Brexit: Options for Trade (EUC Report) - Motion to Take Note

– in the House of Lords at 5:04 pm on 2nd March 2017.

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Moved by Lord Whitty

That this House takes note of the Report from the European Union Committee, Brexit: the options for trade (5th Report, HL Paper 72).

Photo of Lord Whitty Lord Whitty Chair, EU Internal Market Sub-Committee

My Lords, after a week of excitement in this House on Brexit, it is a little galling that it takes us until 5 pm on a Thursday afternoon to get to what is actually the central issue in terms of our future relationship with Europe—namely, the trade relationship. However, I am very grateful to everybody who has stayed, including the Minister, and I am sure that we will have a good and effective debate.

This inquiry was carried out by two committees. I thank all the members of both my committee and that of the noble Baroness, Lady Verma, and the staff who have produced this report. It was a very interesting exercise. The inquiry was conducted in the autumn of last year and reported in December.

There have obviously been one or two developments since then. We have had the Prime Minister’s speech in January and the White Paper which followed. In effect, the Government have rejected two of the broad frameworks that we considered as options: the option of remaining within the single market, probably via the EEA—what some call the Norway option—and, to all intents and purposes, the option of staying within the customs union. More recently, actually as recently as yesterday, we had the Government’s response to our report, for which I thank them.

These developments have limited the range of formal options and negotiating priorities that the Government have decided to pursue—they have restricted them broadly to what the Prime Minister calls a “bold and ambitious” or an “ambitious and comprehensive” free trade agreement—but they have not altered the concerns, anxieties and requirements that we had put to us from a whole range of sectors at that time, most of which are still valid.

Our collective starting point was that membership of the EU has defined the UK’s trade policy for the past 40 years. It obviously defines our terms of trade with other EU states but, equally importantly, the UK’s trade with third countries is in effect based on terms negotiated by the EU as a bloc, either through EU free trade agreements or shared schedules of commitments under the World Trade Organization. We considered how this might change after the UK leaves the EU. We looked at the European Economic Area, at the customs union, at trading on the basis of WTO rules and at negotiating, as the Government seem now to be intent on, some form of free trade agreement with the EU.

We did not attempt a detailed economic evaluation of each of those options, nor have the Government ever presented us with such an evaluation—which is a bit strange, given the strategic importance of the decision before us. Nevertheless, we looked at what the requirements would be as expressed to us by a whole range of industrial sectors, academics and others who saw the advantages and disadvantages in each of the options. The fact that we are now focusing on a free trade agreement is important, but equally important is to focus on the other option which the Government say is now open: in effect, reverting to trading under WTO rules if there is a “no deal” situation.

Let us look a little bit more at those options. The first point in our report is that the majority of our industrial, business and academic witnesses favoured one option that is now rejected: membership of the EEA—or at least of the single market but the most obvious way to do that was through the EEA. That option has been closed by the Government, but the reasons industry favour it remain. They want tariff-free access, maximum regulatory equivalence and, in many cases, freedom to recruit skilled labour within the EU. Any free trade agreement with the EU would need to go at least some considerable way towards meeting those requirements.

Of course, it is true that the Government rejected the Norway solution because it offends two of their key political red lines: first, the need post Brexit to gain what they regard as total control of our migration policy and, secondly, the need to escape the jurisdiction of European law and of the ECJ in particular. It is arguable that a further deal could have been done on the issue of free movement, but our report does not go into that. We clearly say that, frankly, any liberal trade agreement—an FTA or even trading under the WTO rules—involves some compromise on your sovereignty. In other words, it is a myth that you can take back total control of your borders if you engage in trade in any degree of mutual arrangement with other countries, including the EU. Taking unilateral control is subject to at least supranational or joint processes for dispute resolution and for testing equivalence of regulatory frameworks. In the world of international trade, there is no entirely free lunch.

Our report describes two of the most comprehensive FTAs the EU already has with third countries: its trade relationship with Switzerland, which is complicated and based on more than 100 bilateral agreements within that framework, and the very recent and not entirely implemented Comprehensive Economic and Trade Agreement with Canada.

Although CETA has been branded the most comprehensive FTA in existence, our witnesses were quite clear that existing FTAs, including CETA, do not provide anything like as comprehensive access to the single market for businesses as membership of the single market as such would entail. In a free trade agreement, UK manufacturers for example may well have to comply with the rules of origin. These imply levies imposed by importing nations on the components of goods that originate outside the country. Exporting such goods would cause complications for most of our manufacturing industry.

We also conclude that an FTA with the EU would have to be of unprecedented depth to provide anything like the level of market access for UK service industries. There are great complications in the services trade, and most FTAs do not in any detail cover trade within the service sector. They more or less talk about equivalence of regulatory frameworks. There is therefore no precedent in any relationship the EU has with other third countries that gives us much guidance as to how an FTA would look in relation to the EU. FTAs provide a great deal of flexibility. Of course, we would not have to accept the principle of free movement or the jurisdiction of the Court of Justice. However, we would have to ensure that there was a high degree of regulatory equivalence and that we had a joint arrangement to settle disputes.

We then also considered how the process of negotiating such an FTA would operate. This is the area where we had greatest reservations about what appears to be the Government’s current position. In the context of the tight two-year deadline imposed by Article 50, we concluded that,

“experience demonstrates that FTA negotiations with the EU are complex and slow moving”.

All our witnesses were unclear to downright doubtful about whether the UK would be able to negotiate such an FTA in the same timetable as the UK’s withdrawal from the EU. Ministers continue to say that they would hope to do so; almost everybody else told us that, in any case, the EU 27 and the Commission are likely to take the view that these negotiations would have to be undertaken separately and staggered. There would be a divorce agreement, and that divorce agreement covering such contentious issues as the budget and acquired rights would have to be completed before we could move into negotiating a free trade agreement in any detail. Even if we had an outline commitment to a free trade agreement, the complexity I have described would take considerably longer to negotiate. We therefore recognised that the conclusions would be not only complicated but probably part of a wider agreement which the Government would have to reach with the EU.

There are issues other than trade—security, criminal justice, climate change, cultural and foreign policy relationships, and possibly mutual arrangements on migration—and it would be highly desirable if we did have a very comprehensive agreement, but that would be even more complicated and likely to take even longer. Accordingly, we recommended that the Government should urgently consider and be clear to the nation about whether negotiations on a UK-EU FTA could be conducted in parallel with the withdrawal negotiations and if not—and probably even if so—whether they would seek a transitional trading arrangement in order that the full details of the negotiations could be worked out.

On the issue of the transitional arrangement, the Government’s response is that we will not seek,

“some form of unlimited transitional status”.

Rather, we expect,

“a phased process of implementation”.

Nobody was calling for an unlimited transitional phase, but phased implementation clearly relates to an agreed end. In effect, the period of negotiating withdrawal is considerably less than two years. We will not be starting until the mandate has been given by the Council of Ministers to the Commission, which will probably be in June. Even then, heavy discussions will probably have to await the German elections and will have to be completed before the European Parliament elections. We are therefore talking about considerably less than 18 months. In the absence of clarity on the Government’s position, I therefore ask the Minister to clarify the Government’s view on the relationship between the withdrawal arrangements and the negotiation of a free trade agreement, and on the need for a transitional arrangement.

The other reason why the now discarded EEA option remains relevant is that it illustrates what the EU has sought or found acceptable in the past in the pretty comprehensive trading relationship it has with the EFTA countries. It includes a mechanism to transpose changes in EU laws into domestic legislation on an ongoing basis. We are about to see a great repeal Bill, which will in effect put EU laws into British law. That will mean that, at the point of departure, we will have more or less harmonised or equivalent regulatory structures. It is what happens beyond that that the Government will have to ask about, and the EU is likely to have a starting point that it will require the same of us as it has required of the EFTA nations. Frankly, there is not much reason to suppose that the EU’s starting point in negotiations will be to offer the UK significantly more favourable terms than it does to the EFTA countries.

I will mention one other thing before I sit down. The report is about UK-EU relations but those relations are also important for the prospect of deals with the rest of the world, on which the Government are embarked, and for the sequence of events. For all the talk of doing deals with Mr Trump, New Zealand or India, while preliminary discussions can no doubt take place, no deals can be signed until after we leave the EU customs union and the common external tariff. That is not simple. Even if scheduling what are currently EU tariffs as provisional UK tariffs at the WTO may be relatively straightforward, we will then have to unravel from EU arrangements. Until we do that, it is not possible to conclude other deals, because not only is it unclear whether third countries currently party to an FTA with the EU will be prepared to offer the same terms to a market of only 60 million that they offered to a market of 600 million, it is technically difficult in many cases, because many EU tariffs also have tariff quotas attached. This applies in particular to agricultural and commodity trade. Since many third countries, including New Zealand and the USA, are big in agriculture, as are India, Brazil and most of the developing countries, the divvying up of those tariff quotas will be a very complex early stage in negotiation. This has implications for trade with the third world, as well as trade with the EU as such.

