Post-Brexit Britain

This is an audio transcript of the Rachman Review podcast episode: ‘Post-Brexit Britain’

[MUSIC PLAYING]

Gideon Rachman
Hello and welcome to the Rachman Review. I’m Gideon Rachman, chief foreign affairs commentator of the Financial Times. Our subject this week is Brexit. It may sound like yesterday’s news, but as you’ll hear, the political and economic effects of Britain leaving the European Union are still evolving. My guest is my FT colleague Peter Foster, who’s author of a new book, What Went Wrong with Brexit and What Can We Do About It?

[‘RULE BRITANNIA’ PLAYING]

That was the last night of the Proms in London earlier this month. The traditional singing of “Rule Britannia” always ends the concert season on an ultra-patriotic note. But this year, something strange happened. Amidst all the waving Union Jacks there were also large numbers of EU flags. That’s caused real anger from Brexiters who feel that a festival of British patriotism was subverted by fans of the European Union. But that incident at the Proms reflected a real shift in British public opinion. Opinion polls now suggest that around two-thirds of British people think Brexit has failed and that more than 50 per cent would like to see Britain rejoin the EU. So is the Brexit settlement fundamentally unstable? I discussed that question with Peter Foster. But before we look to the future, I began by taking stock. How has Brexit affected British companies seeking to trade with the EU?

Peter Foster
We shouldn’t be surprised that erecting barriers to trade with the market with which we do roughly half our trade should have an impact on our trade. You know, and I spend a lot of time talking to manufacturers, businesses, service providers who will tell you they’re having a really tough time maintaining trading relationships in Europe, expanding their businesses in Europe.

Gideon Rachman
So give me some anecdotes, the kind of thing that’s happening.

Peter Foster
So, you know, for example, I talked to a company like Infinity Engineering Services that did provide gas turbine servicing operations to companies in Europe. It discovered that it needed permits to bring its staff over. Now that was OK for doing regular servicing. But when the gas turbine generator breaks down quickly, then you can’t get someone out there legally quickly to service it. So those companies just turned to companies inside the single market, goods traders.

You know, one of the things we saw after Brexit was, you know, a 45 per cent drop-off in the number of product lines, product trading relationships, which is because small businesses have really struggled to trade. So Apothecary 87, a company that does beards, oils and hair products, finds that its importers in the EU who used to just get box loads sent over, now have to have a cosmetics importing license.

You know, a company, Hamster Teas, that sells or did sell organic and probiotic teas into Europe discovered that actually when you’re outside the European Union, you lose the presumption of compliance. And what you discover is that, you know, your organic certification for a type of tea is treated differently in Italian customs than it is in German customs. And therefore, it got impossible for her to service her European, Italian, French and German supermarkets. So she just moved her distribution and packaging operation into the Netherlands. So, you know, it’s not impossible for us to trade with Europe. No one should think that it is, but it’s marginally harder for us to trade with Europe than it is our competitors in the single market.

Gideon Rachman
And in some cases not just marginally. Significantly.

Peter Foster
And significantly. So I was talking to a company in Warwick the other day that makes super high-end automated manufacturing products for the pharmaceutical industry. You know this picture you see of multi-pipettes, things whizzing around and filling test tubes. He trades a lot with major pharma. A lot of his clients are moved to Ireland and he’s been told by his suppliers that the American parents are saying you need to cut the UK where possible out of the supply chain because it’s just frictional. It’s not that you can’t get the stuff through customs. Of course, you can. It’s just if there’s an alternative to get it from Milan and there’s no friction, get it from Milan. It’s easier to buy from Pedro in Barcelona than Peter in Brighton.

And so, you know, the Resolution Foundation did a very good report about the impact of this. It’s not mass closures, it’s not mass unemployment. It’s the UK slowly being squeezed over time out of high-value integrated European supply chains. Because most of our manufacturing, we don’t make whole planes or whole cars. We make bits of them and we bolt them together. But those bits whizz back and forth around Europe because those manufacturing supply chains grew up when we were inside the single market. And so the worry is that, you know, Honda leaves Swindon, the factory closed down and is replaced by a logistics factory. Swindon doesn’t have an unemployment crisis, but it has less productive, less well-paying jobs than it otherwise would have had. And therefore, you know, the British frog gets slowly boiled. That’s the warning, I think, you know, that as the UK gets squeezed out of these supply chains, it will make it harder to attract investment and harder to maintain our part in our neighbourhood markets.

