Hard Brexit is not a sunny upland - it's a cliff edge

In his third Brexit challenge, Nick Clegg lays out the pitfalls facings the UK's food and drink industry in the event of a hard Brexit and it's not pretty.

By Nick Clegg, 17/10/2016

Read Nick Clegg's remarks as he launched his third Brexit paper - on the impact of a hard Brexit on the UK's food and drink industry.

Nearly 4 months on from the vote to leave the European Union, we are finally starting to understand the early consequences of Brexit.

In the last week we have seen the government on the back foot, pressed by Conservative MPs to give parliament a say ahead of the triggering of article 50.

We have seen Donald Tusk, the President of the European Council, issue the hardest statement yet against giving the UK a sweetheart deal.

And we saw the strongest ripples yet in the currency markets and in business. According to the Financial Times the pound’s effective exchange rate, weighted to reflect the UK’s trade flows, fell to a 168-year low last Tuesday - weaker than the lowest point in the recent financial crisis, weaker than when Britain was ejected from the European Exchange Rate Mechanism in 1992, weaker even than when we left the Gold Standard in the 1930s.

Perhaps most significantly, the markets seem to have woken up to the looming danger of Hard Brexit, and investors are using their money to punish the government for every perceived misstep, while rewarding decisions that raise the chances of a better deal.

The markets are a powerful new player in this story. They are becoming increasing sensitive to relatively small policy changes. Hence the pound rallied sharply last week as soon as the Prime Minister announced there would after all be a debate ahead of the negotiations, but slipped back again when David Davis put in another Commons performance devoid of any meaningful content.

Let me set out my own position at this point.

Tim Farron has made it clear that the Liberal Democrats remain proudly pro-European. It’s in our DNA. The Liberal Democrats will respect the outcome of the referendum, but we’re not going to stop arguing for what we believe in. We’re not going to give up on this country’s proud history of liberal internationalism. And we’re not going to give up on the idea the Britain’s place is at the heart of Europe.

Tim Farron has made it clear that the Liberal Democrats remain proudly pro-European. It’s in our DNA. The Liberal Democrats will respect the outcome of the referendum, but we’re not going to stop arguing for what we believe in.

That’s why I have set myself the task of producing a series of papers which I’m calling the Brexit Challenge. The purpose is to explore and unpack the complexities of the process we’re now facing, in as dispassionate and rigorous manner as possible to understand the tensions and the trade-offs, and to pose the thorny questions that this Conservative government - having got us into this mess - now has a duty to answer.

And yet what we’re seeing is a rudderless government whose defining characteristic seems to be its determination to dodge the difficult questions. The only leadership provided by No 10 seems to consist of slapping down secretaries of state when they dare to say anything at all about the government’s objectives.

Into the vacuum occasioned by Theresa May’s iron silence come Davis, Johnson and Fox, who are driving this government towards the most extreme interpretation of the 23rd June vote.

Let’s be clear: the referendum provides a mandate to leave the EU, not a mandate to leave the Single Market. People voted for a host of different reasons, but they only spoke with one voice on the specific issue that was written into the referendum question. Leave we must, but that leaving could take several different forms, from the ‘soft Brexit’ option of joining Norway as a member of EFTA, to the ‘hard Brexit’ route of exiting without any alternative trading relationship in place and relying instead on WTO rules.

The most important decision of all is whether to remain a member of the Single Market, where we benefit from zero tariffs and can help to shape the harmonised non-tariff rules that ensure that goods and services can flow smoothly across borders. To reiterate: it is completely possible to be a member of the Single Market while standing outside the EU: Iceland, Lichtenstein and Norway all do so.

The choice we make will determine the character and prosperity of this country for generations to come.

So who decides which version of Brexit should prevail? The Conservatives - extraordinarily - say it should be a handful of Ministers, acting behind closed doors, using medieval Royal Prerogative powers, and without reference to parliament.

Where is the mandate for that? The referendum doesn’t provide it, and their own 2015 election manifesto actually says the opposite, committing Conservative Minsters to “say yes to the Single Market”.

Can it really be that they have developed the ability to mind read on a mass scale, allowing them to know exactly why every leave voter made their decision?