The report is not all doom and gloom; we are merely saying it is difficult. The Government have to recognise that it is difficult and gear up to tackle it. We were a bit critical of the Government’s capacity when we discussed this back in December. We have been reassured to some extent that the Government are getting their act together across Whitehall now, but it is a colossal task. I would welcome anything the Minister can tell us about how the build-up of Whitehall expertise, capacity and co-ordination is going.

Our report is but a snapshot of the debate. It covers different paths that we are now likely to go down. None the less, it remains instructive not only about the realities of trade in the modern world, but in highlighting the trade-offs and the deals that will need to be done on sovereignty and mechanisms. It also brings the House up to date on the complexity and size of the tasks. I beg to move.

Photo of Baroness Verma Baroness Verma Chair, EU External Affairs Sub-Committee 5:21 pm, 2nd March 2017

My Lords, I am extremely grateful for the opportunity to debate the report of the External Affairs and Internal Market Sub-Committees of the EU Select Committee. It is a great pleasure to follow the speech of the noble Lord, Lord Whitty. We have worked very closely with him and his sub-committee on this joint inquiry. He has laid out with great eloquence a number of key areas that have been provided by witnesses in evidence to the committee and the range of questions that the committee has put to the Government.

I will not repeat many of the areas the noble Lord has alluded to but, as the chairman of the External Affairs Sub-Committee, I start by extending my thanks to its members for their important and considered contributions to this report. I am pleased that many of them are here supporting the debate and contributing to it. I also put on record our thanks and appreciation to the secretariat, to Eva George and the policy analyst, Julia Ewert, for their assistance and diligence throughout the inquiry and in the preparation of the report. It has not been easy. It has been a difficult one to bring together. They have done a sterling job with the clerk and members of the Internal Market Sub-Committee. I also put on record my appreciation and thanks to our specialist adviser, Holger Hestermeyer, for his expertise. It made a valuable contribution to our work, the report and our wider understanding of some of the minute details of the work the Government have to undertake.

As the noble Lord, Lord Whitty, said, future trade with the EU after Brexit is a hugely important issue. The EU is the destination for 44% of our exports and the source of 53% of all our imports. The terms of this relationship will be fundamentally changed by our exit from the EU. We are entering uncharted territories, so in this environment the role of Parliament in investigating the implications of Brexit and in scrutinising the Government is critical. The committees have sought to provide a balanced and thorough overview of the issues that are likely to arise from the four main options for trade. As the noble Lord, Lord Whitty, said, the EU committees will further be publishing detailed reports on trade in goods and trade in services next month. In this debate, I will focus on two options not covered in detail by the noble Lord, Lord Whitty, in his opening remarks, although he did mention them: the implications of leaving the customs union and trade under World Trade Organization rules.

I turn first to the customs union. As we set out in the report, the customs union prohibits customs duties and non-tariff barriers on imports and exports between member states. It forms the single market in goods and has significantly benefited cross-channel trade and facilitated the development of integrated EU supply chains in many industries, for example in, first, the chemical industry and, secondly, the automotive industry.

We have heard that great attention has been given to the Government’s stated intention to negotiate their own trade agreements after Brexit, and since we published our report, as the noble Lord, Lord Whitty, said, the Government have confirmed their intention to leave the common external tariff and forge new agreements with third countries. In our report, we concluded that addressing tariff barriers within an FTA could be relatively straightforward, notwithstanding the short timescale to negotiate an agreement. But replicating the prohibition of non-tariff barriers to trade while outside the customs union will be more of a challenge. This includes compliance with rules of origin, regulations and standards. A second issue in leaving the customs union will be costs and delays resulting from customs procedures and any added administrative burdens.

Since we published our report, the Government have, as has been alluded to, ruled out membership of the customs union following the model of Turkey—a non-EU country. They have also stated their intention to achieve “frictionless” trade with the EU. Currently, it is unclear how this can be achieved outside a customs union, but our forthcoming report on trade in goods will consider and probe these matters in greater detail. It will be interesting to understand much more clearly what frictionless trade means.

My second point is about the World Trade Organization option. Establishing the UK’s independent schedules at the WTO is a matter of first-order concern. The UK’s WTO schedules will be the baseline for the rest of our trade, with the EU and with other trading partners. I am pleased that the Government have confirmed that work is under way to begin this process, and that they will seek to replicate the EU’s existing schedules. The Government told us that this process should be a largely technical “rectification” process, and so relatively straightforward. Although I hope that this is the case, as we noted in the report, politics and events can sometimes intrude into such negotiations. Although establishing UK schedules swiftly may be the UK’s priority, other members of the WTO may seek to use this process to seek further concessions and clarifications from the UK. Notably, negotiations on tariff rate quotas for agricultural products often prove protracted and complex to resolve.

The Government have said that they recognise the need to increase human resources within government and, as the noble Lord, Lord Whitty, said, we are pleased that the headcount is going up. I am assured that the Government are working to increase not only staff numbers but capacity at the Department for International Trade. However, we concluded in the report that its current staff headcount is relatively modest compared to the ambitions of the Government to begin preliminary discussions on FTAs with a range of third countries. It is crucial that in that light, and looking at what other current partners already have, we see the capacity and resource issues addressed urgently.

I reiterate the view of the committee that establishing the UK’s schedules at the WTO, alongside the negotiations with the EU, should be the Government’s priority. The UK’s WTO schedules will be the foundation of its independent trade policy. Future FTAs with countries such as the US cannot be concluded until the UK has left the EU, and so work by the Department for International Trade should be sequenced accordingly.

If, as we concluded in the report, the UK is unable to agree an FTA with the EU within the two-year Article 50 process, as raised by the noble Lord, Lord Whitty, we will trade on WTO terms. The Government have said that, in their view, no deal is better than a bad deal—but when the Government describe the no-deal scenario, trade under WTO terms is the reality. I will elaborate a little further. Trading with the EU on the basis of WTO schedules would involve a considerable change to the UK’s current conditions for trade: tariffs would be imposed, non-tariff barriers would no longer be prohibited, and there would be no provisions for many important services traded by the UK. This could be extremely damaging. The Government have been clear that this is not the outcome that they seek but, while we must aim for the best possible outcome from the negotiations, rigorous planning is needed to understand the impact of no deal—that is, of trading with the EU on WTO terms—to help businesses prepare for this as a possibility.

This also highlights how important it will be to secure a transitional arrangement, as the noble Lord, Lord Whitty, has said. The Government’s position—as stated by the Prime Minister on 17 January at Lancaster House, and in their response to our report—has been somewhat unclear. They have ruled out what they term an “unlimited transitional status” and instead proposed a “phased process of implementation”. This may be a case of semantics—at least, I hope it is—but UK businesses need a bridging agreement that begins immediately after our current terms expire. I urge the Government to seriously consider negotiating a transitional arrangement as they begin these vital negotiations with the EU.

I recognise that there is a lot of work being undertaken by the Government, but the Prime Minister has excluded membership of the single market and the EU’s customs union, and there remains considerable uncertainty. Can my noble friend the Minister tell the House how they will assist business in managing the transition to a new trading framework, and provide more detail on the content and feasibility of the Prime Minister’s approach to the customs arrangement? I look forward to hearing from my noble friend.

Photo of Baroness Armstrong of Hill Top Baroness Armstrong of Hill Top Labour 5:32 pm, 2nd March 2017

My Lords, it is a pleasure to follow the noble Baroness, Lady Verma, and my noble friend Lord Whitty who, as the chairs of the two sub-committees that came together, guided us very carefully to as clear a report as possible. I saw this inquiry as a straightforward attempt to set out the myriad relationships that there are currently between the European Union and other countries and the costs and benefits of each approach, so that wider stakeholders, the public, and the Government could begin to see some of what will need to be negotiated.