Gideon Rachman
All those examples are very powerful, of people on the ground who must be wondering what their government has just done to them. But I guess the government’s response would be twofold. Firstly, look at the aggregate figures. It’s not clear Britain is doing that much worse than its European counterparts. And secondly, we’re making all these deals overseas and we now have the freedom to join the TPP in Asia. We’re gonna do a deal with India so there’ll be countervailing benefits in due course. Respond to those arguments for me.

Peter Foster
But the first question to the countervailing arguments is that very simply, the value of those trade deals that you might or might not do — we’ve not done one with India, not done one with the USA, we have joined the CPTPP — will never outweigh the costs of erecting barriers to your largest market. So broadly speaking, even if we did a trade deal with the United States, I think the government’s own estimate is about 0.2 per cent of additional GDP over a 15-year period. The median Office for Budget Responsibility assessment of the effects of Brexit in terms of barriers to the single market are about -4 per cent of GDP over the medium term.

Gideon Rachman
So gaining a low 0.2 per cent and a loss of 4 per cent.

Peter Foster
I mean, you know, do the math, right? And I think, you know, business organisations have been really clear. Yes, we want trade deals with the rest of the world. But remember, we know we had 60-odd trade deals when were a member of the EU. You know, the EU is one thing — it’s a trading bloc. In terms of the GDP figures I think, you know, there’s a kind of certain element of whataboutery about that. The statistics are all over the place. Other EU agencies haven’t reviewed their own statistics. But we haven’t lived the counterfactual. And what is clear is that the trade numbers are really not good relative to what they otherwise would have been when you compare them with our peer economies. And both the OBR and the Bank of England have said in recent reports they don’t see any reason to revise their estimates on the negative impacts of Brexit on trade. The UK-EU trade deal is essentially a reverse trade deal. Trade deals are there to lower non-tariff barriers, which are the problem with trade-now bureaucracy, paperwork of the stuff that we talked alike at the beginning. But the EU-UK trade deal, a Canada-style trade deal, erects those barriers. We were a member (inaudible) we put them back. We shouldn’t be surprised that had a negative impact on trade.

Gideon Rachman
A paradox, of course, is that a lot of the Brexiters’ argument was always that Brussels generated red tape. But it turns out that leaving the EU has created a huge amount of red, white and blue tape.

Peter Foster
Absolutely, because one of the kind of ironies, of course, is that we were shackled to a corpse, weren’t we, when we remember the EU.

Gideon Rachman
That was the phrase of Jacob Rees-Mogg, I believe.

Peter Foster
It was a standard Brexiteer phrase. And of course, the thing about regulation is that, yes, it’s cumbersome, yes, it’s expensive. But when that regulation gives you access to a market of 500mn people, so you comply once and then you’re compliant to 500mn people, that is, the business groups will continually tell you better than having a nimbler set of regulations for 55mn people in the UK diverging from the set of regulations that you’re gonna have to comply with anyway, whether you like it or not, to access the market of 450mn people on your doorstep. And as you say, one of the bitter ironies of Brexit is that actually, the UK is far more impacted by EU red tape as a result of leaving the EU and has actually far less say obviously over the future creation of EU regulation than it did when it was a member.

Gideon Rachman
Yeah. But I suppose the Brexiters would say, or if you look back at the campaign, the slogan was “Take back control”. And I think a lot of people who voted for it probably understood that above all as borders: stopping immigration, that stopping the right of EU citizens to come and not just work here, but then eventually become citizens. And in fact, when they did an audit, they discovered that, yeah, a million Poles had moved to Britain, a million Romanians. If that’s what you care about, has Brexit at least worked in those terms that it’s controlled immigration?

