Sir Anton Muscatelli: Britain needs a Brexit reality check

Canadian Prime Minister Justin Trudeau (left) and EU Council President Donald Tusk are all smiles as they sign the CETA trade deal; it remains to be seen if the UK will reach such an amicable settlement (Picture: AFP/Getty)
Canadian Prime Minister Justin Trudeau (left) and EU Council President Donald Tusk are all smiles as they sign the CETA trade deal; it remains to be seen if the UK will reach such an amicable settlement (Picture: AFP/Getty)
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Ideological extremists could damage the UK economy, warns Professor Sir Anton Muscatelli

The MPs who will judge Theresa May on the success or failure of the Brexit negotiations with the EU recently set her a very ambitious target.

Laying out 15 different criteria in its latest report, the House of Commons’ Exiting the EU Select Committee told the Prime Minister they expected that trade in goods to be frictionless and not add to the costs on businesses. In addition, it expressed a desire for the UK’s financial and broadcasting services to be able to sell their products into EU markets as at present.

However, the MPs also made clear that if a bespoke “deep and special partnership” with the EU was not achieved, then membership of the European Economic Area should remain an option.

Unsurprisingly, the report’s conclusions were contentious and divided the Committee between those supporting a hard or soft Brexit – but broadly speaking we can separate the key economic issues in the forthcoming negotiations into two: trade integration and people.

The first is whether a “deep and special partnership” in trade is achievable. A stand-alone Free Trade Agreement (FTA) on the model of Canada or South Korea would cause real economic damage to the UK’s current trade with the EU, which is largely focused on integrated value chains between the UK and the EU, and UK services exports to the EU which are only covered in limited ways by FTAs.

Meeting the Select Committee’s criteria (or, indeed, achieving the Prime Minister’s objectives) would imply a partial integration of the UK into the European Single Market (ESM). The only examples of this are the deals which the EU has done with Switzerland and the Eastern Neighbourhood countries, such as Ukraine.

But the EU has made it clear that these examples are not ones that would be applicable to the UK.

READ MORE: Report warns of Brexit damage to key economic sectors

The Ukraine deal is limited in scope and has been designed with a view to convergence over time with the EU. Elements of mutual recognition in the EU-Swiss treaties come closer to the territory which the UK wants to explore in these negotiations – but even if the EU were to agree to elements of mutual recognition or equivalence in various sectors/tiers in a future trade partnership, there would be an asymmetry of power, with the potential for continuous conflict between the UK and the EU. As is currently the case with Switzerland, the EU could end up effectively putting pressure on the UK whenever divergences emerge in tiers/sectors which compromise the integrity of the internal market.

If one looks at the 2017 Canada-EU agreement (CETA) or the 2011 EU-Korea FTA, one can see just how limited the scope of these deals tend to be. In the South Korea FTA, the focus of the deal in goods trade was in reducing non-tariff barriers in three main sectors, and in services there was a limited relaxation of right of establishment and relaxation around foreign ownership in sectors like telecommunications. None of this would approximate even slightly to the current access enjoyed by UK business and financial services in the EU. The second major economic issue facing the UK is the post-Brexit immigration regime for EU citizens.

As we know, inward mobility of talented, skilled EU citizens has been crucial in helping to solve Scotland’s long-running demographic problems. EU migration has been equally important for key sectors at UK level, from financial and business services to the NHS. And regardless of some of the much-repeated tropes of too many of our politicians, we know that – as Jonathan Portes notes in his analysis of the economic impacts of immigration to the UK – the consensus is that EU immigration has had little to no effect on wages of existing UK workers.

READ MORE: Theresa May says Brexit deal ‘must involve compromises’

The evidence of EU immigration on UK productivity is also worth noting. Although the evidence base is not large, there are some studies which suggest that immigration has boosted UK productivity. This boost happens because of the human capital of immigrants, particularly in the key sectors mentioned above where these skills are scarce and are complementary to those available in existing UK residents.

It seems inevitable the issue of labour mobility will be front and centre of the negotiations if the UK seeks more than a simple FTA. What we know from the EU-Swiss relationship is that freedom of movement has been intimately linked to the management of the overall relationship. For instance the EU temporarily suspended Swiss association to the Horizon 2020 programmes following Switzerland’s refusal to sign a treaty protocol which would have extended freedom of movement to Croatia.

If the UK wants partial integration into the ESM and a Canada++ deal, not to mention association agreements in the European research and innovation area and student mobility, it is almost unimaginable that this will not involve a special relationship in terms of future EU-UK labour mobility. This would require the blurring of a key UK red line, but in economic terms it would be beneficial for the UK to accept this as an area for negotiation.

Whether the UK Government likes it or not, the fact is the Prime Minister’s two red lines around the role of the European Court of Justice and free movement will both need to be actively in play if the UK is to achieve the “deep and special relationship” they are aiming for. If these two issues are sacrificed to the hard Brexiteer agenda, the damage to the UK economy will go down in history as the worst case of needless self-sabotage in generations.

There is however a possible solution. What many of us have realised, from the beginning, is that both in economic terms and in terms of the governance of the relationship, the European Free Trade Association/EEA model offers many advantages compared to any putative bespoke model.

The Commons Select Committee may have also have, privately, reached the same inevitable conclusion by suggesting that the EFTA/EEA solution should be an option in the negotiations. The mantra of the Leave campaign was that Parliament should take back control. On this issue, it is vital the UK Government takes heed of the Committee’s views, and puts the interest of the economy ahead of the extreme ideology of the hard Brexiteers.

Professor Sir Anton Muscatelli is Principal of the University of Glasgow and chairman of the Scottish Government’s Standing Council on Europe