As I have said before in this House, I am learning a lot from these committees—I come out of every meeting thinking that this is much more complicated than anybody anticipated, and certainly more than anybody understood before they were able to place their cross on 23 June last year. I approached this inquiry as I approach most things: from the prism of the region that I come from—the north-east. Trade is at the centre of the relationship between the north-east and the European Union. Indeed, a higher proportion of exports from our region go to the EU than from any other region. These exports are almost exclusively manufactured goods, although there are, of course, services that often go alongside them, but we export more manufactured goods per capita than anywhere else in the country. The north-east has a positive balance of trade that is the healthiest in the country and I am sure that the Government will not want to lose or neglect that really important point, because I suspect that the north-east is—by every criterion—one of the areas left behind that the Prime Minister talks about so much.

The Government, in their response to the report, make it clear that they are not actually going for any of the models that are outlined in it. They do accept, however, that they have to prepare for the “no deal” option, which would mean reverting to WTO rules. Even before triggering Article 50, they have already ruled out the option that the majority of manufacturers want—continued membership of the single market and the customs union. That means that the struggle to meet their expectations is going to be even greater, and I hope that the Government accept from this report the challenges that any new deal is going to bring. None of them is cost-free and none of them constitutes “taking back control” continually, as my noble friend Lord Whitty said. The real problem that crawls out of this report is that nothing is for nothing.

The Government have been, to date, incredibly optimistic, but sometimes it seems—and their response to this report reinforces this view—that they are not being wholly realistic. What manufacturers are looking for is as much clarity and certainty as possible. I accept that it is not possible at this stage to provide that fully, but the Government have a responsibility to respond to those ambitions as much as possible. I have met no one in the EU—and the committee has met people from the EU in relation to this report and to many other activities in recent months—who wants to be vindictive towards us. However, their prime ambition seems to be to make sure that the EU survives and, hopefully, prospers. If they think that we are seeking a deal with no difficult consequences for the UK—that it is all going to be wonderful in the way it is often described to us in government speeches—then they are going to look at that with a great deal of caution. They do not want people in any other country to feel that we will get a better deal than they would and that, therefore, it is worth them seeking to leave the EU. We have to remember that in the way that we negotiate and approach this.

I suspect, and the report reinforces this, that the devil will be in the detail, and that the framework for future relations that will have to be spelled out in the leave document, which we normally refer to as the divorce settlement, will simply not be able to explore the detail. In this case, the Government need to address transitional arrangements, but they seem somewhat coy in acknowledging this. They say—again, as the noble Lord, Lord Whitty, said—that they expect a “phased programme of implementation” following the Article 50 process. Frankly, I do not care what the Government want to call it. What we need, and what manufacturing industry in particular needs, is some clarity that there will be a process put in train after the two-year limit, which will deal with the detail in a way that does not put it at the cliff edge. I know that that is the Government’s ambition but they are going to have to establish the game plan, as we say in the report.

I am normally an optimist: being a woman in the Labour Party and a Sunderland supporter, you have no option. However, I find this very difficult. I do not accuse the Government of false news, although a lot of the campaigning for the referendum could be described in that way, but I caution them about being so optimistic that it appears blasé. The worst outcome will be to raise expectations that are then distinctly underachieved. That is not in the interests of the country and, I might say, especially not those of the north-east. I hope the Minister recognises that we need a dose of reality in this debate. It will be a long, tough road ahead. Yes, we want the best outcome but this is a negotiation and while we may be one of the largest countries in the EU now, we are not in sole control of these negotiations. We need to approach them realistically and with humility.

Photo of Lord German Lord German Liberal Democrat 5:41 pm, 2nd March 2017

My Lords, I, too, add my thanks to the two chairs of the sub-committees and to the staff of Parliament who assisted us in making this report. In his opening remarks the noble Lord, Lord Whitty, referred to the picture having moved quite rapidly since the report was written. It is rather like having a snapshot taken out of a moving picture. I will therefore concentrate my remarks on the Government’s response to this report. We could probe many very pertinent issues very deeply.

It seems that the Government have issued all departments with a lexicon of words that they must use in respect of everything to do with our future relationship with the European Union. I will name a few: ambitious, comprehensive, frictionless, phased implementation, and the one that is definitely not my favourite, facilitations—I even have trouble pronouncing that because it does not appear in any dictionary. I looked up one word that has been used frequently: frictionless. The Oxford dictionary defines it as, “Smooth, achieved with little difficulty, effortless”. I wonder therefore whether the Government have given out the wrong book, because they are using these words in their analysis of the huge challenges ahead.

I am somewhat amazed—in fact, absolutely amazed—at the level of ambition, given the timescale in which the Government seek to meet their own objectives. I am also concerned about the way in which the words “return of sovereignty” are used, as an underpinning ambition to be reached. Any free trade agreement involves trading off interests in one area to gain in another. By their very nature, free trade agreements involve losses of sovereignty. The alternative is building barriers. I am reasonably confident that the Government do not wish to build a wall—physical or otherwise—around the UK, not least because that would mean a definite and dangerous return to a hard border between Northern Ireland and the Republic of Ireland.

There is no example in the world of a significant economy that has both market access and absolute sovereignty. So it is appropriate to ask the Minister: how do the Government reconcile their response to the report, which states that they want,

“the freest possible trade in goods and services”, with their desire at the same time to take,

“control of our own laws”?

In their response to the report, the Government state that our future relationship with the European Union will be very complex. I would say that that is very much an understatement on the part of the Government. They say that it will be wide-ranging and will apply to both trade and non-trade issues, citing justice, defence and home affairs as examples. The House of Lords report looks in detail at the wide spectrum of matters that will need to be dealt with in terms of UK-EU trade. All this is to be agreed within the timescale set by Article 50.

The Government hope that they will not only secure the framework for the new relationship with the European Union but will deal with both departure and future arrangements simultaneously. On the assumption that only the framework will be concluded in the timescale available, given that that is what is actually in Article 50, it would be useful if the Minister could outline in her response the Government’s understanding of how close a framework comes to a fully worked-out set of arrangements, particularly in the area of our new trading arrangements with the European Union.

The timescale for negotiation will not be two years. Given the requirements to achieve the agreement of individual member states and the European Parliament, many months will need to be sliced off the end of the 24 months to achieve the two-year target. Some have suggested that the negotiations therefore need to be concluded in 18 months. As has just been said in the Chamber, there is likely to be some slicing-off at the front end of the timetable as well, as elections and future politics in France, Italy and Germany take their part. So I would be grateful if the Minister could give your Lordships’ House the Government’s view of how many months they think they will actually get to conclude an agreement to exit and a framework for this new relationship with the EU—whatever that framework might contain.

This brings me neatly to the issue of transitioning and phased implementation. I recognise that in their lexicon, the Government have found new words for the period that follows the 24-month exit period. They say that they want not unlimited transitional status but a phased process of implementation. The introduction of the word “unlimited” is interesting, and I would like the Minister to explain what is meant by it. For example, does it mean that the UK does not want unlimited time to complete the new relationship; or does it mean that it will be seeking transition only in a limited number of areas; or does it mean that it wants to limit the need for any changes to be made during the implementation phase? I simply do not understand it, and I should be grateful for an explanation. In all other respects, I think the use of “phased implementation” and “transition” are virtually indistinguishable.

This brings me in turn to one aspect of transitioning that will definitely be needed: our trading relationship with third countries. The committee’s report makes it perfectly clear that the UK cannot conclude trading agreements until we have ceased to be a European Union member state. The report also makes it clear that the UK would be unlikely to be able to retain access to the European Union’s free-trade agreements with third countries. Can the Minister confirm that this is likely to be the case? The question was raised in the report but not answered by the Government in their response.

At the point of exit, we would be facing a cliff edge for our trade with third countries. The Government’s response to the committee’s recommendation on this matter states that they are “exploring ways to achieve” avoiding a cliff edge, but then fails to give certainty that such routes are available to us. So I ask the Minister directly: what ways are available to the Government to ensure continuity of trade with third countries on the day of departure from the European Union? I am asking the Government not to give us their preference but simply to outline the choices available. There is a very practical issue here for which, as the report points out, certainty is required by UK business.

We recognise the need to invest in greater trade negotiation expertise. Unfortunately, the Government’s response to this matter in the report is to provide a set of bald numbers—300, 350—building up in departments. What is needed to understand this properly is what skills the Government now have available to them. By way of example—again, this question was asked in the report—how many new, experienced trade negotiators have recently been taken on by the Government? Where have they come from and what level of skills do the Government now have available?

The Government’s responses on this and other trade matters lead to far more questions than answers. It will be necessary for your Lordships’ House to continue to throw light on the issues which face us. I commend the report and I look forward to the upcoming reports on trade in goods and trade in services which will give another chance for this House, British industry and our people to examine these critical issues for our future well-being as a country.