Peter Foster
I think it’s worked. In a sense, it’s controlled immigration. So when you look at in detail on the polling of people’s attitudes to free movement, the thing they didn’t like about free movement was, as you say, the government didn’t have control; as many people could come as possible. Of course, since Brexit, the net migration, not EU migration, but the net migration, has actually gone up. Now the government would say, we never said we didn’t want any migration. We said that we wanted to control migration and now yes, we’ve got more Nigerians and Filipinos and etc coming in to work in the NHS and that’s what we decide we need for our market. And we have control. We don’t have to accept people unregistered from the EU. You know, I think that still probably touches a political button in the UK.

But if your view was that Brexit was going to massively reduce migration to the UK, well then you would be disappointed because actually in lots of places where you see the government quietly extending the seasonal workers programmes, quietly extending the occupations shortage list to include construction workers recently. You know they’re quietly actually expanding the envelope because they realised that when you leave the EU single market, yes, you had the right to control immigration, but what you lose is flexibility. The point was seasonal migration happened a lot. People could come work a season in hotels when people coming for their summer holidays go back again, and so areas like construction, hospitality, etc have been complaining bitterly that they’ve lost that flexible supply of labour.

Gideon Rachman
And ironically, I suppose that one of the effects will be that because of the proximity of Europe, a lot of people came in, but quite a few would have gone back. Whereas if you’re coming from Nigeria, India, the likelihood that you’ll become a permanent migrant I think is probably high, yeah?

Peter Foster
That’s a good question. I have not seen data on that. And again, I’m not sure that Brexit has really helped have a super honest conversation about migration, you know, which is that it’s an important driver of economic growth. Whether it’s an important driver of per capita GDP is a slightly different question. It’s much less clear that that’s the case. But government has responded essentially to the pressure from industry because, you know, we’ve had very tight labour markets in the UK since Brexit and you know, in other areas of course Brexit has kept us from our neighbourhood. I’m thinking about musicians, about school trips, students. You know, the ending with Erasmus scheme universities. You know, they’ve got a lot more Chinese students coming in, but they’ve lost a lot of the European students who previously paid home fees but now pay international fees. And so essentially, the UK is the same choice as whether it’s Canada or US or Singapore, for the European education dollar. And that, again, you know, we’ve just come back into the Horizon scheme, the scientific co-operation program. But again, you know, universities will tell you they want to get back to having more European students because they’re part of the ecosystem in a way that a Chinese business student who comes does a year and goes away again isn’t. Even though they might bring revenues in, they bring a slightly different thing to the party.

Gideon Rachman
So let’s accept your argument — I certainly accept it — that this has been damaging to Britain. How about saying, well, yeah, it was a bad move economically, but it’s a one-off and Britain will now over time adjust and things will get better. Is that the case? One of the things that disturbed me about your book and indeed about your reporting is the suggestion that actually, the effects of Brexit are still unfolding and there’s a lot more to come.

Peter Foster
Certainly in the trade piece, you know, this idea that everyone gets used to the safety and security declarations, the rules of origin forms, the customs forms, but we’re actually seeing now what industry calls Brexit 2.0. So carbon border taxes. The EU is about to start requiring all importers to collect information on the embedded carbon in goods as part of net zero and levelling the playing field. Because obviously if you allow goods, say from China, that are made with subsidised power to come into the EU, there’s no incentive for EU producers to create net zero low-carbon steel, for example. As that comes into force reporting requirements from this October and then carbon border adjustment mechanism credits from 2026 October. That’s just gonna be another layer of friction unless we align our carbon trading schemes.

Another layer of friction for UK businesses want to play into EU supply chains similar with plastic packaging taxes. We actually have our own plastic packaging directive. But the thing about being outside the single market is that your assumption of compliance is not there, so you still need to show at the border. Even if you’ve got your own carbon border tax, you still need to show up at the border to say, look, we’ve paid our carbon border tax, we don’t have to pay yours. That’s just hassle. It’s about the marginal competitive disadvantage. Same with supply chain due diligence. And all those things of course, they apply to other countries. American businesses have the same issue, but the difference is that the UK is trading much more intensively and frequently with the EU than other countries are, you know, trading across long distances. And so the impact of these future Brexit 2.0 frictions is commensurately more damaging to the UK. There’s more drag to the UK because we do more trade and our systems were built inside the single market. So when you’re applying rest-of-world trade processes to systems that were built inside the single market — we see this with food products, etc — it gets complicated, it gets frictional.