Where there is such uncertainty, and where so much is at stake, parliament must be the arbiter. We shouldn’t be arguing about this: it is the essence of our parliamentary democratic system. What the Conservatives are doing is autocratic and unconstitutional, and totally contrary to the mantra of the Leave campaign that Brexit is about “taking back control”.

Where there is such uncertainty, and where so much is at stake, parliament must be the arbiter. We shouldn’t be arguing about this: it is the essence of our parliamentary democratic system.

It is also richly hypocritical of the Conservatives. Let us remember the passionate radicalism of the “Parliamentary Control of the Executive Bill, 1999”, authored by one David Davis in an attempt to get rid of the very Royal Prerogative he now relies on as Secretary of State.

Or this from the Shadow Leader of the Commons in 2008:

"We should have a statutory scrutiny reserve so that ministers would have to gain parliamentary approval before negotiations in the Council of Ministers.

"The scrutiny reserve should be put on a statutory basis so that ministers are required to come to the committee before negotiations at the European Council and cannot override it."

The speaker? Theresa May.

I confirmed yesterday that I will be working in the coming weeks with Ed Miliband, Kier Starmer, Nick Herbert, Stephen Philips and other senior figures across all parties to force a vote on the the government’s negotiating mandate before article 50 is triggered. In doing so we will be following ample precedent, including the example set by John Major in 1991 when he held a 2-day debate and vote ahead of the negotiations that ultimately led to the Maastricht Treaty.

And what of the preparations with other European countries to ensure we get the best deal when we leave? In France, Germany and Spain the newspapers are conspicuously not full of Liam Fox’s clever negotiating tactics, David Davis’ fine speeches, and Boris Johnson’s diplomatic prowess. Instead, they are looking on aghast at the clumsy and occasionally xenophobic rhetoric, not least at the Conservative party conference earlier this month.

The Government’s approach seems to be based on gridlock in Whitehall, secrecy in parliament and offending our partners around Europe. This cannot be allowed to continue.

Which is why it is all the more important to set out for the public what ‘hard Brexit’ would entail. Because if we want to stop it, we only have a few short months to do so.

In the first two papers of the Brexit Challenge, which are available on the Liberal Democrat website, I explained what leaving the Single Market and the Customs Union in 2019 will mean for trade.

The single most important thing to say is that the 2-year timeframe afforded to us by article 50 is woefully inadequate to the scale of the challenge. Article 50 is deliberately designed to make life hard for a member state that has decided to leave. It’s primary purpose is the negotiation of the terms of the divorce. While it requires any agreement to “take account of the framework for its future relationship with the Union”, it is essentially about unpicking the past, not formulating a new relationship for the future.

So while some outline may be reached in parallel with the article 50 talks on the priorities for a future Free Trade Agreement, the FTA itself will take much, much longer. Canada’s trade with the EU is far simpler than our own: their primary exports are raw materials where ours are services or complex manufacturing. If we want an indication of the time it will take to broker a comprehensive deal with the EU, remember that the Canada-EU process was launched in 2007, and nine years later it is still not ratified.

So what happens in the interim? In a word: turmoil.

Businesses that haven’t had to deal with customs checks for 43 years will suddenly have to navigate them.

Tariffs will be automatically slapped on exports to the Continent - something the Brexiteers will tell you isn’t going to happen when it is in fact a legal requirement once we stand outside the Customs Union.

Companies that have relied on the EU’s single rulebook to determine everything from labelling to safety standards will find that adherence to those rules is a precondition of trade, but will no longer be able to influence them.

And more than 50 trade agreements with other parts of the world will fall into abeyance, and will have to be painstakingly renegotiated - something that is only likely to happen once the EU talks are complete and we have established ourselves as an independent trading nation at the WTO.

Today I am launching the third of a series of Brexit Challenge paper, on Food and Drink - everything from farming and fishing to high value-added foods made with imported ingredients. It is our biggest manufacturing sector by value, larger than car and aerospace manufacturing combined, and employs 850,000 people. And it is highly dependent on access to EU markets and to EU migrant labour.

Seen through this lens, Hard Brexit is not a sunny upland; it’s a cliff edge.