Photo of Lord Horam Lord Horam Conservative 5:50 pm, 2nd March 2017

My Lords, the noble Lord, Lord German, had great fun with the lexicon of the terminology to which Ministers are clinging like a life raft. I think one recognises here all the subtle skills of a Sir Humphrey in collating the incompatible. To be absolutely fair to the Government, they have come up with a clear plan in the shape of the White Paper which we are all familiar with, but I remind the Government and the House of the words of Mike Tyson, the boxer, who said recently, “Everyone has a plan until they get a fist in the face”. A fist in the face will come with the shock when we find out exactly what the European Union thinks of all this. We will have some idea—there is talk of €60 billion bill as a start, before discussions can even take place—but I hope it is not too big a shock. Even as professional an adviser as Sir Ivan Rogers said that we should be prepared for some sort of stand-off after the initial discussions take place, and that may well happen.

The merit of our report—speaking as a member of the committee—is that it lays out for the trade in goods the various options: the single market, the European Economic Area, a UK/EU free trade area, the customs union and World Trade Organization rules. I, too, thank our chairs, the noble Lord, Lord Whitty, and my noble friend Lady Verma, for getting us through all this, and I thank the staff who did a very difficult job in marshalling this extensive material and trying to understand it. I now understand what a diagonal cumulation of rules of origin is—at least, I understood for five minutes this morning, but I am not sure I could repeat the explanation shortly afterwards. We tried to explain to the world at large exactly what is involved in these various options.

We went on to make two recommendations—bits of advice, I may say. The first has already been touched on by the noble Lord, Lord German. We said that this cannot be done in the time available and we need some sort of transition period. To be fair to the Government, they have grasped this point and are using the phrase “implementation”—we return to the question of language. We explore this further in our second report, which is about to hit the stalls. I shall give it a trailer: it is fascinating reading, just as our first report was. I think the Government have grasped that there is a very short period.

The second recommendation is that we advocated staying in the customs union—not the single market, of course, which is impossible as the Government have ruled that out—at least in the transitional period while this is all sorted out. The White Paper rejects that, saying that the Government want to set up a new customs or free trade arrangement—a bespoke arrangement, a unique arrangement—for the UK. This is not impossible. For example, Wolfgang Schäuble, Germany’s Finance Minister, has commented on this and said that the model the UK might look to is the arrangement that Switzerland has with the EU. Of course, we should remind ourselves that Mr Schäuble is a notably good friend of the United Kingdom. It is reported that he shed tears when he heard the referendum result. He is a friend, but there might be others who are rather less friendly and who have rather more influence when we are negotiating these things. He may not, of course, be in post as Finance Minister any longer, so we cannot rely too much on him. None the less, it is certainly possible.

However, if that cannot be negotiated, we have either to go back to the customs union or to rely simply on World Trade Organization rules, which present us with a problem. First, as David Davis apparently said to the Cabinet sub-committee looking at these issues this week, all the bureaucracy of government will have to be re-engineered in a very short time to be ready for that period no less than two years from now. All the companies will have to re-engineer all their arrangements, particularly those with complicated just-in-time supply chains. That will be an absolutely major undertaking. Not only that, but we are looking to replace the certainties of a large free-trade market on our doorstep with only the possibilities of free-trade agreements with other countries, which may take a long time to complete and may not give us as much in total trade as we will lose by not continuing to be members of the customs union. There is no doubt that this is a huge gamble, and we live in perilous times—when you look at it this way.

Some in these circumstances predict disaster, and some say that we will have a bumpy ride for a few years and, after that is out of the way, things will be better. In my experience, in such situations certainty is usually misplaced. I say that particularly as an economist who has quite often found that predictions I have made in good faith and from my expertise have turned out to be wholly wrong. People far more illustrious than I am have made even more certain predictions that have been even more certainly proved unfounded in the light of events. Even the greatest of experts—as in Michael Gove’s view of experts—have come unstuck in all this. So I confess that I do not know what is going to happen. What I do know is that a great deal will depend on the choices we make in these areas in the trade negotiations we are about to enter into. Success in politics usually comes from a good combination of courage and judgment, so I can only hope that my colleagues in government can show both the courage and the judgment to steer us through these perilous times.

Photo of Baroness Donaghy Baroness Donaghy Labour 5:57 pm, 2nd March 2017

My Lords, I am pleased we have the opportunity to debate this report, and I thank my noble friend Lord Whitty for his skilful steering of the two committees—and, of course, the noble Baroness, Lady Verma—through a complex subject. The secretariat has done a marvellous job in presenting the options for trade with clarity and thoroughness, and I add my thanks to all those who submitted evidence, whether in person or by correspondence, for sharing their knowledge and wisdom.

I want to say something about the timing and context of the report and why its recommendations are still valid, as my noble friend Lord Whitty has said. I also want to explore what precisely is meant by open-mindedness in the context of the Government’s approach. It is 75 days since our report was published, and most of our hearings took place in September and October last year. Some would argue that it has been overtaken by events—in particular the Prime Minister’s speech on 17 January when she said:

“What I am proposing cannot mean membership of the single market”.

It is important to remember that when the sub-committee saw the noble Lords, Lord Bridges and Lord Price, on 13 October, we were told that the Government were,

“looking at all the options”, and “not ruling anything out” for a future trading relationship between the UK and the EU. We took that statement on its merits and looked at four options, and their implications and risks. This is set out in our report. It is my contention that, although the politics may have changed, it does not invalidate our report or its analysis.

The risks and uncertainties are still there. Following the Prime Minister’s January speech, the White Paper was published on 2 February. It says:

“We have an open mind on how we implement new customs arrangements with the EU”.

It is not my intention to put the Minister on the spot. I appreciate that the open mind of 13 October is very different from the Government’s open mind of 2 February, and she has her instructions from her boss, but in our report we say:

“We therefore had to adopt an open mind and following chapters consider all four potential frameworks”.

Our mind was genuinely open and we carried out that remit. From a personal point of view, I regret that two of the four potential options have been ruled out by the Government.

Two key recommendations in the report are about business confidence and the need, as the noble Lord, Lord German, said, for a clear game plan for future transitional agreement. We referred to the fact that businesses are operating in conditions of considerable uncertainty, which is a significant threat to the UK economy. Our report is clear that business confidence is of the utmost importance. In these days when international compliance on quality, standards, country of origin agreements and dispute resolutions are the norm, it makes nonsense of the kind of free-trade buccaneering of Mr Patrick Minford’s world, for instance. Will the Minister give us an assurance that industry will be fully consulted and involved in the negotiations and that that will be a government priority?

Secondly, we recommended the need for a clear game plan. It could be argued that the Prime Minister’s 12 principles are as clear a game plan as could be had, but they are not principles but objectives, many of which depend entirely on the agreement of others, and I think the Government accept this. When I was chair of ACAS, I would see many so-called principles presented by both sides of industry. The trouble was that they were never the same. That is why language is going to be extremely important.

Looking through the Government’s belated response to our report, much of which is a reiteration of the White Paper, I welcome the emphasis on dispute resolution and I am duly impressed by the volume of contacts with interested parties listed in the annex to the letter. I particularly welcome the statement that,

“we do not want to undermine the Single Market, and we do not want to undermine the European Union. We want the EU to be a success and we want its remaining member states to prosper”, politically and economically. There are some Europhobes who would delight in seeing the dismantling of the EU, so this statement by the Government is important.

Finally, there is an intriguing answer by the Government to recommendation 3 of our report, on the World Trade Organization. It says:

“As we leave the EU we will be the more able to play a full role in underpinning and strengthening the multilateral system”.

So we are leaving the EU to take over the world. Now that really is open-minded.

Photo of Lord Gadhia Lord Gadhia Conservative 6:03 pm, 2nd March 2017

My Lords, having made my maiden speech last October during the debate on championing free trade it feels appropriate to speak again today to welcome the excellent report produced jointly by the EU sub-committees chaired by my noble friend Lady Verma and the noble Lord, Lord Whitty. Having missed the opportunity to be the 180th speaker at Second Reading of the Article 50 Bill last week, I am provided another opportunity to share some broader reflections on Brexit. In particular, I shall focus on the central issue of how the dynamics of the trade negotiations might unfold once Article 50 is finally triggered.

