David Davis writes for Conservative Home about the economic strategy for Brexit


As published on ConservativeHome.com
Trade deals. Tax cuts. And taking time before triggering Article 50. A Brexit economic strategy for Britain

Economic growth in the UK has been founded on a number of unhealthy characteristics in the last decade or so. It has depended above all on large population increases based on uncontrolled mass migration. This has made the economy bigger, but not necessarily better for individual citizens, as shown by GDP per capita growth rates of two per cent or less – significantly weaker than in most decades since the Second World War. It has depended on moving a large number of people moving out of unemployment, which is good, but because the new jobs tend to be low paid it created a low productivity economy. And it all depends far too much on domestic demand, which even after 2008 is excessively funded by consumer credit. This is unsustainable in the long run.

So we need to shift our economy towards a more export-led growth strategy, based on higher productivity employment. Fortunately, this will prove eminently possible as a part of a Brexit-based economic strategy. Indeed, far from being the risky option that many have claimed, Brexit gives us many tools to deal with the very serious economic challenges that the country will face in the coming decades.

Taking back control of trade

First of all, leaving the EU gives us back control of our trade policy, and gives us the opportunity to maximise returns from free trade.

Because any deals currently settled are obtained by finding a 28 nation compromise, the EU is clumsy at negotiating free trade deals. That is why we currently only have trade deals with two of our top ten non-EU trading partners. This is incredibly important to us, as about 60 per cent of our trade is with the non-EU world. In fact, we sell as much to non-EU countries with which we have no trade agreements as we do to the EU.

The first order of business is to put that right. As the amicable statements coming from the US, Australia, China and India show, these countries are as keen to knock down trade barriers as we are.

Single countries, with the ability to be flexible and focussed, negotiate trade deals far more quickly than large trade blocs. For example, South Korea negotiated a deal with the US in a single year, and with India, which is notoriously difficult, within three years. Chile was even faster, negotiating trade deals with China, Australia and Canada in under a year.

The EU, by comparison, takes more than six years to negotiate trade deals; the deals which would most benefit us, such as those with Canada or the US, take even longer. And without the often conflicting requirements of 28 different countries to consider, deals negotiated by single countries tend to be broader and have more favourable terms on matters that are important to us, such as services.

So be under no doubt: we can do deals with our trading partners, and we can do them quickly. I would expect the new Prime Minister on September 9th to immediately trigger a large round of global trade deals with all our most favoured trade partners. I would expect that the negotiation phase of most of them to be concluded within between 12 and 24 months.

So within two years, before the negotiation with the EU is likely to be complete, and therefore before anything material has changed, we can negotiate a free trade area massively larger than the EU. Trade deals with the US and China alone will give us a trade area almost twice the size of the EU, and of course we will also be seeking deals with Hong Kong, Canada, Australia, India, Japan, the UAE, Indonesia – and many others.

How will this help our economy? For a start, it will obviously provide massive markets for our exports, but it will also helps to cut the costs for our manufacturing industries. For example, let’s take our car manufacturers. Electronics in today’s cars already exceed 25 per cent of the total vehicle value, and this proportion is only expected to grow as drivers demand ever more from their vehicles in terms of performance, safety, comfort, convenience and entertainment. And the vast majority of the world’s electronic components are manufactured in Asia.

Many of these components currently face tariffs, increasing their costs. The elimination of such tariffs will decrease the cost of manufacturing a car in the UK, increasing our industry’s global competitiveness. The same thing will happen across other industries as tariffs come down and the cost of doing business with the UK is reduced.

Now the new trade agreements will come into force at the point of exit from the EU, but they will be fully negotiated and therefore understood in detail well before then. That means that foreign direct investment by companies keen to take advantage of these deals will grow in the next two years.

Cutting taxes and cutting red tape – but protecting workers.

At home, there is much we can do to make Britain a better place to do business.

We should be expanding export support arrangements for companies too small to have their own export departments, but who wish to sell into these newly opened up market places: an 0800 number that a small specialist manufacturer in the North of England, say, could call for practical help in Shanghai and Sao Paolo, Cape Town and Calcutta.

Regulation already in place will stay for the moment, but the flood of new regulation from Europe will be halted. We can then look at structuring our regulatory environment so that it helps business, rather than hinders.

At the moment all businesses in the UK must comply with EU regulation, even if they export nothing to the EU. This impacts on our global competitiveness. Instead, we should look to match regulation for companies to their primary export markets.

To be clear, I am not talking here about employment regulation. All the empirical studies show that it is not employment regulation that stultifies economic growth, but all the other market-related regulations, many of them wholly unnecessary. Britain has a relatively flexible workforce, and so long as the employment law environment stays reasonably stable it should not be a problem for business.

