Remain fundamentalism

An argument I have often heard is why are people talking about getting a softer Brexit (by staying in the Customs Union (CU) or Single Market (SM) for example) when what we should be doing is staying in the EU. There is a more extreme version of this which says that attempts to get a soft Brexit are dangerous, because they make the prospect of remaining in the EU less likely. I will call this more extreme position Remain fundamentalism.

I want to argue against Remain fundamentalism by imagining a soft Brexit that involved the UK staying in a comprehensive Customs Union with the EU and staying in the EEA. (For an excellent discussion of what the EEA is and is not, see Ian Dunt here, here and here - in that order.) [1] That is what the current UK withdrawal bill specifies as amended by the Lords, so let me call this the Lords’ Brexit. Compare this to the only hardish Brexit deal that can be done (assuming, as I think is reasonable, that parliament would never pass No Deal), which is something close to what John Springford and Sam Lowe have called the Jersey option: staying in the CU and the SM for goods but not services, perhaps allowing some UK flexibility on freedom of movement.

We have no idea whether the EU would accept either option, because the UK government has been wasting its time (which given they are supposed to be running the country on our behalf is also our time) trying to choose between fantastical solutions to the Irish border problem that the EU will not accept. But for the sake of argument suppose that May ignores her Brexiters, and perhaps with parliament’s help chooses something like the Jersey option and that the EU agrees to it, or instead that May has to go with the Lords’ Brexit and the EU (and EFTA) agree to it.

The Remain fundamentalist argument is that because the Jersey option does more economic damage to the UK than the Lords option (because the EU has a comparative advantage in exporting services, and immigration from the EU is beneficial to the UK), it is more likely that parliament would grant a referendum on it and that people would reject that deal in favour of staying in the EU. I actually think the opposite is the case, We are much more likely to see parliament grant a referendum if we go for the Lords’ Brexit, and that people would reject the Lords’ Brexit in favour of staying in.

The case for a referendum on the final deal is much more clear cut if the deal is the Lords’ Brexit, because the Lords’ Brexit has virtually no advantages compared to EU membership and a clear disadvantage. In practice being in the EEA would mean accepting rules adopted by the EU with no say on those rules. In short, we gain nothing by having no say on the rules we have to obey. I cannot imagine any politician being able to get people to vote for the little bit of wriggle room and influence being in the EEA gives you compared to the having a real seat at the table.

In contrast, with the Jersey option things are much more complex. There will be perceived advantages of this option compared to staying in, such as greater control over immigration. You can be sure that the more Mrs. May can fudge the agreement such that she can pretend these advantages are there even when they are not, she will.

Now add in a powerful group of Brexiters. They would angry that they did not get the hard Brexit they want, but in the Jersey option they would still see hope in ambiguity. More importantly, with the Jersey option there would be plenty of meat for this group to work on, including immigration of course. But with the Lords’ Brexit it is hard to argue a strong case for why this is preferable to be in the EU, even if you are a Brexiter politician or newspaper.

I would be the first to admit that these arguments are not clear cut. But the Remain fundamentalist position only makes sense if you can be sure that a harder Brexit makes a referendum more likely. To me, at least, it is not obvious that it does. The more you can eliminate the economically damaging but superficially attractive aspects of Brexit, the more chance people have to see that the whole thing is a complete waste of time.

[1] There are a lot of differences between being part of the EEA and what is called BINO: the UK being in the Single Market and Customs Union and everything else to do with the EU except being absent from its political structures. I am assuming that there would be no problem being in the EEA and a CU, that agreements with the EU would also be made on agriculture and fisheries that would at least allow a soft Irish border, that the EU and EFTA would allow all this and so on.

Understanding free trade

A past member of the UK’s monetary policy committee once told me that they got much more intelligent questions from committees of the House of Lords compared to committees of the House of Commons. This should not be too surprising, as there are some people with considerable knowledge and experience in the Lords.