With all due respect to your Lordships’ House I believe that we have spent far too much time on the process issues, at times generating more heat than light, and today’s debate allows us to get into the substantive and tricky issues which lie ahead. We should ultimately be comfortable in granting the Prime Minister maximum flexibility to negotiate unencumbered. We can do so in the full knowledge that the success or failure of this negotiation will make or break her premiership, as signalled by her rare appearance on the steps of the Throne last week. Put simply, the Prime Minister will have the clearest of political incentives to carry Parliament and people with her ahead of the 2020 general election—which will serve as a de facto referendum on the outcome, or define the negotiating parameters for the remaining process should the timetable extend beyond two years, which seems highly likely, as noted in the report.

Much of the debate during Committee on the Article 50 Bill this week has boiled down to different views on the art of the possible once negotiations commence. So instead of speculating, I say: let us get on with it. I have spent 25 years negotiating large and complex corporate and financial transactions, but those pale into insignificance compared with the heroic and daunting task ahead. It is now clear that we are seeking to conclude an unprecedented free trade agreement with deeper preferential access to the EU single market across both goods and, importantly, services than is currently enjoyed by any third country. Indeed, it is likely to form part of a wider association agreement encompassing other, non-economic areas of co-operation. So all the apparent hyperbole is more than justified. This will be the most ambitious and complex trade treaty of all time—particularly if it is going to deal effectively with alternatives to a customs union, not least in Northern Ireland, and the equivalence and/or mutual recognition issues for services.

Let us drill into how we might persuade our counterparts to conclude such an unprecedented FTA, and consider if we are overestimating the strength of our cards. We must certainly be ambitious, but at the same time make an honest assessment of whether our starting positions are realistic.

The UK Government’s position is built on four pillars of logic. First, the Article 50 process and the FTA should be undertaken in parallel since the withdrawal process is intended to take account of the framework for the UK’s future relationship with the EU. The other obvious reason for linking the two processes is that we can then maximise negotiating leverage from any divorce settlement.

Secondly, we start from a position where all the rules and regulations are identical on day 1, with zero tariffs and so, unlike most trade negotiations, we are not seeking convergence. The great repeal Bill underpins this position from a legal perspective. What is therefore important is to protect against divergence, so the dispute resolution mechanism will be key—which is why the Government’s White Paper includes a whole annexe of such examples.

Thirdly, we can achieve all this in two years and therefore any transitional arrangements are designed not to extend the negotiating period but simply to provide an implementation buffer. The actual negotiating period, as mentioned, would in fact be shorter—something like 18 months, or even shorter than that if we include the process for approval by both the European and UK Parliaments. Fourthly, if we cannot get the deal that we want then we fall back to WTO terms, and this represents what expert negotiation theorists call the BATNA, or best alternative to a negotiated agreement.

In contrast, the EU position is clearly at odds with our own starting position. On the first pillar, Michel Barnier has made it clear—repeatedly—that the EU proposes a sequential process: Article 50 first followed by the new trading arrangements. I believe the current stand-off can be unblocked only by the European Council in its negotiating mandate to the European Commission in response to the formal triggering of Article 50. Without this course correction the negotiations will get off to an acrimonious start and it will remove the leverage inherent in our monetary settlement.

On the second plank of our argument, about starting from a unique position of trading conformity and offering zero-for-zero tariffs, we are placing huge faith in Homo economicus that rational decision-making will prevail. Having had dinner in Brussels with senior European leaders earlier this week I am not sure that they see it entirely this way. Brexit was a political choice and it will receive a political response. The EU is determined that Britain pays a price for leaving the club—not out of vindictiveness but because it fears that a favourable deal for Britain would create a bad precedent and potentially encourage other member states down the same path. It clearly want us to pay a price, while we naturally want to minimise the economic impact. Put crudely, can we get away with a slap on the wrists or will it be a slap on the face? I believe that we will not really know until much later in the process, when all the big contentious items are on the table and we progress to 11th-hour horse-trading.

There is a significant risk that the arrival of Macron in France and Schulz in Germany could embolden European hawks to play hardball. There is also a big bear-trap waiting for us: clasping at what might appear a relatively attractive deal on goods—where the EU runs a trade surplus—but a relatively poor compromise on services, where we enjoy our biggest competitive advantage. I am afraid that standing up for City interests is clearly unfashionable, but I hope that protecting the £66 billion tax base that pays for essential public services is something we will not trade away lightly. To secure a preferential deal on services we will inevitably be asked for some form of preferential access to the UK’s new immigration policy; so we must define that, as a matter of priority.

On the third area, relating to the timetable and transition, a big expectations gap is opening up. Understandably, the Government are targeting two years to conclude the whole process. It would certainly be in our national interest to minimise the period of uncertainty. However, all the empirical evidence and expert opinion is stacked up against us and I fear that Ministers are creating a rod for their own backs. It seems more likely that within a two-year timeframe we can conclude Article 50—including our new WTO schedules—alongside a substantive framework for the future trading relationship and how to reduce customs friction; but more time will be required to complete and ratify the FTA. In those circumstances, a strictly time-bound transitional phase would be extremely valuable. That would be about not just implementation. I note that my noble friend Lord Bridges has side-stepped the question of temporarily remaining in the EEA but this option, or something more bespoke, could provide a bridging phase from one regime to another. We will also need this phase to replicate all 53 third-country FTAs.

I can assume only that the Government’s logic is driven by the desire to keep maximum pressure on timing, and that a transition period which elongates the timetable is a fallback and any such proposal is tactically better off coming from the EU. I believe that there is significant risk that the Government ultimately will be forced to retreat on both timing and transition, so perhaps it might be preferable to hedge their bets.

Fourthly, I come to our fallback position that,

“no deal for Britain is better than a bad deal”.

The EU is likely to view that in a diametrically opposite way, namely, “Any deal is better than no deal”. Why? Because the cost of abrupt exit is significant. From where we stand today it would be the Grand Canyon of cliff edges and therefore falling back to the WTO will be seen as an empty threat. As Sir Ivan Rogers pointed out in his evidence to the House of Commons Brexit Committee last week, no other major country trades on pure WTO terms with the EU. Since the WTO does not cover services in any depth it is doubly disadvantageous for a country like the UK. We would be walking into a legal vacuum in many areas.

On all four pillars of our negotiating strategy, therefore, we have serious work cut out to win over hearts and minds. The honest assessment is that we do not hold many cards and face a negotiating asymmetry of 27 versus one, set against a ticking two-year clock without an easily palatable fallback. Put starkly, we will need to buy our way or charm our way out of this situation. Fortunately, our surprisingly resilient economic position since the referendum provides us with some room for manoeuvre on the financial settlement, particularly if the amounts can be stretched out over time. It is also crucial to galvanise the good will among our European partners. In the words of Sir Simon Fraser, speaking at the Worshipful Company of World Traders last week, we will need to avoid “gratuitous political friction”. This is a time not for gifted amateurs but for serious and professional negotiators.

We might also need to draw upon the mediation skills of leaders and countries that enjoy the trust and respect of both the UK and the EU and can see the benefits of enduring non-economic co-operation across Europe. The voice of European businesses will also be important in focusing the minds of national Governments back on to the economics and not just politics. I suggest to the Government that this wider advocacy mission is not just for Ministers and that we should actively draw upon the expertise and Rolodex of the House of Lords in reaching out to parliamentarians and key influencers across Europe.

In conclusion, to achieve a successful, smooth and smart Brexit and secure the most advantageous trade agreement going forward, we will need to have our cheque book ready and, above all, make efforts to win friends and influence people as never before.

Photo of Lord Jay of Ewelme Lord Jay of Ewelme Crossbench 6:15 pm, 2nd March 2017

My Lords, it is a great pleasure to follow the noble Lord, Lord Gadhia, with all his experience of the City and his extremely wise words. As a public sector Cross-Bencher, I feel rather uncomfortable being sandwiched between the noble Lords, Lord Gadhia and Lord Green—but I will do my best.

I very much welcome the report and offer my congratulations to the noble Lord, Lord Whitty, the noble Baroness, Lady Verma, and their committees for producing it. It is good to have the discussion now about the future relationship between the UK and the EU because, rather like the noble Lord, Lord Horam, I have some suspicion that when Article 50 is triggered, the attention will switch, at least for a while, towards the rather more exciting prospect of the short-term withdrawal negotiations and, in particular, will focus on the much-heralded figure of €60 billion that may or may not come forward from the Commission. None the less, I hope that those negotiations will progress and that attention will turn again, both in public and during the negotiations, to the longer-term relationship between the UK and the EU.

