Every year in Davos, there is a lunch organised by the CBI at which the keynote speech is invariably given by one of the senior government ministers in town. The guest list includes the bosses of a good cross-section of FTSE 100 companies as well as representatives of smaller but fast-growing firms. Invites are extended to the media so it is not hard to find out what business leaders are thinking about.
Last Thursday’s lunch was all about politics, with two topics dominating the conversation: where is the government going with Brexit and what are the prospects of Jeremy Corbyn being prime minister by the time the next lunch is held in January 2019?
Staying in the single market and customs union
The UK could sign up to all the EU’s rules and regulations, staying in the single market – which provides free movement of goods, services and people – and the customs union, in which EU members agree tariffs on external states. Freedom of movement would continue and the UK would keep paying into the Brussels pot. We would continue to have unfettered access to EU trade, but the pledge to “take back control” of laws, borders and money would not have been fulfilled. This is an unlikely outcome and one that may be possible only by reversing the Brexit decision, after a second referendum or election.
The Norway model
Britain could follow Norway, which is in the single market, is subject to freedom of movement rules and pays a fee to Brussels – but is outside the customs union. That combination would tie Britain to EU regulations but allow it to sign trade deals of its own. A “Norway-minus” deal is more likely. That would see the UK leave the single market and customs union and end free movement of people. But Britain would align its rules and regulations with Brussels, hoping this would allow a greater degree of market access. The UK would still be subject to EU rules.
The Canada deal
A comprehensive trade deal like the one handed to Canada would help British traders, as it would lower or eliminate tariffs. But there would be little on offer for the UK services industry. It is a bad outcome for financial services. Such a deal would leave Britain free to diverge from EU rules and regulations but that in turn would lead to border checks and the rise of other “non-tariff barriers” to trade. It would leave Britain free to forge new trade deals with other nations. Many in Brussels see this as a likely outcome, based on Theresa May’s direction so far.
No deal
Britain leaves with no trade deal, meaning that all trade is governed by World Trade Organization rules. Tariffs would be high, queues at the border long and the Irish border issue severe. In the short term, British aircraft might be unable to fly to some European destinations. The UK would quickly need to establish bilateral agreements to deal with the consequences, but the country would be free to take whatever future direction it wishes. It may need to deregulate to attract international business – a very different future and a lot of disruption.
For those running UK plc, the two issues are linked. They see the government as riven by its Brexit factions and drifting towards disaster. Big business supports the Conservative party and has real misgivings about Labour’s plans for the economy, but is now far more interested in finding out what these would mean in practice. Anybody interested could have found out by seeking out John McDonnell, who made his Davos debut this year with a call for a clampdown on tax havens, for nationalisation and for redistribution of wealth.
The guest speaker at this year’s lunch was Philip Hammond, and business liked what it heard. While accepting (albeit grudgingly) that Britain is going to leave the EU, the CBI and its member firms would prefer as little change to the status quo as possible.
This is Hammond’s position, too. The chancellor said there was something unique about the trade negotiations Britain would have with the EU: normally discussions are about how to bring countries closer together but London and Brussels were discussing what new barriers to trade they wanted to put in place. Hammond said his aim was to move Britain and the EU very modestly apart.
This seemed clear enough, but it was the chancellor’s own view, not a statement of government policy. Within half an hour of the chancellor ending a question and answer session at the CBI lunch, the prime minister walked on stage in the Davos congress centre to deliver a keynote address.
If the government really had decided to aim for as much of a no-change Brexit as possible, this was the perfect opportunity to do so. Instead, Theresa May made one fleeting reference to the result of the referendum in a speech devoted to ways of maximising the benefits and minimising the risks of new technology.
May then met Donald Trump for a 15-minute chat before flying back to Britain. On landing, a Downing Street spokesman said the prime minister did not agree with her chancellor that Brexit could happen with only very modest changes.
The prime minister’s problem is that the bulk of the parliamentary Conservative party is at odds with Hammond. It wants the “clean Brexit” proposed by Liam Halligan and Gerard Lyons in their book of the same name. This involves leaving the single market, leaving the customs union, offering the other 27 nations a deal to carry on trading on existing tariff-free terms but being willing to fall back on World Trade Organisation rules if necessary.
This, though, doesn’t seem to be what May has in mind either. Halligan and Lyons first came up with their clean Brexit idea a year ago, when they argued it was important to give businesses certainty so that they could prepare for the future. That is precisely what May has not provided, but the attempt to keep everybody happy has proved impossible. Tory remainers think the economy will be damaged by leaving the single market and the customs union; Tory Brexiters think the prime minister secretly wants “Bino” (Brexit in name only); business is demanding clarity so it can plan ahead; and voters have picked up on the idea that the government is winging it.
The CBI has suggested a possible compromise: the government should commit to leaving the single market but commit to a customs union with the EU, although not necessarily the existing one.
Staying in the single market would involve contributions to the EU budget and accepting free movement of labour, the two issues at the heart of the leave campaign in June 2016. Whatever the views of its member companies, the CBI has accepted that Brexit involves leaving the single market.
But the employers’ group thinks membership of a customs union is a different matter. It says this would avoid the cost of putting up barriers, put paid to the idea of long queues of lorries at UK ports and provide a solution to the Irish border question.
Membership of a customs union would mean that the UK would have to impose tariffs on non-EU goods and would not be at liberty to strike its own trade deals independently of Brussels. But the CBI says this is a spreadsheet issue: the government should weigh up whether the freedom to cut trade deals with the US or China is worth putting up trade barriers with its biggest export market for.
For a number of reasons, a Brexit compromise now looks increasingly likely. The resilience of the economy means there is no prospect of a recession-induced second referendum. The government’s loss of its overall majority in last year’s election means it doesn’t have the votes for a clean or “hard Brexit”. And the passing of time means that businesses are threatening not to take long-term investment decisions unless they get a clearer idea of where things are heading.
A hard Brexit would take Britain out of the EU’s single market and customs union and ends its obligations to respect the four freedoms, make big EU budget payments and accept the jurisdiction of the ECJ: what Brexiters mean by “taking back control” of Britain’s borders, laws and money. It would mean a return of trade tariffs, depending on what (if any) FTA was agreed. See our full Brexit phrasebook.
Nothing May has said during her 18 months as prime minister suggests she is ready to compromise. But everything she has done suggests that a compromise is coming. In the context of the current film Darkest Hour, May would have the country believe that she is the hardline Winston Churchill rather than his rival Lord Halifax, who wanted to explore a negotiated peace. But a negotiated peace is all May can offer. She talks like Churchill but acts like Halifax.