Below is an excerpt from the conclusions of a recent Lords EU Committee Report (HT Frances Coppola)

“The notion that a country can have complete regulatory sovereignty while engaging in comprehensive free trade with partners is based on a misunderstanding of the nature of free trade. Modern FTAs involve extensive regulatory harmonisation in order to eliminate non-tariff barriers, and surveillance and dispute resolution arrangements to monitor and enforce implementation. The liberalisation of trade thus requires states to agree to limit the exercise of their sovereignty. The four frameworks considered in this report all require different trade-offs between market access and the exercise of sovereignty. As a general rule, the deeper the trade relationship, the greater the loss of sovereignty.”

There you have, in one calm and measured paragraph, the contradiction at the heart of the argument put forward by Liam Fox and others that leaving the EU will allow the UK to become a ‘champion of free trade’. You cannot be a champion of free trade, and have sovereignty in the form of taking back control.

It is not a contradiction, of course, if you are happy to accept the regulatory standards of the US, China or India. That appears to be the position of Leave leaders like MP Jacob Rees Mogg. Ellie Mae O’Hagan spells out what this may mean in practice. Lead in toys - bring them in so we can sign a trade agreement with China. And you can be sure that this will be the nature of the discussion every time a trade deal is signed. In each case we will be told that we have to accept this drop in regulatory standards, because British export jobs are on the line.

This is the point of Dani Rodrik’s famous impossible trilemma: you cannot have all three of the nation state, democratic politics and deep economic integration (aka free trade). His trilemma replaces sovereignty, by which in meant in this context the nation state being able to do what it likes, by democracy. In the past I have always found this problematic. Surely a democracy can decide to give away a bit of its sovereignty in return for the benefits of international cooperation (in the form of trade deals, or indeed any other kind of international cooperation). After all, every adult in a relationship knows that this relationship means certain restrictions on doing just what they would like.

At first sight, it would seem as if the Brexit vote shows Rodrik is right. Democracy voted to take back control, which means reducing trade integration. But I think it is becoming increasingly clear that this is the wrong interpretation. Voters were told they could take back control and be no worse off, and polls make it clear that message was believed by many Leave voters. As it becomes clear that people will be worse off, as depreciation induced inflation cuts real wages, opinion is changing. Polls already suggest that if the vote was held again, we would get a different result. Polls also suggest more voters want to prioritise favourable trade deals in negotiations, not curb immigration. Over the next year or two this will only intensify, as prices rise, as companies make plans to leave the UK, as the problems caused by declining immigration emerge, and as the UK’s weak negotiating position becomes clearer.

Leavers know this, hence the attempts to remove any kind of democratic oversight from the Brexit process. At present MPs appear transfixed by the light of the Brexit vote, even though most know Brexit is an act of self harm. But it was utterly predictable from the day that Corbyn was re-elected that we would see a revival of the Liberal Democrats. As they chalk up election victories, it might just be possible that we could yet see some democratic oversight of the Brexit process. [1]

To see a model of what could and should happen, look to Switzerland, where referendums are part of political life. In February 2014 Switzerland voted to restrict immigration from the EU, even though this jeopardised their trade relations with the EU. Since then the EU has insisted that its bilateral trade deals with Switzerland depend on free movement. As a result the Swiss parliament has backed down, and just passed measures which greatly diverge from the referendum proposal, even though in Switzerland referendums are (unlike the UK) meant to be constitutionally binding.

So we see in Switzerland, and perhaps we will see in the UK, that parliamentary democracy can be compatible with trade integration. Rodrik is right that deep trade integration (the pressures from which will continue, as Richard Baldwin outlines) puts pressure on the ability of nation states to decide on their own laws, but a democratically negotiated compromise is possible. (After all, national languages are a barrier to trade.) Perhaps the examples of the UK and Switzerland suggest two things: first that these negotiated compromises should be out in the open rather than done behind closed doors, and secondly that what is very difficult to mix are trade integration with national referendums.

[1] The conventional logic is that MPs would go along with Brexit because the Remain vote is concentrated in too few constituencies. But outside Scotland the Leave vote is now split three ways (Conservative, Labour and UKIP). Labour may mock the LibDems as Brexit deniers, but as the LibDems get the votes not only of people who deeply care about being part of Europe (see the surge in Remain identity noted here) but also of those that voted Leave but are now getting concerned, they will be the ones with the last laugh.