Like others who have spoken this evening, it seems clear to me—and it is quite clear from what the Government have said—that remaining in the single market is not an option that will be open to us. The Government’s commitment to having at least some control over the levels of migration from the EU and their concern to avoid ECJ jurisdiction will rule that out. I regret that but it is a fact. I had hoped that they would keep open the option of staying in the customs union. That would have guaranteed tariff-free movement of goods, if not of services, and also would have eased the difficulty of managing the border between Northern Ireland and the Republic of Ireland. Although I am very glad that the latter issue is mentioned in the Government’s response to the report, I still feel that it is not given anything like enough attention. I hope that it will get more attention in future. However, the Government have not kept the customs union option open—or at least they seem not to have done so.

I am not quite sure what the Government are now hoping to achieve in their trading relationships with the EU and the rest of the world. In her speech on 17 January the Prime Minister said:

“We want to get out into the wider world, to trade and do business all around the globe”.

That is an aspiration but I do not think it is a policy. It was slightly more fleshed out in the recent White Paper, but I hope that in her response to the debate the Minister will say a little more about the Government’s intentions as regards their relationship both with the EU and the rest of the world.

I will make three points in what time remains. First, if the Government do not succeed in reaching agreement on their negotiating objectives, they risk getting pushed back, as others have said, on to WTO terms. I have heard it argued that this would be no bad thing, and that it would provide business with certainty. Perhaps—but that is not the kind of certainty that business, and in particular the jobs that depend on business, needs. So I hope that the Minister can also tell us more about whether resort to WTO terms really is envisaged as a desirable or even plausible fallback if—as I hope is not the case—the negotiations do not succeed.

My second point concerns dispute resolution. The Government clearly do not like the ECJ and in particular its direct effect on UK law. But dislike of the ECJ does not mean that you can do away with dispute resolution. The key point is that virtually any international agreement, and certainly any trade agreement—again, as has been said in this debate—has to have some form of dispute resolution. The WTO has its own dispute resolution mechanism. The EU and the US, the US and China and the EU and China have resorted to it when necessary in the past. So will the UK, if and when it has trade agreements that lead to disagreement—as, inevitably, will happen.

I deliberately used the past tense when I said that the US had recourse to WTO dispute resolutions in the past, because I have seen, as I am sure have other noble Lords, reports in today’s press that the US may be thinking of not accepting WTO dispute resolutions in the future. That is a profoundly worrying development that would make our position outside the EU, if there were no effective dispute resolution within the WTO, even lonelier than I fear it will be when we leave the EU.

My final point is perhaps the most important. There sometimes seems to be an assumption behind the Government’s rhetoric that with one bound we will be free from the constraints of the EU and the single market—which, incidentally, as others have said, takes more than 40% of our exports—and shall be able to trade easily through new bilateral trade agreements with China, the US, India, Australia, Brazil and others. But those are all tough potential partners, with a clear sense of what is in their interests. They and other countries will negotiate what they want out of negotiations and not what we want. Such negotiations will be tough, protracted, complex and at times ugly—and it is no use pretending otherwise.

I do not favour another referendum on the EU. I would have wished the result of the last one to have been different, but I accept it. But I echo what the noble Baroness, Lady Armstrong, and others have said in this debate: that the road ahead, particularly for trade, will be hard and long and gritty.

Photo of Lord Green of Hurstpierpoint Lord Green of Hurstpierpoint Conservative 6:23 pm, 2nd March 2017

My Lords, as has already been recognised, since the report was published, events have moved on. The Government have set their course, aiming for a deep and comprehensive free trade agreement, a customs agreement with the EU and a range of FTAs with other markets. More generally, the Government have proclaimed an aspiration for Britain to become the standard bearer for open trade policy. This is to be the new global Britain.

There is much to be saluted in those aspirations, even by one such as myself who believes that we should have remained in the EU. Apart from anything else, there is a fundamental difference between this approach—the approach of the new Brexit Britain—and that of Trump’s protectionist version of America. We did not hear at any stage in the referendum campaign rhetoric about cheap Chinese imports, for example.

I want to make a few points, all briefly—not least because some of what I was going to say has already been covered. First, the deep and comprehensive free trade agreement and the customs agreement with the EU will now be critical as the centrepiece of the Government’s strategy. As has already been underscored, this is unprecedented. It will be more ambitious than the ambitious Canadian agreement, the South Korean agreement and the Ukraine agreement—which we looked at in our deliberations. It will be different, too, from the Turkish association agreement. In a sense, “more than all of these put together” is the mantra. At the end of the day, it will be something sui generis.

Of course, unprecedented does not mean impossible. In fact, it has often been argued—there is clearly an element of truth in this—that the starting conditions make an agreement easier to achieve than was the case with any of the others that I referred to. We start, after all, from a position of considerable harmonisation, certainly in the goods markets and increasingly in the services markets, too. So, technically, the achievement not of convergence, which already exists, but of the avoidance of divergence should be easier.

Politically, however, it will not be straightforward. As has already been mentioned, from the EU perspective this deal cannot be as good for the UK as the status quo. If it were, others might be tempted to say, as Philip Snowden is reported to have said in 1931 when Britain dropped off the gold standard, “I didn’t know you could do that”. It will also be difficult for Her Majesty’s Government because the dispute resolution process will almost certainly have to involve in some way the ECJ—certainly on the EU side, there is no way to avoid that.

My second point has been made by a number of other noble Lords: there is close to no chance of accomplishing all this in two years. The Canadian deal took somewhere between seven and 10 years; the Japanese discussion with the EU is going surprisingly well but it is already into its third or fourth year and clearly will not be completed any time soon.

The complexities are enormous. They are not just about the short-term distractions of the EU elections and the high priority that will undoubtedly be attached by the EU to the budgetary questions and by all of us to the acquired rights questions. All these mean that that the process will take some time. On top of that, the trade discussions with the EU are inevitably related to other trade discussions—this is true on both the UK side and the EU side. The existing EU FTAs may be questioned by their counterparts. The South Koreans and the Canadians, after all, both signed deals with a market that included Britain. Will they want to review those agreements in the event of their no longer getting access to the British market?

Then there is the question of new agreements that are in process of negotiation now—I have referred already to the Japanese agreement, which is the most important case. The noble Baroness, Lady Armstrong, mentioned the north-east and its high export propensity per head. Those exports are very largely of cars to the EU market. Therefore, I am sure that the noble Baroness would want to join me in asking the Minister whether the Department for International Trade has given careful thought to the impact of a successful conclusion of the EU-Japan deal on the UK-EU discussions.

Thirdly, there is the all-important question of Ireland. We debated this at great length earlier this week, but, unlike everything else in the Brexit discussions on trade and investment, this is not just about commerce and could not be treated as one item in a shopping basket for a negotiation where, inevitably, trade-offs and compromises get made. It is of course about the peace settlement, and if it went wrong a human tragedy could result. Ministers have confirmed on a number of occasions that they attach a very high priority to the maintenance of a seamless, open, frictionless border on the island of Ireland. In responding to this debate, could the Minister confirm that this means that there are no circumstances in which we would sacrifice that question on the altar of a very good free trade arrangement in other respects?

Fourthly, the phased period of implementation in which the UK, EU and member states prepare for the new arrangements—to quote from the Government’s response to our report—has been commented on by a number of speakers. What is in a name? We might well ask. A rose is just as prickly by any other name. The fact is that this will take a considerable number of years beyond the two years of the Article 50 discussions. I wonder, in the company of a number of other speakers, whether the Government would not be better to say this outright and set a period— not an unlimited period but one, for example, of five years—during which there will be a transitional agreement and, knowing the direction of travel towards an eventual deep and comprehensive free trade agreement, discussions can take place in the orderly manner and over the timeframe they will need and necessarily take.

Finally, I will raise a broader and deeper issue. Global Britain will want to think of itself as a nation of traders. Indeed, we have heard that expression. We want to think of ourselves as outward looking and entrepreneurial, ready to take on the wider world. But, as of now, we are more what Napoleon said we were: a nation of shopkeepers. We have too few companies engaged in exports. We have market shares in some of the fastest-growing markets in the world that are behind those not only of Germany but of France and Italy. The growth statistics this week produced by the Office for National Statistics show how unbalanced the current growth pattern is in this country. We have a yawning trade and current account deficit, which has a long history. We have an import penetration problem such that the devaluation of sterling is blunted and tends to translate all too quickly into higher rates of inflation. Rhetoric will not change this and neither will monetary policy and fiscal rectitude alone.

