Rt Hon Lord Lilley

    This article was originally published by Conservative Home


    Project Fear did not become a self-fulfilling prophecy.   But Remain made the legitimate point that a prolonged period of uncertainty could damage the economy.  So we should aim to complete Brexit as rapidly as possible.


    Unfortunately, the impression has taken hold that Brexit is an interminable process.  The haunting last couplet of the Eagle’s hit ‘Hotel California’ has been likened to leaving the EU: “You can check out any time you like, but you can never leave!”  Gus O’Donnell suggested that negotiations could go on for a lifetime; John Major predicted it will take over a decade.


    But there is another line in ‘Hotel California’ which describes their mental predicament: “We are just prisoners here, of our own device”. They may devise imaginary obstacles to keep us in Hotel Europe indefinitely, but there is no reason why Brexit should be interminable.   In fact, it need not take even the two years arbitrarily specified in Article 50.


    Joining the EC was far more complex than leaving: we had to introduce Value Added Tax, transform our farm support, implement all existing EU laws, replace Commonwealth Preference by EU tariffs and much else.   That took barely two years.


    Here is how we can expedite the process.


    • We must distinguish between issues which are matters fordecision by the UK and those which are matters fornegotiation with the EU.   The widespread presumption that everything is a matter for negotiation is damaging nonsense.  It leads officials to suppose that we can do nothing until we have laboriously assessed what can be traded off against what in a multi-dimensional game of diplomacy.  Once we identify the issues which we can decide, Ministers can start taking decisions.  That immediately reduces uncertainty.  It also narrows the focus for negotiations which will render them simpler.
    • The first decision we should take is to convert all EU legislation and regulations into UK law.   It might seem paradoxical that Eurosceptics should propose this.  But it will:

    – Provide businesses with certainty: they will be able to run themselves in the same way the day after Brexit as before,


    – Mean that Parliament can amend, repeal or improve any law subsequently.


    – Ease the Parliamentary passage of leaving legislation by depriving die-hard Remainers of excuses to oppose it.


    It is more or less what countries like India, Canada and Australia did when they became independent: they initially adopted British laws as their own.


    • Then we should reassure EU residents already working here that they will be allowed to remain.   That will end uncertainty for them and their employers.  Using them as bargaining counters in case EU member states threaten to expel UK residents – which none has – is abhorrent and unprecedented.   When Uganda expelled British passport holders we did not even contemplate expelling Ugandan citizens.
    • But that risks provoking a ‘closing down sale’ influx from the EU. So we need to announce that EU citizens arriving henceforth will face the same limits on work as apply to citizens of other friendly countries.   (Incidentally, should such action be ruled out by the ECJ while we are still members of the EU we could, under the Vienna Convention, resile from the EU Treaties without going through the Article 50 process.)

    The more such decisions we take, the clearer it will be to our partners what scope there is for negotiation.   The first rule for a successful negotiation is to narrow the scope to the essentials.  The main item for negotiation will then be the terms on which the EU and UK will trade with each other.  By ruling out free movement of labour, we have closed off the unattractive option of joining the EEA.  The EEA was devised for countries whose governments wanted to join the EU, but whose people were reluctant.  It is an ante-room, not a departure lounge.


    • So there are only two realistic outcomes for the future trading relationship between the UK and the EU.   Either the UK and the EU27 agree to continue to trade freely with each other without tariffs.    Or the UK and the EU27 apply to imports from each other the WTO tariffs which we currently apply to the EUs biggest trading partners – USA, Russia, China.
    • Both options are pretty simple.  Unlike negotiations to remove complex tariffs between countries, retaining zero tariffs is simplicity itself.   Likewise, the EU has a common external tariff which we will inherit.  That is the highest tariff we could apply to each other.  Applying that to each other is less desirable than continuing tariff free trade, but it is equally simple – and requires no negotiation at all.
    • Moreover, both are acceptable to the UK, and preferable to the present situation.   Continuing tariff-free trade (plus passporting of financial services) is only negotiable if we are willing to walk away with no deal: i.e. trading on a WTO basis.  Fortunately, we can.  The average tariff our exporters to the EU would face would be about four per cent (that includes agricultural products: manufactures average 2.4 per cent).   Given the 12 per cent exchange rate movement in favour of our exporters, they would remain better off.   By contrast, continental exporters would have to absorb the tariffs on top of a 12 per cent loss of competitiveness.

    Tariff-free access is certainly not worth continuing our net budget contribution of £10 billion, which is equivalent to a seven per cent tariff.   In any case, it is a myth to suppose that the EU will only give tariff-free access to its internal market in return for a budgetary contribution and accepting free movement of labour.   The EU has free trade agreements with over 50 countries, all but three of which involve neither budgetary contribution nor free movement.


    • The other aspect of access to the EU’s internal market is ‘passporting’.   The value of passporting rights, though worth keeping, should not be exaggerated.  I say that as the Minister who negotiated the first passporting directive and later implemented the Single Market programme.

    UK-based financial services firms have passporting rights as a member of the EU.


    – But so too under the the Markets in Financial Instruments Directive (MIFID2) Directive financial services companies from countries such as the US, Hong Kong and Singapore, whose financial regulatory systems are deemed to have ‘regulatory equivalence’, as would the UK’s.


    – Most British Undertakings for Collective Investment in Transferable Securities (UCITS) funds choose to operate via companies set up in Luxembourg and Dublin, rather than using their passport from London.   They should therefore be unaffected by our exit.   More revealing, however, is that they found the value of low tax in these countries more than offset the extra cost of setting up companies which passporting from London would have avoided.   This puts a pretty modest value on passporting.


    – The growth in UK financial services exports to the EU does not show any marked change since passports were introduced.


    – British financial companies seem to export very successfully without passports to countries such s the USA and Switzerland – our two largest markets.


    – Most of British financial services business is wholesale, whereas passports are largely designed to facilitate retail business.


    • In the event that continental governments prevaricate on reaching a trade deal we should simply announce that, for the time being, we will maintain our zero tariffs on imports from the EU – unless they choose to impose WTO tariffs on us, in which case we will reciprocate.   (We need not worry whether retaining the status quo without a formal agreement after we have left the EU is compatible with WTO rules. The EU itself has not updated its registered tariffs since enlarging from 15 members! Objectors would have to prove not merely that the rules have been infringed – which is debatable – but that they have been harmed.  And that would take a long time.)

    The onus would then be on the EU 27 to continue free trade – or take the blame for triggering tariffs on their exports to their biggest market.  Continental governments contemplating this would face the wrath of German car makers and unions, French wine growers, Dutch cut flower-growers, etc for initiating an unnecessary tariff battle in which they lose more than we do.


    This, incidentally, suggests we should confront continental governments with this choice before the French, German and Dutch elections next year.   The Commission may want to ‘punish’ the UK for leaving the EU – but continental electors will baulk at that if it means them losing tariff-free access to the British market on which their jobs depend.