There is also a political, or perhaps sentimental point. The great British industrial working classes voted overwhelmingly for Brexit. I am not at all attracted by the idea of rewarding them by cutting their rights. This is in any event unnecessary, and we can significantly improve our growth rate by stopping the flood of unnecessary market and product regulation.

We should also continue with the programme of lessening the tax burden. In particular, I would focus on reducing taxes that have a deleterious or distortive effect on growth. This Conservative government has already done good work in this area, with corporate tax rates cut from almost 30 per cent to 20 per cent, and with plans to cut the rate to 15 per cent. This will make the UK a more attractive business destination, and the tax gained from companies moving their operations to the UK, through the people they employ and the sales they generate, will more than offset any reduced corporate tax take.

Single market access – and why we should take time before triggering Article 50.

This leaves the question of Single Market access. The ideal outcome, (and in my view the most likely, after a lot of wrangling) is continued tariff-free access. Once the European nations realise that we are not going to budge on control of our borders, they will want to talk, in their own interest. There may be some complexities about rules of origin and narrowly-based regulatory compliance for exports into the EU, but that is all manageable.

But what if it they are irrational, as so many Remain-supporting commentators asserted they would be in the run up to the referendum?

This is one of the reasons for taking a little time before triggering Article 50. The negotiating strategy has to be properly designed, and there is some serious consultation to be done first. Constitutional propriety requires us to consult with the Scots, Welsh, and Northern Irish governments first, and common sense implies that we should consult with stakeholders like the City, CBI, TUC, small business bodies, the NFU, universities and research foundations and the like. None of them should have any sort of veto, but we should try to accommodate their concerns so long as it does not compromise the main aim. This whole process should be completed to allow triggering of Article 50 before or by the beginning of next year.

In this process, we should work out what we do in the improbable event of the EU taking a dog in the manger attitude to Single Market tariff free access, and insist on WTO rules and levies, including 10 per cent levies on car exports. Let us be clear: I do not believe for a moment that that will happen, but let us humour the pre-referendum Treasury fantasy.

In that eventuality, people seem to forget that the British government will be in receipt of over £2 billion of levies on EU cars alone. There is nothing to stop us supporting our indigenous car industry to make it more competitive if we so chose.

WTO rules would not allow us to explicitly offset the levies charged, but we could do a great deal to support the industry if we wanted to. Research support, investment tax breaks, lower vehicle taxes – there are a whole range of possibilities to protect the industry, and if need be, the consumer. Such a package would naturally be designed to favour British consumers and British industry. Which of course is another reason that the EU will not force this outcome, particularly if we publicise it heavily in a pre-negotiation White Paper.

Brexit – The Big Picture

So how will this look if we get it right? We will have a more dynamic economy, trading throughout the world. Our businesses will have greater global opportunities, and will be more competitive. There will be lower prices in the shops, once we are outside the Common External Tariff. There will be higher wages for the poorest. An immigration system that allows us to control numbers. Control of our laws, so our lives are not hampered by needless and restrictive regulations.

It should be clear from all this that Brexit favours an export-based growth strategy, and that should be what we embrace. This has implications for macro-economic strategy too. George Osborne has announced that he is abandoning the zero deficit target for 2020, which if nothing else gives us an opportunity to review the approach. Clearly, any Conservative government would want to continue a strategy of fiscal prudence in terms of spending: we would do well, for example to revise the Canadian-style budgeting approach that we talked about prior to the 2010 election. We should also recognise that the biggest impact variable in the fiscal mix is tax buoyancy generated by high growth.

Brexit will deliver the circumstances that allow us to pursue an unfettered high growth strategy. Perhaps a better way to translate that into fiscal balance is to commit to using a significant proportion of the benefits of growth above a target level to deficit reduction, or in time surplus creation. That really would be “fixing the roof while the sun is shining”.

So in summary, we need to take a brisk but measured approach to Brexit. This would involve concluding consultations and laying out the detailed plans in the next few months. In conjunction with the high intensity negotiating free trade round this increase in certainty will stabilise the markets. As the free trade round and associated economic policies progress, we should see a material increase in foreign direct investment and domestic capital expenditure to take advantage of the opportunities that are created. This means that some of the economic benefits of Brexit will materialise even before the probable formal departure from the EU around December 2018. All economic estimates are subject to the vagaries of the world economy, but this approach should allow us to present to the British electorate in 2020 the early fruits of a successful global trade-based economic strategy as we build our place in the world.