We need to face up to one of the most basic lessons of the Brexit vote. Britain has lived for half a century with not only an increasingly unbalanced economy but an increasingly unequal society. These two trends are related. We have failed over decades to invest properly in the country’s societal future, above all through the education and training needed to enhance life chances and social mobility. Changes in the nature and structure of the economy in the latter decades of the last century played their part in this, and the radical change in technology that is likely to transform the economy over the next few decades will exacerbate the challenge.

The last generation saw the British economy become more dominated by services than that of any other major European country. Of course, others have seen manufacturing decline as a percentage of national output in the face of newly globalised competition—but none as steeply as Britain. As the share of manufacturing shrank from the 1970s onwards, apprenticeship training—the principal route into the good, intermediate-skilled jobs that are the backbone of any effective manufacturing industry—was allowed to wither on the vine.

The so-called hourglass economy has not done away with the need for intermediate skills. In fact, we are gradually building up a significant skills mismatch. An unbalanced and unfair system of preparation for adult working life has produced plenty of low-skilled workers and not enough intermediate-skilled ones, such that by 2022 on present trends, 9 million low-skilled workers could be chasing 4 million jobs while there will be a shortage of 3 million workers needed to fill some 15 million higher-skilled roles. In an underinvested economy that has seen no material growth in labour productivity, economic growth overall has failed to increase average prosperity and has been possible at all only because skills gaps have been plugged through immigration.

This is not sustainable and the social implications of these imbalances are certainly unacceptable. This is a complex problem with deep roots, both societal and economic. The Social Mobility Commission’s State of the Nation 2016 report documents in sobering detail how a disadvantaged start in life feeds through to weaker average educational performance from the earliest years onwards; less access to tertiary education; and less support for vocational development routes into adult working life and into a labour market where the supply/demand equation is increasingly weighted against the low-skilled.

Does this all seem irrelevant to the question of trade? I hope not, because it is actually fundamental to our long-term ability to succeed in trade. In other words, there is a lot more to the strategy for the successful development of the new global Britain in its trade position vis-à-vis the rest of the world than trade deals. Surely a major priority has to be a long-term, properly resourced skills education strategy. It is not easy. We have failed over several decades to do this well. We need—dare I say it?—to be prepared to learn from some of our European friends who do this so much better than we have done.

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour 6:35 pm, 2nd March 2017

My Lords, I very much welcome the report and the debate that we are having. Indeed, I very much welcome the thrust of the remarks just made by the noble Lord, Lord Green of Hurstpierpoint. When we are compared with the Germans, the area of training, educational standards and so on is one excellent feature of the closer European integration. The concept of benchmarking best practice in Europe, our nearest neighbours, is a huge factor in what has been the relative success story—let us say it—of our membership of the European Union since 1973, when we joined the EEC.

My noble friend Lord Whitty said at the start that he was a little sorry that the report had not been debated before the two days of Committee this week. The plus side is that we who sat through most of those two days—Monday and yesterday—can add some reflections arising from that debate, which are germane to where we are today. I moved the first amendment on Monday, to do with retaining our membership of the European Economic Area, at least to get it on to the map so that everyone understands we are a member of the European Economic Area by virtue of our membership of the EU, and that membership would be retained if we were a member of the other pillar of the EEAEFTA—despite leaving the EU, as was required by the result of the referendum last June.

One thing I am looking for—perhaps in vain—in the next few months is for the public debate to become much more ruthlessly realistic about the options. I hope my noble friend Lord Whitty does not mind me describing him as ruthlessly realistic in chairing the committee but it is what we need. We still have too much “have your cake and eat it”, Alice in Wonderland stuff. When we go back to the referendum question, what people voted for was totally obscure. As all we all know, there was a melange of things in people’s minds. But the idea came up yesterday: “We voted for maximum access to the European single market, not membership of it”. “Oh, so that was on the ballot paper, was it?”—et cetera. This ruthless realism is absolutely vital to avoid what Field Marshal Montgomery would have called a dog’s breakfast at the end of it. I do not know whether breakfast rhymes with Brexit but it will have to do for the moment.

It is also rather irresponsible to have an imbalance in the debate, which the Government somehow have to answer for. On the one hand, things are ruled out in this speech or that: you see a bridge and you blow it up; it is ruled out. But nothing is ruled in. The number of things that are still there to be looked at seem to get less and less until you are left with only one. That one will be the same as all the others: it will have down sides as well as up sides. In the spirit of ruthless realism, let us acknowledge that all the options have down sides as well as up sides. We have to evaluate them all against the background of that recognition.

Let us take account, for example, of some excellent points made by my noble friend Lord Mandelson. We shall hear from my noble friend Lord Mendelsohn in a minute; I always pause to make sure I have not got the two pronunciations mixed up. My noble friend Lord Mandelson made an interesting speech on Monday, saying that the sort of agreement the Government now think they can get would give us far less economic bang for our buck than the arrangements we have at the moment. Let us reduce all this to one slogan. We are in the business of maximising our world market share. The central question is: what, in the short, medium and long term, maximises our world market share? That is certainly how the Germans and Japanese see it. One cannot quite summarise how the Americans see it at the moment because it is very hard to make the thing add up.

There is, in the way the debate is becoming rather abstract, a denial of what my noble friend also said in an interesting phrase: in Europe, we are talking about not just a vast trading area but a vast factory floor. As a former trade union official, in designing the framework of agreements for multinational companies on a whole string of things, which is the way much of the world now operates—there are not as many strong trade union agreements as we would like—conceptually it is clear that you do not want a race to the bottom. You want some minimum standards and even long-term training investment. You cannot just have people poaching each other’s labour. This is what happens if you do not have any rules.

Talking about rules, I mention the metaphor of a level playing field. There seems to be a belief that we want a level playing field, while at the same time we do not want a referee. I thought the metaphor of a level playing field referred to football, where the levelness of the playing field was so that, even though you have half-time and you move from one end to another, generally speaking you are kicking the ball along an even, horizontal patch, and you have a referee. As we know, there are offside rules and some disputed decisions, but you do not normally shoot the referee—much as Everton supporters think you ought to be able to. We have decided that there is a world where we can have free trade and it will all be hunky-dory, but no referee—unless the implication is that we are happy to have a referee as long as he or she is not a foreigner, certainly as long as he is not a European foreigner, or as long as he is not specifically called the European Court of Justice. EFTA has a European court of arbitration, so is it just about the name, or are people still irrational when it comes to how you have rules about trade and investment in Europe? I would be very glad if the Government could give a lead in making sure that their succession of Green Papers, White Papers or whatever are ruthlessly realistic in having a totally objective view and transparently evaluate and publish how the national interest, in terms of trade and investment and our world market share, would be met by the different options on the table.

In yesterday’s debate on all the Brits living in Spain and all the Spanish et cetera living here, we heard a very interesting vignette about reciprocity which bears on all of this. It began with an acknowledgment that this was inherently a relationship of reciprocity, but that we could give a lead by saying that we would make the first move ourselves. But that notion assumes that we can have everything that suits us and ignores the fact that there are 27 member states over there against our interests. All of them simply want to recognise that the Brits want this interest to be reflected. But there has to be reciprocity; we of course need reciprocal rules. I do not think you can simply say that this was not what people voted for. Retrospectively, we can deliver only something which is deliverable, whatever people thought they were voting for, and I repeat that I do not believe that they were voting, in any conscious sense, to say, for example, “We would like to have access to the single market but not be members of it”.

I hope the committee will go on and do further work, ruthlessly identifying the options and holding the Government’s feet to the fire to make sure they give us a running commentary. I do not buy this idea that there should be “no running commentary”. We are parliamentarians, and it is our job not only to have a running commentary ourselves but to demand that the Government engage with us in so doing.

Photo of Lord Aberdare Lord Aberdare Crossbench 6:48 pm, 2nd March 2017

My Lords, it is a privilege and a pleasure to serve on the European Union Internal Market Sub-Committee under the able and affable chairmanship of the noble Lord, Lord Whitty. The report we are debating today gave us the welcome opportunity to work in tandem with the EU External Affairs Sub-Committee, chaired by the noble Baroness, Lady Verma. This proved both enlightening and somewhat daunting, and I am grateful to both chairs as well as to the clerks and other staff—and of course to my committee colleagues and other noble Lords speaking in this debate—for their contribution, at least to the enlightenment part.

The report provides an essentially factual analysis of available options, and its findings have already been outlined very clearly and succinctly by other noble Lords, so I will try just to highlight some issues that strike me as significant. The Government have made clear that their aim is to achieve an ambitious, comprehensive and bespoke free trade agreement with the EU, together with a new customs agreement. The Prime Minister has stated that no deal is better than a bad deal. So what would a good deal look like? What criteria will the Government use to determine whether the outcome of the negotiations is good enough for the UK to sign up to it?

