Call by UK business lobbies for Brexit transition underlines May’s weakness

11 July 2017 1:26pm

10 July 2017. By Simon Taylor.

 Confederation of British Industry broke its silence over Brexit last week after holding its tongue for more than a year.

In a speech at the London School of Economics, CBI Director-General Carolyn Fairbairn called for the UK to stay in the EU's single market and the customs union not only beyond the day of Brexit, but until a new trade deal with the EU is in force.

This would mean the UK staying subject to EU regulation, external tariffs and the jurisdiction of the EU court of justice at least until the early 2020s.

This may not sound like a radical position, but the fact that the CBI is piping up at all is newsworthy.

During the campaign ahead of last year's referendum on the UK leaving the EU, the CBI was in favor of remaining inside the bloc. But after the Leave side won, the country's main business lobby stayed quiet on what form Brexit should take.

The CBI's silence could then be largely explained by the ruling Conservative government's clear view of what Brexit should look like.

With that certainty now gone, and indications that the government's arm's-length attitude to business is crumbling, it is safe to conclude that the CBI felt emboldened to take a stance at odds with its position.

New assertiveness

For evidence of business's new confidence, look no further than the meeting by a group of representative organizations with David Davis, the UK's Brexit minister, on Friday evening.

The groups included the Institute of Directors, the British Chambers of Commerce, the Federation of Small Businesses and the EEF, which represents manufacturers. They put their case for transition periods that would minimize the impact on British business until a new trade deal was in place.

The backdrop to the CBI's assertiveness is political: The recent results of the UK election, in which Prime Minister Theresa May lost her slender majority in parliament, have weakened her grip on the form of Brexit the government is pursuing.

May's original position — as set out in her Lancaster House speech in January, her letter triggering Article 50 in March and a white paper — was to come out of the single market and the customs union when the UK left the EU: a version dubbed "hard" Brexit.

Since the election, that model is up for debate, with government ministers playing out their battle over what shape Brexit will take in public.

Transition limits

The chancellor, Philip Hammond, is calling for the UK to stay in the customs union for a transition period after the Brexit date in order to minimize the impact on business. While still in the customs union, the UK would have to apply the EU's tariffs on imports of goods from outside the bloc.

If this came to pass, the UK would not be able to negotiate free-trade deals with third countries by offering tariff concessions until its new trade relations with the EU came into force.

But it would be able to do deals on services, which would be interesting for the UK with its services-oriented economy.

This might offer one way for the UK to take advantage of the offer by Donald Trump at last week's G-20 summit of a rapid free-trade agreement, one that the US president said would be "very big" and "very powerful."

Nevertheless, by calling for the UK to stay in the customs union, Hammond's position undermines Liam Fox, the trade minister, who would find his margin for finalizing new free-trade deals severely limited until the end of the transition period.

Hammond went further on Friday, speaking a day earlier at the G-20, saying that the sort of countries with which the UK could do free-trade deals — geographically distant ones such as Australia and New Zealand — would do little to replace the privileged access to the EU's market that the UK enjoys as a full member.

According to media reports of Davis's meeting with business groups on Friday, he dismissed their vision for a soft Brexit, saying that remaining in the single market and the customs union for an unspecified period wasn't the sort of Brexit that most UK voters had backed in last June's referendum.

Business advantage

This is the political context in which UK business groups are now operating, and it would appear that they are now taking advantage of an opening within the ranks of the government to push for a softer form of Brexit.

If realized, this would minimize the medium-term impact on British companies until a new EU trade deal is done.

This might be a smart lobbying tactic on the part of the CBI and other prominent business voices. Yet there is a contradiction which lies at the heart of their position.

While they are right to identify the potential damage from leaving the EU's single market and the customs union, their strategy only seeks to mitigate the harm in the medium term and stays silent on what happens when the transitional arrangements come to an end.

In short, the government's weakened position has made possible a debate in the UK which centers around a softening of Brexit's impact, but there is little appetite, as yet, to broaden that debate to include questions about whether Brexit itself should be reconsidered.

With the opposition Labour Party still backing Brexit, the tectonic plates of UK politics will have to shift a lot further for a reversal of the UK's decision to withdraw to be a serious option.

Brexit Special Report