU charging duties, if any, only on the finished product. Yet cross-border supply chains are hardly confined to these priority sectors.  Once it is known what the UK is proposing, manufacturers in all sectors will surely press their case for this kind of special treatment.

The analysis of tariff questions only takes you so far, however. There are reams and reams of legislative texts, many of them sector-specific, knitting the UK into the internal market and the EU’s external trade system. As Ivan Rogers, the former UK Permanent Representative, tried to tell UK Ministers, unpicking and re-stitching it all into a new set of agreements is a huge and complicated task that will take years.

A quick break won’t be clean; even a phased transition will be messy. Many carefully-honed production and trading patterns, and business models built on them, will be in jeopardy. The UK government position is a recipe for chaos not clarity, and this is why business is right to be so worried.

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