Gideon Rachman
And I suppose the carbon border adjustment mechanisms are just a very big example of a broader problem, which is the EU is not a static thing. It evolves. And if we don’t evolve and track its evolution, the gap between the markets and all the regulatory hassle that comes with that just gets bigger and bigger.

Peter Foster
Exactly. There’s a ratchet there, which was part of the intention, by the way. I think that was part of David Frost’s intention.

Gideon Rachman
David Frost was the guy who eventually negotiated the whole deal, the last one.

Peter Foster
Indeed.

Gideon Rachman
Lord Frost to you.

Peter Foster
Lord Frost, I should say. Yes. You know, there’s a ratchet there. You know, the UK is now a regulatory iceberg that’s carved off the ice sheet of the European Union. And as you say, even if we stay still, unless we dynamically align on issues, we will diverge passively over time.

Gideon Rachman
OK. So Peter, let me put it to you. This is an evolving disaster. It’s unsustainable. And the British people seem to me to be realising that this is unsustainable. If you look at those opinion polls that I cited in the introduction, two-thirds think Brexit’s failed. And most polls that I see now saw steady majorities, about more than 50 per cent saying we’d like to rejoin. So isn’t it possible that we might actually rejoin?

Peter Foster
So I think where I’d challenge that statement is that you used the word disaster, and I’m not sure it is a disaster. I think it’s more gradual than that. You know, it’s the boiling of the frog. It’s the slow puncture. If it was an absolute disaster, maybe you would get a political inflection point where people would go, this has been a complete catastrophe, we need to rejoin. I’m not sure that is ever going to emerge. I mean, certainly at the moment, one of the interesting things that if you look at all of the difficulties that have happened as a result of Brexit and indeed the political instability and the reputational damage and all those threats of lawbreaking in Northern Ireland, this narrative internationally, which you will know better than anybody that’s out there that the UK has become a bit of a basket case.

Gideon Rachman
Yes. It’s the one thing I must say that I think the Chinese and the Americans seem to agree on (Peter laughs) in Washington or Beijing. They all think, what were you doing?

Peter Foster
Yeah. And I think, you know, you can put some of that back into the bottle, although not necessarily totally easy. But my worry, I think, is that actually, what you just outlined is not what is likely to happen, particularly as, you know, in a normal world you would have expected that the opposition Labour party would have been pointing the finger at this Tory Brexit, this Boris Johnson, Lord Frost Brexit and saying, look, it’s done this, it’s hit the manufacturers of the Midlands and the north who pay the hired wage jobs. These are the people, you know, who have been damaged by a Tory Brexit. Of course that hasn’t happened because the Labour party has made a political decision. It doesn’t really want to talk about Brexit, certainly not in a meaningful way, because it wants to win back those voters who were traditional Labour but went over to the Tories in 2019 — the get-Brexit-done election. And so actually, the political inflection point that you conjured there, at the moment I’m not sure where that comes from when essentially nobody wants to talk about it.

Gideon Rachman
And it does seem to me that, to argue against the point I made in the last question, that Keir Starmer, the Labour leader, has boxed himself in because he has said maybe to assuage those kinds of voters and the kinds of arguments the Tories might hurl at him, that he’s gonna sell out Brexit. We won’t be rejoining the internal market, let alone rejoin the EU. He’s not even talking about the internal market or the customs union. So how much room for manoeuvre does that leave Britain to try kind of reverse some of the damage you outlined?

Peter Foster
Not much is the short answer. You know, Keir Starmer essentially says Boris Johnson’s Brexit deal has been a catastrophic failure and we’re gonna fix it while sticking to the no single market, no customs union red lines that essentially created it. You know, if you feed that into the commission computer and wind the handle, out comes a Canada-style trade deal. And then, you know, they quietly sort of overstate, oh we’re gonna have mutual recognition of professional qualifications. Well, OK, great. But, you know, Canada has a provision for that in its trade deal with the EU. It took nine rounds of negotiation to do one deal on architects. Now, a mutual recognition professional qualifications agreement on architects isn’t gonna change the price of fish fundamentally. Nor is a veterinary deal, which is gonna be harder to do than you might think. And yeah, it will be good for the food and drink industry, but it’s not going to really solve that issue we spoke at the start about the constant marginal frictional disadvantage that comes from being a major EU trade partner outside the single market.

