Up against the clock
By insisting that Britain is going to diverge from the EU, Sajid Javid is waving goodbye to the car industry, writes Eddie Ford.
In his weekend interview with the Financial Times, Sajid Javid outlined a stance that will have profound political and economic implications for Britain - yet strangely did not generate anywhere near the sort of response you might have expected. Is everyone half-asleep from Brexit fatigue?
Almost casually, the chancellor told the newspaper that not all businesses will benefit from Brexit - there will be winners and losers. No more sunlit uplands. At the end of the transition period, “there will not be alignment” with the European Union - no legislation that follows the contours of the bloc. Free of its shackles, Britain will not be in the customs union or the single market, or be a rule-taker - and “we will do this by the end of the year”, no ifs or buts. Rather, Javid insisted, businesses must “adjust” to the new regulations - do or die. After all, he argued, “they have known” since 2016 that Britain was leaving the EU, even if “they didn’t know the exact terms” - which is one way of putting it.
This means that the treasury will not lend support to manufacturers that continue to “favour EU rules”, refusing to embrace the exciting new world. Instead, the chancellor wants a “deep, comprehensive free trade agreement”, and “that’s what we are working on”. Indeed, with a hint of Trumpian hubris, he declared that, once the deal with the EU is clinched, “we will continue to be one of the most successful economies on Earth”. It is worth remembering that the very same Sajid Javid in May 2016 wrote an article for The Daily Telegraph saying the only thing guaranteed about Brexit was a decade of “stagnation and doubt” - Britain was better off, thanks to the single market, which was a “great invention” that Margaret Thatcher had “campaigned enthusiastically to create”. Three and a half years is obviously a very long time in politics.
Javid also said in his interview that he wanted to double the UK’s annual economic growth to between 2.7% and 2.8%, contrary to the expectations of most forecasters, such as the Bank of England - which believes you would be lucky to get half that. Apparently, the extra growth would come from “spending on skills and infrastructure” in the Midlands and the north of England - even if they did not offer as much “bang for the buck” as projects in other parts of the country. Therefore treasury investment rules would be rewritten, promised Javid, as they have tended to favour places with high economic growth and high productivity - a vicious circle helping to “entrench” inequality. But from now on, weaker and poorer parts of the country would have “first call” on the new money. New economy, new Britain - if you are prepared to wait a bit.
Of course, the government must be seen to be doing something in these regions in order to “repay the trust” of those who voted Tory for the very first time - otherwise they might quickly regret it. According to Javid, now that austerity is officially dead and money trees are sprouting everywhere, historically low interest rates were “almost a signal to me from the market that here’s the cash” - so “use it to do something productive” and make a difference. You could almost call it Keynesianism.
The chancellor hinted as well that there might be tax rises, saying that he was determined to take the “hard decisions you need to sometimes, especially at the start of a new government”. But, naturally, we will have to wait for the budget to get more details - whether in March or the autumn. Funnily enough, that is not what it said in the Tory manifesto.
Javid’s remarks clearly represent a strategic departure from Theresa May’s approach, which envisaged some sort of close alignment with the EU in an effort to reduce friction at the border for traders. It will inevitably mean customs barriers, tariffs and delays - the very opposite of what we were promised by the Brexiteers and the government. Only a few days before the election, an ebullient Boris Johnson said companies reliant on the EU had nothing to fear, as the deal “we have got ready to go” does “protect the supply chains and keeps them intact and makes sure we have complete equivalence when it comes to our standards, our industrial requirements” - which seems like complete fantasy.
In fact, Javid’s comments to the FT were essentially “the death knell for the concept of frictionless trade” with the EU - in the words of Tim Rycroft, chief operating officer of the Food and Drink Federation. Significantly he told the BBC’s Today programme that divergence would “probably” mean food prices would rise when the transition period finishes, as businesses like his will have to take into account the costly new checks, processes and procedures - a lot of new paperwork. Yes, Rycroft acknowledged, some industries might benefit from UK-specific trade rules. But for him it is vitally important that the government clearly understands “what the consequences will be” if it goes ahead and changes the trading terms - it could spell bad times around the corner.
The Confederation of British Industry and the British Chamber of Commerce had similar concerns. Alignment supported jobs and competitiveness, as far as the CBI was concerned, especially in some of the most deprived areas of the UK - making a nonsense of what the chancellor said in the FT. Whilst its director general, Carolyn Fairbairn, recognised that there are areas of the economy which could benefit from its future divergence from EU regulation - she urged the government “not to treat this right as an obligation to diverge”. Think before you jump. In the opinion of Claire Walker, co-executive director of the British Chamber of Commerce, while business communities were prepared to be pragmatic about coming changes to regulation, “uncertainty around the extent of divergence risks firms moving their production elsewhere” - hence the government must provide “substantial support to help firms adapt”. She might be waiting a long time. John McDonnell tweeted about “rightwing ideology overriding common sense”.
