Brexit: Options for Trade (EUC Report)

Lord Mendelsohn Excerpts

Thursday 2nd March 2017 Lords Chamber

[Lord Mendelsohn (Lab)]

My Lords, there is an abbreviation that expresses the sense that someone feels that they were not in the right place at the right time when something else rather remarkable went on. It is called FOMO—the fear of missing out—and I fear that I have a case of FOMO when it comes to looking at this committee’s report. This has been an excellent and extraordinary debate, with eloquence, relevance and expertise in every contribution. We owe a great debt to the EU Internal Market Sub-Committee and the EU External Affairs Sub-Committee, and in particular to the noble Baroness, Lady Verma, and my noble friend Lord Whitty for the excellent way in which they have brought the committee together and its conclusions to life. I note that that there is a further report on what a good deal on trade and services will look like, and I hope that we will get an early opportunity to debate that in the House.

While events have moved on, the report stands the test of time. In short, the report and this debate demonstrate that while an approach of pursuing a free trade agreement has been chosen, many other elements are in play which cause uncertainty and complexity. Official trade statistics show that the European Union is the destination for about half of all British goods and exports, but the trading links are bigger if we include the countries we trade freely with because they have a free trade agreement with the European Union. Those agreements mean that 63% of Britain’s exports in goods are linked to EU membership. What is at stake here is about more than just the single market; it is about how entwined and impactful have been the past decades of economic connections and their evolution. Those elements will rest heavily on the construction of an even more complex series of future arrangements.

This report is full of sound advice and it should be re-read constantly throughout the process of negotiations and as people consider our options. I want to touch on three themes from the report and from this debate. The first is that of synchronicity. The task of withdrawing from the EU, of establishing what the free trade agreement will look like, of preparing trade agreements with other countries, with all the problems of whether we can have those in sequential or concurrent mechanisms, and the question of how interrelated those elements are and whether they are determined by economics or a bit more politics: all of that will shape a very difficult series of considerations. The Government will need to consider what is fundamental and what anchors we need. There is a big question around what assumptions they make about how to integrate into any discussions a whole variety of other elements which fall from the side and some of which we have not touched on in detail during the debate but have been touched on in the report. They include questions around the UK’s position in the WTO schedules and our share of EU quotas.

In tandem with these discussions, we need to design and agree future trade relations with the least developed countries and other developing countries which are currently covered by the EU’s generalised system of preferences. In practical terms, how and when this is done will be crucial for our export position in developing markets, and our EU competitors will take advantage of any interregnum that we create as a result.

To ease negotiations with third countries, joining existing or intended large regional or mega-regional agreements could be advantageous. However, doing so may also result in a loss of sovereignty and raise other issues relating to migration and financial contribution. Is this something that the Government will consider in a tapestry of new trade relationships?

Secondly, we have also the large question of capacity. The report raises the issue of capacity, and I have heard others say that they are reassured that we are at least starting to make some progress on this. I am less reassured. My own experience of the Government’s dealings with other sectors is that we have created for presentational purposes—which is not always a bad thing—layers which do not inherently indicate that we are going to take account of some of these considerations of companies and businesses, and the long list covered in the Government’s reply, in the mechanism that will add to the capacity of our country to deal with the huge challenge.

We are faced with the task of negotiating more than 100 new trade agreements if we leave the EU customs union. In addition, trade partners in regional and bilateral agreements may want to change the terms of their existing agreements. The most immediate challenge the UK faces arises from our reduced negotiating powers as sole actor, time pressures and concerns about the character of how negotiations will be conducted. In view of the narrow base of domestic expertise in conducting trade negotiations, we will need to recruit and train a large body of new specialist staff. We will also need—this is an important point—to re-engineer how we do negotiations and trade, and how we re-create the Whitehall machine to deal adequately with how policy is addressed across a variety of departments.

Crucially, as raised by other noble Lords, there are questions about what support and advice has been given to British businesses. If the UK is to expose its markets to greater competition, we also need to make sure that we are ready to help potentially disadvantaged groups at home to adjust. We must get these elements right. It is about our capacity not just to negotiate but to deal with the consequences of the negotiations and the pattern of them.

Thirdly, there is the question of data. As my noble friend Lord Whitty said, no comprehensive economic evaluations have been made. These are absolutely crucial. Making a correct estimate of our trade interests, as well as properly informing the slowly developing industrial strategy, requires us to have a very sophisticated view of the dynamics in our economy and in the existing trade situation, as well as a correct estimate of the trade opportunities and context of other markets. This is no small challenge.

To illustrate the point, let us look at services. A large volume of services are traded across borders directly—for instance, a legal opinion or a form of insurance. This area is relatively easy to quantify, but a large amount of our services are wrapped up in other activities. Some services trade is camouflaged as merchandise trade, as it encompasses services inputs—for example, elements that are value added in the context of design or about some forms of advice, research and development.

Data that trace how value is added in both goods and services along the supply chain have only started to emerge and are not particularly meaningful at this stage. The strength of the services available and the quantity, quality, availability and geography play an ever more important role in making manufacturing competitive. Understanding how these impact and how we can design the right sort of policies and the future architecture of what our trade relationship should be with Europe and all the other countries we are looking at will require a much better set of data than we have at the moment. In relation to that question about comprehensive economic analysis, I am keen to know what sort of work the Government plan to do here.

This also touches on the issue of capacity. Many officials whom we are now training to look at some of the aspects of trade have great expertise in a variety of areas, and we now need that knowledge to enhance the ability of those areas to be adequately covered in the negotiations but they are now focusing on different elements. That shows a sense in which the breadth of the people, experience and expertise required will play an ever-increasing part during these negotiations and discussions.

This debate has shown the complexities of negotiations on our position. The path we are on is not the one that I wanted, but our task is to make the best of the situation. As someone from a business background, I am hotwired to think about what is the best we can do. The Government’s challenge is to face up to the need for a realistic approach and to prepare for the ripples and waves caused by the negotiations that will wash over all sorts of different areas of our economy and country. Without addressing that adequately, there are too many questions and uncertainties. Uncertainty is the main destroyer of GDP and our greatest economic risk in the short and medium term.

While the Government need to provide leadership and have the responsibility to conduct the withdrawal from the EU, the political need to look in control and to ignore building a broader capacity for our country to succeed in the face of this challenge is self-defeating. This report and the EU committees demonstrate that others can make a valuable contribution. The Government would do well to reach out more to them.