Gideon Rachman
So I mean this is a political question. I cling to the thought that, well, maybe Starmer’s a Machiavellian because I remember him from, you know, the great Brexit wars before Brexit actually was done. He was a pretty strong Remainer. And you see the way he’s handled the Labour party. He’s not done everything in one go. He started with some of the lefties in his shadow cabinet and the sort of Blairites, if you like, not in there, and he’s gradually brought the people he wants in. So now he has a kind of New Labour-style shadow cabinet. So do you think that Starmer may have a longer game in view, but that to get him through the election he has to be quite conservative about what he says?

Peter Foster
Possibly. But I think it’s a dangerous game to say one thing and do another, to do that with no democratic mandate and no pitch rolling. ’Cause I think one of the things that we have to be honest about here is that Brexit didn’t come out of the blue. Brexit was the product of 30 or 40 years of pretty unchallenged negative narrative about the EU single market. And because the Labour party haven’t been pointing the finger at the damage that’s been done by leaving the single market economically, it’s not clear to me that there’s a massively obvious political sell in moving closer.

Now I suspect the Labour party think that they can quietly dynamically align on various sectors. I fear that underestimates, number one, the political pain that comes with rule-taking, because we won’t have a seat at the table. And two, that yes, that will make life easier for some industries like food and drink or chemicals or cars, etc. But you have to remember that EU mantra of single market, that alignment doesn’t bring you access. So even if you’re following exactly the same rules, you’ve still got to show up at the border to prove that you’ve followed the rules.

Now there are some people who argue, you know, the Tony Blair foundation and others have argued that if you want to fundamentally reframe the conversation with Europe and get a clean break between the Frost-Johnson approach, you need to start somewhere. And one of those is creating a kind of solid legal base that you’re trying to create a genuine level playing field, and that if you do that, you can then move the discussion on. Of course, the EU may go, well, listen, you’re a small country on the periphery of a large market. Of course you’ll align with us. Everybody does. It’s the Brussels effect. I think actually in practice, it’s not unreasonable to hope that with the right macropolitical framing, the right, you know, real intervention, that you could move the conversation on from that. But it’s not a given. And it would certainly start with a lot of rule-taking, a kind of reverse retained EU law bill, that bill that was there to scrap all EU-derived law in the UK. But I think the UK, if it wants to change the weather, is gonna have to think relatively radically and certainly quite radically relative to the longstanding narrative about bendy bananas and EU red tape, etc, etc. We’ll have to see. I don’t have a crystal ball on that.

Gideon Rachman
OK, but let’s say I put you in government — and I’m afraid there is quite a strong record of journalists who write about the EU ending up in government, Boris Johnson being the main example. You’ve now got to deal with this. You obviously don’t think it’s possible, really, to rejoin the EU, at least in the short run. So where would you, Peter Foster, start? What would be the two or three things you could identify that actually are doable that would make the situation better?

Peter Foster
So I think the first thing you have to do is recognise that the longer it goes on, the sort of oppositional zero-sum approach, the harder it will be to go back. So I think, you know, my argument would be whether you’re gonna rejoin in five, 10 years, if you are gonna rejoin, you need to make progress in this first term. And to do that, I think you need to make a really early statement that you are different from Johnson and Frost and that you want to create a durable new relationship. Now, part of that is recognising that the EU and the UK have big shared issues on energy, on net zero, on Ukraine, etc.

And so I think you need to go to European capitals and go to Brussels and say we really want to be ambitious. And of course that’s not the signal that’s been sent now. You know, my point is if you want to get beyond the very itty bitty, you know, review of the implementation of the trade and co-operation agreement which starts in 2026, you need to start to move the needle. You could think about maybe a political ambassador in Brussels. Some people have mentioned that. Somebody who obviously has the ear of the prime minister, someone you know, who is clearly making a statement that we mean to do something.

