Hard Brexit or Soft Brexit?

A few thoughts on the current debate between hard and soft Brexit, and why I prefer soft Brexit:

  1. “Hard” and “soft” Brexit are not clearly-defined positions. They are usually thought of as being the UK getting no deal with the EU at all, and relying on WTO rules to trade with the EU (“hard Brexit”) and the UK staying as a member of the Single Market, like Norway (“soft Brexit”). But the eventual outcome may be somewhere in the middle, and a “hard” Brexit could mean the UK getting a rather limited trade deal with Europe, such as one that abolishes tariffs for goods but does not safeguard services firms, while a “soft” Brexit could mean Single Market-like rules governing certain sectors (such as finance) but not others. It’s probably best to think of them as referring to how extensive the free trade deal we have with Europe is.
  2. A lot of what’s going on right now is posturing. This can’t be emphasised enough. It’s tempting to try to read a lot into what different ministers say about the relative attractiveness of membership of, or access to, the Single Market, or the ease with which we could adopt WTO rules and go it alone ourselves. On the other side are European politicians like Francois Hollande who have been quite gung-ho about how quickly the UK should leave the EU, or like the European Parliament’s chief negotiator Guy Verhofstadt who has been quite hardline about the supposed all-or-nothing nature of the Single Market. In my opinion, all of these people are playing to their respective galleries and posturing before negotiations begin, and their statements are best taken with a pinch of salt.
  3. Hard vs Soft are not simple proxies for Leave vs Remain. A lot of Remainers prefer the hard Brexit option – Nick Boles MP, for example, kindly cited our case for the EEA Option (a soft option) in a recent post but decided that he preferred a hard Brexit option – while a lot of Leavers are leaning towards a softer exit option, as with long-time Brexiteer Roland Smith’s case for the EEA Option or Daniel Hannan MEP, who has emphasised the need for a close economic relationship with the EU (but is opposed to full Single Market membership). 
  4. Free trade is not just about tariffs. It’s easy to assume that tariff-free access to an economic bloc is all you need for firms to be able to trade freely, but regulations matter a lot too. Countries can obstruct trade with regulations intentionally – one example is France’s requirement that services like Netflix carry at least 40% French-made content – or unintentionally – different safety standards, for example, might mean that a medical device made in the UK to British safety standards cannot be sold in the US without going through a very costly testing process in the US as well. Since tariffs are already very low between developed nations, modern free trade agreements are about mutually accepting other countries’ regulations (if it’s made in Britain and passes British rules, you can sell it in America too – and vice-versa) or agreeing on a shared set of rules for firms in both countries to adhere to.
  5. The Single Market is not all-or-nothing. It’s a mistake to believe EU rhetoric about the Single Market being a single, monolithic thing. We are very far from having a true Single Market in services – according to a 2013 government report “the Services Directive only covers half of the services sector, and is only partially implemented”, and other regulations overlap causing inadvertent barriers to services trade. With this in mind we can begin to see the bluster behind the EU’s supposed ‘red line’ on Freedom of Movement. I think it’s quite possible that we may end up with a deal that gets us free movement of workers (people employed by or with a job offer from a UK firm) but not free movement of all people, as well as things like an emergency brake.

And why I support a “soft Brexit” (though some at the ASI disagree):

  1. Something like a Swiss-style bespoke deal might be the best option for the UK in the long run. But it took Switzerland decades to negotiate that, and we have two years. Something like the EEA Option, with modifications that kept control over things like labour laws, would be a good halfway house
  2. The banks are in a more precarious position than most people realise, and if the economy and/or the financial sector did take a hit from a hard Brexit it may be difficult to control the damage.
  3. Recession is not the only danger here. A hit to Britain’s economy via the strength of the pound is a hit to people’s real disposable income, and a few years of sub-par growth is just as bad as a short recession. Brexit has never had to mean economic harm, but a hard Brexit probably would. Nobody wants Brexit to make us poorer, and there's no reason that it should – but disrupting existing trade links and making trade harder overall might do it.
  4. Europe shouldn’t dominate the next decade of politics. It’s tempting to see hard Brexit as drawing a line under the question of what our relationship is with Europe. I suspect the opposite is the case – the greater the change, the more the next ten years of British politics is polarised between triumphant Outers and bitter Inners. I’m with Dan Hannan in thinking that a compromise can avoid that.
  5. Similarly, for Scotland’s sake, we should try to avoid a conclusion that pushes undecided Scottish voters towards independence. The SNP is fanatically supported and governs like the ruling party of a banana republic – an independent Scotland dominated by it could be a truly dire place to live.
  6. I’d quite like to see the government's experts proved wrong. As I said at the time, it was misleading of the Treasury to exclude an EEA-style option in its forecasts. I don’t think that “gravity”-based trade modelling is bogus (indeed it’s one of the most empirically well-supported models in economics), but a model is only as good as the assumptions that go into it, and it’s very bad to only model the scenario with the worst-case assumptions – which, in the Treasury’s case, was a hard Brexit.