It goes without saying that these concerns are hardly new. In October, the UK’s largest manufacturing industries warned of a “serious risk to competitiveness” and “huge new costs and disruption to UK firms” if the government ends regulatory alignment as part of any post-Brexit trade deal. A group of trade bodies, employing 1.1 million people and accounting for a turnover of £98 billion, wrote to cabinet office minister Michael Gove and Brexit secretary Steve Barclay, highlighting their worries.
One very big loser from Javid’s shakedown of the British economy will be the car industry - which faces annihilation. As the Society of Motor Manufacturers and Traders explained, the automotive trade between the UK and EU is “uniquely integrated” and “our priority is to avoid expensive tariffs and other ‘behind the border’ barriers that limit market access”. In short, the car industry exists largely on the basis of two things - Europe, and foreign investment in order to be in Europe. If you take the British car industry, apart from Austin Martin (which is about to be bought up by a Chinese billionaire), it is basically European or Japanese-owned. Vauxhall, for example, is a subsidiary of French car manufacturer Groupe PSA (parent of Peugeot, Citroën, DS and Opel). Margaret Thatcher got the Japanese into Britain partly because of the European market.
If European and Japanese companies no longer have unfettered access to EU markets, then the British car industry is finished. It was always under question anyway, because Japan now has a trade deal with the EU and therefore does not necessarily need an actual manufacturing plant in Europe, let alone the UK. Furthermore, there is also a consolidation of the size of plants - electric engines need larger-scale facilities, so it is back to Japan or somewhere else with bigger and more efficient plants. The extinction of the British car industry must mean, directly or indirectly, hundreds of thousands of job losses in terms of components and direct production - but Brexit is a price worth paying as “ultimately” the British economy as a whole will “thrive” in the long term, if we are to believe the chancellor.
Javid was asked if his comments meant the government was prepared to “sacrifice some elements of manufacturing and industry” - which he strenuously denied, of course. However, a senior member of the cabinet told the prominent political journalist, Robert Peston, that “there will be friction at the border, we are under no illusion about that”.1 That means without any doubt that there will have to be checks at the border for compliance with EU standards, which for some businesses will be onerous - not just car-makers, but also livestock and agri-food exporters, chemicals manufacturers, aerospace, pharmaceutical companies, etc, etc. Many will move plant and people across the Channel to avoid the new friction at Dover and Calais. For these businesses, Brexit might not feel like ‘taking back control’.
Business leaders are now urging the government to publish detailed negotiating objectives for the oncoming trade talks with the EU. Brussels is expected to publish draft negotiating guidelines on February 1, yet so far nothing seems forthcoming from the government - though Boris Johnson is due to set out his “hopes” in what is touted as a major speech in the first half of February. The Institute of Directors has warned that business needs time to prepare for the radically new relationship with the EU by the end of the year, finding in a survey that 55% said they would only be able to “make planning and investment decisions” with certainty, when “we understand our future with the EU”. More than 60% of businesses said the EU deal was “more important” to them than a US deal. Get your skates on, Johnson - tell Donald Trump you are busy.
Yet time is already beginning to run out for the British government, which is adamant that it will never seek an extension to the transition period. The European Commission has said the Brexit negotiations “will not start” until March, as the EU will “take some time” to agree its collective position. The EC’s spokesman, Eric Mamer, said: “this is not a slowing down or speeding up of the process” - it is just “simply the nature of the institutional process and the consultations that need to take place before the negotiation directives can be formally adopted”.
This leaves a remarkably short amount of time to secure an agreement, particularly when you bear in mind that it took seven years to complete the trade deal between Canada and the EU - which was almost blocked at the last minute by the Walloon regional parliament. Ratification of any deal between the EU and UK will probably take two to three months; therefore even in a best-case scenario an agreement has to be struck between March and September - which seems very unlikely. Complicating matters even more, Downing Street did not rule out starting talks with the US before the EU, as it appears that Donald Trump is prepared to “move heaven and earth” to get an agreement over the line in the summer.
However, despite the very early stages, Washington seems to be getting impatient with the British government. The White House has accused Boris Johnson of “foot dragging” over negotiating a trade deal, and is concerned about what it dubs as “naivety” in No10 over how long the talks will take. As with the EU, the UK is yet to publish its formal negotiating objectives for the US deal, but Washington made its public in February last year. Robert Lighthizer, the Trump administration’s trade representative, again pressed Liz Truss, Britain’s international trade secretary, to publish the UK’s position last week - piling on the pressure. A US administration source said “we’re up against the clock”, because Washington “will close down in the autumn for the election”, noting that “there are some really sticky issues here” - phytosanitary, lamb and beef standards, tariffs on cars and trucks, and so on, and congress is “likely to kick up rough when ratifying it”. Anything could happen - leaving aside the impeachment circus, which will come to nothing.
The fact that Johnson wants to complete his trade deal with the US as early as the summer is hardly something to fill you with joy - did you trust him when he said the NHS was not up for sale? Nevertheless, this year you might be enjoying chlorinated chicken or hormone-treated beef for your Christmas dinner.