And then on a practical level, I think, you know, we talked about aligning dynamically in law on certain sectors to create a kind of base of trust that’s locked in, you know, trust and verify, which is the EU approach. The legal linking of our carbon markets; emissions trading schemes would be another clear statement of intent. You know, on the security and co-operation piece, there’s bits that you could do that would get you into the discussion on whether you start to work with the EU on procurement, on Ukraine. Do you send some observers to Operation Althea, for example, in the Balkans? You know, there’s ways in which, you know, you build an apparatus that says, let’s park for a minute the whole rejoin question, because we none of us want to go there, but we actually want to fundamentally reframe the relationship.

If, on the other hand, Starmer — assuming it’s Starmer and the polls say it’s likely to be Starmer — comes in, looks at the books, sees the fiscal pressures, etc, it’s perfectly possible he might just go, look, let’s just do some little things that anaesthetise the impacts of Brexit round the edges and not get stuck in a negotiation with the EU, which essentially is going to be, you know, on past form, accretive, iterative and quite dispiriting. You know, someone in the Foreign Office said to me recently the first term of the Labour government will be marked by their steady disillusionment with Europe. And I think, you know, that is probably quite shrewd.

If you look at, for example, the recent negotiation between the UK and the EU over us taking up our associate membership of Horizon, Ursula von der Leyen, almost teary in the press conference in Windsor, oh, we’re free now! You know, it took seven months and we fought tooth and nail to get a few micro concessions, but the EU sat on its hands and really feel it had to move. By the same token, the EU is not particularly interested in engaging with the UK or is it frankly not giving that much headspace to the problem, partly because it’s obvious there are huge political limitations as things stand to that kind of engagement. But we shouldn’t necessarily assume that were a British prime minister to really seek to engage, that the response would necessarily be churlish and negative.

Gideon Rachman
Last question then. It’s early days yet, but how much of a historic rupture do you think Brexit will end up being? It seems to me in my gloomier moments that it may be the beginning of a kind of long, slow decline of Britain with all these accretive effects that don’t collapse our economy but make us steadily a bit less competitive, a bit poorer. Do you worry that that’s really likely to be the effect, given that it doesn’t sound talking to you like we’re going to be able to turn this around quickly?

Peter Foster
That has to be the worry, Gideon. I mean, if you look at the UK’s reputation post-Brexit, yes, we took back control. What did we do with the control? Well, we spent six years, seven years squabbling with ourselves, essentially. We’re coming out of that now. Sunak, to his credit, did the Windsor framework, has taken some quite pragmatic decisions on things like recognising the EU’s quality assessment mark, etc. But fundamentally the UK is no longer the entrepôt to the single market that it once was. The UK has inbuilt relative regulatory instability as a result of Brexit, which we discussed, and therefore as an investment proposition — you know, I was in Swindon recently, they’re trying to reboot their entire FDI — that makes it harder because that was one of the reasons why lots of US companies invested in the UK in ’70s, ’80s and ’90s. It doesn’t mean that the UK is sunk, but those are frictional headwinds that the UK is gonna have to contend with.

And the final argument I make in the book is, you know, we need to be honest about the extent to which we’ve backed ourselves into a corner and then we need to think clearly. If we’re not gonna rejoin the EU, if we’re not going to rejoin the single market, what is the UK offer? Because right now when you talk to investors, it’s not clear what it is. How is the UK going to create a stable regulatory and political environment that will drive investment, that will make the UK a credible actor when it’s outside its own neighbourhood structures? You know the British prime minister don’t go to the European Council. We see recently at the G20 an agreement on the sort of alternative to the Silk Road between the US, the EU and the Middle East and no UK. When you talk to people in Washington, as I know you do, they wonder where the UK is gonna fit in.

Now I’m sure we will find our place, but we need to think really hard where that is and what the offer is if we’re outside the EU and fix a load of things that hold us back. And that’s all that boring domestic stuff that I write about — planning and skills and labour markets, you know, because my biggest fear actually is, you know, we talk about the boiling of the frog and the slow puncture, is that actually the political expedient narrative is just not to talk about Brexit. And then you just shove a load of problems under the metaphorical doormat and that’s when you end up with that risk, as you say, of slow relative decline of the UK.

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Gideon Rachman
That was Peter Foster of the FT, ending this edition of the Rachman Review. Thanks for listening. Please join me again next week. And next week we’ll be beginning a new series of podcasts on Bidenomics, the new turn in American economic policy, and what it means for the wider world.