A short transition can help Britain make the best of Brexit

This week the UK government published a paper in which it set out its wish for Britain to remain in a customs union with the EU for a transitional period after it leaves the bloc in 2019. In doing so, the UK has seized the business initiative. The CBI employers’ organisation called the proposals “encouraging”.

If these plans are rejected by the EU — and so far the European Commission has merely said that it “take[s] note” of the UK’s preferences — it would highlight the challenge of putting business interests centre stage.

The plan has to be seen in the context of the need to leave both the EU single market and the customs union. This is the best way to maximise the economic benefits of Brexit. Outside the single market, Britain would save its EU contribution, determine its own laws, regulations and migration quotas. Outside the customs union, it can escape EU protectionism, cut trade deals and set its own tariffs.

If Britain reaches a deal with the EU it may not be until close to the March 2019 deadline. This does not help the planning horizons of the one in 10 UK companies that trade with the EU, nor those in the City of London whose business model is predicated on the existing relationship.

I have been in favour of a transition deal for some time. But it needs to meet important criteria that the government’s latest proposal does only partially.

Any transition needs to be short. While the government wants a clear end date, in this plan it is the EU that would likely set it. Will it decide upon what is in the UK’s best interests, especially as it knows the longer a transition is, the more Britain will have to pay? There is a risk that any arrangement ends up being semi-permanent, and in the process that the UK accepts rules over which it has no say.

We also need to know where the transition would take us. The UK had two good proposals. One was to utilise the kind of state of the art technology in use on the US-Canada border to manage future customs arrangements. The other was a bespoke relationship in which the UK would mirror current tariffs for EU-bound goods, so protecting supply chains, and set its own for UK-bound goods. European politicians are being lobbied hard by businesses in their own countries to sort out a deal. Britain’s proposals should feed that pressure.

The end point of negotiations must be a free-trade agreement with the EU. Trade deals can take years to agree if both sides start far apart. But a UK-EU deal should be simple to conclude as the respective starting positions on regulations are identical.

One stumbling block is the role played by the European Court of Justice. The repeal of the 1972 European Communities Act will end the supremacy of EU law in the UK. Therefore, any interim arrangement should be between two sovereign legal entities.

What about Britain’s ability to cut trade deals with the rest of the world? Brexit will allow the UK to take a leadership role at the World Trade Organisation and work with others to eliminate non-tariff barriers, especially in services, which account for three-quarters of the British economy. It will also allow the UK to seize the initiative and conduct its own global trade deals. The danger in the government’s proposals is that much of this may have to be put on hold. The UK may have to maintain all EU tariffs for the duration of the transition period — which would be fine if that lasted for, say, a maximum of one or two years.

We should not forget that the EU customs union is protectionist with high tariffs, especially on cars and food. Like all customs unions it protects certain groups at the expense of new entrants and consumers. Little wonder big firms like the idea.

Making a success of Brexit means getting our domestic economic agenda right, as well as our global approach and our relationship with the EU

Making a success of Brexit means getting our domestic economic agenda right, as well as our global approach and our relationship with the EU. But some, including officials in the UK Treasury, find it hard to abandon groupthink. They want as little change as possible and cannot accept the vision of Britain, and the City, repositioning to succeed in the global economy.

It made sense, given the understandable desire to avoid a “cliff-edge” departure from the EU, to think of a transition deal as a bridge — we could see how long it was and where it was taking us. However, the government’s latest plan carries with it the risk that negotiations turn the bridge into a tunnel with no light at the end. Happily, David Davis, the Brexit secretary, seems well aware of the risks and opportunities. I am confident he will navigate the right route.

The writer is chief economic strategist at Netwealth Investments

Letter in response to this article:

Aiming at divergence will make negotiation difficult / From Timothy Lyons, London, UK