by Dr. Jo Michell — Senior Lecturer in Economics at UWE Bristol
The Prime Minister has finally spelled out the government’s Brexit strategy. Theresa May intends to take the United Kingdom out of the European Single Market and Customs Union. We will no longer trade freely with our closest geographical neighbour. Despite the Supreme Court ruling against the government, Parliament is almost certain to pass the bill allowing the Prime Minister to begin the formal process of leaving the European Union — and putting her strategy into practice.
In reality we have known for some time that this was all but inevitable. The European Single Market is founded on the principle of ‘four freedoms’: freedom of movement of labour, capital, goods and services. The government stated from the outset that immigration would be a ‘red line’ in negotiations. There was therefore never any real possibility we could remain in the Single Market, despite assurances from the Leave camp during the referendum campaign.
While this was publicly confirmed for the first time in Theresa May’s recent speech, Foreign Secretary Boris Johnson must have known it back in June when he wrote, ‘British people will still be able to go and work in the EU; to live; to travel; to study; to buy homes and to settle down… there will continue to be free trade, and access to the single market.’ Government negotiators must have known that ‘have cake and eat it’ was not a viable strategy.
What is new in May’s speech is the proposed alternative to Single Market membership. The UK will seek a trade deal with the EU. But if favourable terms are not offered, May threatens to take us out of the EU unilaterally — falling back on a strategy of competitive tax cuts and deregulation.
This would leave the UK reliant on World Trade Organisation (WTO) agreements. If this was to happen — it may not even be legally possible — it would mean big increases in tariffs on a range of goods and services. Car manufacturers selling to the EU would face tariffs of around 10% alongside increased prices for imported parts. Despite this, Theresa May has offered assurances that Nissan and Honda will remain competitive. It is unclear how such promises can be made without the government essentially writing a blank cheque.
Potentially more significant is the threat of deregulation and corporate tax cuts if a deal falls through. In effect, May is threatening to turn the UK into an offshore tax haven in an attempt to attract multinational corporations — a European Singapore. Possible regulatory changes could include a rollback of the EU tax avoidance directive pushed by George Osborne and loosening of targets on carbon emissions.
To say this is a risky negotiating strategy is an understatement. Even if such regulatory changes could be pushed through parliament, there are important domestic implications. The UK already suffers from weak wage growth, low productivity, and insecure employment. These problems would be likely be exacerbated by further deregulation. Cutting taxes on corporations would reduce the amount available for spending on social security, education and health.
In effect, May’s position amounts to the following: give us a trade deal on favourable terms or we will impose even harsher cuts to our own government — a redoubling of Tory austerity. It is hard to think of a less promising negotiating strategy.
The UK is already an off-shore European financial centre with low rates of corporation tax. These threats are therefore likely to hold little sway over European negotiators. But the potential damage to the UK’s welfare state is significant. It is alarming that the Prime Minister is prepared to use the well-being of her own electorate as bargaining chips in the Brexit negotiations. A new strategy is urgently needed.