First, exporters. Food and drink products are currently traded across borders with no forms or checks. Once we leave the EU, products will have to go through customs checks at the EU border which include applying for relevant import licences, costly export health certificates to show that the product meets EU public health standards, and veterinary inspections. Major markets for key exports like whisky (which brings in £4bn a year) will become more challenging as tariff-free EU-negotiated FTAs fall away.

For farmers, the next few years are extremely worrying. Profit margins are already squeezed to the barest of minimums. Come 2019, farmers will face average tariffs on their wheat, milk, and other agriculture produce of 22.3%, and the following year they will most likely lose some of the £3bn in subsidies they currently receive from the EU. In the face of stiff opposition from abroad, the logical conclusion is that smaller operators will go out of business, while only the larger more industrial farms are likely to survive.

Manufacturers further up the food chain face the prospect of big price hikes in raw ingredients, both from domestic production and from the increased cost of imports once tariffs are applied. 70% of imported food comes from the continent.

Consumers will inevitably have to bear the knock-on cost of these pressures, while also seeing the price of imported foods rise, including popular products which we are accustomed to buying cheaply.

For example, Chilean wine faces a 14% tariff, while for New Zealand Lamb the additional cost for importers will be 40%, while chocolate and beef will face whopping tariffs of 38% and 59% respectively.

These are daunting tariffs for importers and for consumers, but the problems start well before Brexit actually takes place. The recent drop in the value of the pound and its impact on sales of Marmite and PG Tips is only a foretaste of what is to come in the next 12 months.

There are two problems. First, many importers and producers reliant on imported ingredients are currently hedged against currency fluctuations, but those hedges will start to expire soon, exposing them to the full effect of the weaker pound.

Secondly, supermarket suppliers are tied into long-term contracts, usually for 12 or 18 months. Producers who signed contacts before the devaluation of sterling are stuck with fixed supermarket prices, while the cost of their raw ingredients has risen sharply. One shortbread producer in Scotland recently warned that he risked going out of business due to a 75% rise in the cost of butter since June. When those supermarket contracts expire, suppliers will be able to negotiate at a higher price. Good news for them, but bad news for shoppers.

Of course we don’t exactly know what effect all of these factors will have on supermarket prices. As Ian Wright, the chair of the Food and Drink Federation said the other day, retailers only have three choices: either absorb the costs into their margins (which is difficult given the ultra-competitive nature of the supermarket industry); pass it onto consumers (similarly unattractive when discount supermarkets are nipping at your heels); or stop stocking certain products altogether. No wonder the Federation also found in a recent survey that close to 70% of their members are pessimistic about the future.

Price rises therefore seem inevitable. One study conducted for the National Farmers Union in April this year estimated that Hard Brexit would lead to average food price increases of around 8% by 2025. And in May this year the Treasury predicted that a fall in the value of sterling of 12% caused by uncertainty after a vote to leave would mean that a family of 4 would see their bills go up by £123 after 2 years. Given the fall in the value of sterling is now 17%, the final bill will surely be higher.

Tariffs and transaction costs are not the only concern though. EU rules govern every corner of food and drink, from hygiene standards to nutritional labelling, disease control to animal welfare. Consumer confidence in the quality and safety of our food hinges on these standards. All of these rules will therefore need to be brought into UK legislation and some of them will be hotly contested, with consumer groups and industry arguing about the correct balance.

The heavily EU-dependent food and drink industry really is the bellwether for a successful Brexit. If the government can’t get it right for them, then they won’t be able to get it right for other sectors.

At the moment we are being led into a crisis of the government’s own making.

But there is an alternative. In fact, it is the only alternative to the scenario I have outlined today. That is for the government to opt to keep us in the Single Market by pushing for a Norway-style deal, either as an end point or as a transitional status pending the ironing out of all our new trading relationships.

That is not without its serious drawbacks, as I set out in my first paper in July, but it is by far the least worst of the options on offer. It would provide continuity of access to European Markets while opening up the ability to strike our own independent trade deals with third countries. It wouldn’t be popular with the Eurosceptics, and it certainly wouldn’t be easy to negotiate with our European partners. But this government has a duty to try.

So I call on the government to have the courage to stand up for the Single Market. If they don’t, then parliament may just force them to do so.

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