I recently received a helpful document entitled A Successful Brexit: Four Economic Tests from a body called The UK in a Changing Europe, based at King’s College London. This sets out a series of tests under four headings. Will Brexit make us better off economically? Will Brexit make Britain fairer? Will Brexit make the UK a more or less open economy and society? Will Brexit increase the democratic control of the British people over their own destiny? These tests make a lot of sense to me but it is of course down to the Government to determine the actual criteria to be used. So I ask the Minister, first, how do the Government plan to define the criteria against which the merits of a deal will be assessed? Secondly, how will these criteria be tested to determine their acceptability to business and other affected interests, Parliament, the devolved nations and, of course, the electorate? Thirdly, what sort of process will the Government conduct to evaluate the terms of a deal against the criteria and to explain the conclusions that they reach? Finally, what are the options being considered if a deal is found not to be acceptable against those criteria?

My next point relates to the negotiating process and the engagement in it of business and other parties affected by the outcome. When I worked on trade issues for IBM in Washington in the early 1980s, in the lead-up to the GATT Uruguay round, I was struck by the wide range of mechanisms used by the US Administration to involve business and other groups in establishing negotiating objectives and priorities, and indeed to encourage such groups to do their own horse-trading among themselves, so as to present an agreed common position—often involving a considerable degree of compromise—to the US Government. IBM had its own trade team and was an active member of organisations such as the American Electronics Association, the National Association of Manufacturers, the US Chamber of Commerce, and other bodies concerned with specific trade-related issues, such as services, intellectual property or overseas investment. Its chairman and chief executive was one of a number of chief execs on a business round-table task force, which provided direct support to the US trade representative.

To me, this points to a responsibility for both government and business in the UK to set up appropriate mechanisms to enable agreed common messages and objectives to be developed and fed into government and the negotiations. What can the Minister tell us about plans to ensure that the Government have access to clear, reliable, broadly agreed input and advice from business, available at short notice, if required? We have been encouraged that most of the businesses that the committee has heard from have been positive about the level of engagement that they have so far had with the Government and Ministers. At the moment, of course, the Government are mainly in listening mode, seeking to understand the range of issues raised by Brexit and how they affect businesses across the 50-plus sectors they are analysing. The real test will come when they need to make trade-offs between different sectors and interests or to determine priorities between competing options.

My third point is about planning for situations that may arise in the negotiating process. I will address this by posing some “what if” questions. What if, even with good will on both sides, a deal takes longer than two years to finalise? Given the challenge of reaching an ambitious and comprehensive bespoke FTA—and indeed in the light of the time needed to agree existing EU FTAs, such as that with Canada—the committee felt that it would not be possible to complete a deal within two years, even though it may be easier to do so as an existing member, already fully complying with EU rules and regulations, than for a country outside the Union. It is surely essential to have a plan B in place. Article 50 allows the possibility of extending the negotiating period beyond two years, but only if all 27 other member states agree. Can the Minister indicate what thought the Government are giving to whether and how this might be achieved?

What if a deal is in prospect but needs time to be brought fully into effect? Our report argues that:

“A transitional agreement will almost certainly be necessary”.

What thinking are the Government doing about how such a transitional arrangement might work and what it might involve—such as a temporary continuation of the UK’s membership of the EU customs union, which is indeed mentioned as a possibility in the Government’s response to the report? Other noble Lords have raised the question of what the difference is between a transitional arrangement and a phased process of implementation.

What if, at the end of the day, no deal proves possible because the various demands and interests of the other 27 countries prove irreconcilable with the goals of the UK? Do we just fall back on WTO rules—which in itself may not be wholly straightforward and is widely seen as highly undesirable?

My final question is: what can the Minister say about possible parameters for dispute resolution mechanisms? Enforcement is one of the strengths of the EU single market. Legal action can be taken both by companies—even relatively small ones—and by individuals in their own national courts. There are also less costly mechanisms for resolving disputes, such as SOLVIT.

None of the example dispute resolution mechanisms in the annexe to the Brexit White Paper comes close to matching the EU arrangements. One possibility that is not mentioned at all, perhaps for obvious reasons, is whether the EU Court of Justice might have a role to play in a new bespoke dispute resolution system, without, of course, having primacy over the counterpart UK court or panel.

In conclusion, this report raises some crucial issues for the conduct of the Brexit strategy and negotiations. I do not for a moment expect all the answers from the Minister today, but I believe that the Government will need to share considerably more of their thinking on such issues than they have been willing to do to date if they are to end up with an outcome that is clearly recognised as a good deal. That means a deal that reflects the needs of business and other interests in a balanced way and that is achievable in the time available, even if that time has to be extended beyond two years. I hope the Minister can give some reassurance about how the Government plan to tackle this challenge and how optimism—as another noble Lord suggested—can be matched by realism.

Photo of Lord Mawson Lord Mawson Crossbench 6:56 pm, 2nd March 2017

My Lords, the findings of this excellent report are in the document before the House. Having listened to evidence of companies on the cutting edge of our economy, I wanted to take this opportunity to talk about what our future as a country might need to look like if we are to trade, post the decision of 23 June last year, in a changing world and to truly optimise the development of products and services that we can sell not just to Europe but across the world.

Sitting on House committees sometimes feels for me a little schizophrenic, because I am conscious that as a working Peer, I live my life nowadays in two very different worlds which gloriously collide in this place. This, of course, is one of the reasons why the House of Lords is such a treasure and needs to be preserved at all costs in a modern economy, but it can also be a little painful when you find yourself riding two horses at the same time.

I have spent most of my working life growing and developing modern entrepreneurial environments that generate innovation both in public services and in wider products and services, that do not sit neatly in traditional government silos. I am an innovator by nature and know that new ideas and ways of working do not come out of the clouds, but develop when very different skills and experiences collide. New products and services in the modern world will now come from between the siloed worlds of government and business, and not from within them. In this internet age this is increasingly so.

We have heard in the evidence that sits behind this report that modern digital entrepreneurial environments generating these new products and services that we must now sell across the world, come about through networks of individuals engaging together across different disciplines, from clusters where different skills and businesses sit cheek by jowl. The modern entrepreneurial environment is not about policies, strategies and reports so favoured by civil servants; it is all about people and relationships and learning through hands-on experience. The traditional governmental environment is increasingly no longer fit for purpose in a very fast-moving business environment, within which SMEs certainly now live, and are a rapidly expanding sector of our economy. This is as true here as it is for our partners across Europe.

I am responsible today for the development of 10 entrepreneurial campuses in 10 towns and cities in the north of England, based on 33 years of work in east London, and I declare my interests. My 10 clusters in the north are bringing together very entrepreneurial business people, leaders in the public sector, local residents and emerging business and social entrepreneurs. They are generating lateral, out-of-the-box relationships, and it is fascinating to watch the speed with which these organisms are growing if the conditions are right. In time, I can see already lots of opportunities for new, cross-cutting products and services that we could export across the world if these young flowers are watered and given time to blossom.

Brexit is a real opportunity for new thinking about the opportunities now presenting themselves in a digitised world that exists outside traditional silos. To grasp it, we all need a real change of mindset, both in Europe and in this country, if we are to trade with the world. I suspect we have more in common than we realise. The clues in this new world are in the micro and not the macro. They are not necessarily in large corporate businesses and institutions. Small is beautiful in this new world.

Last week, a former finance director of one of our most established banks came to see me—a young man who had decided to resign from the security of his position. Why? Because he was fed up with the outdated politics that went with the job, with the endless treacle and bureaucracy he had to drown in. He wanted a more fulfilling life: to innovate in financial services and use his many skills and knowledge to rethink the industry. He now has a £50 million fund and within one hour, with no forms or papers, we were agreeing practical work that we could start to do together on the back of a handshake.

Another of our very large government-controlled banks that I have been dealing with recently, which will remain nameless, has forced me into endless meetings in silos and red tape, with no joined-up thinking. The middle management and those at the front edge of this bank were great; they wanted freeing up to engage with me and my colleagues. Those sitting in the boardroom were apparently unaware of and uninterested in all this entrepreneurial behaviour below them, which did not fit in with their policies. I worry that that bank will be out of business in 20 years’ time if it does not focus more on this entrepreneurial activity at the leading edge of the business. This bank felt more siloed and bureaucratic then anything I have experienced in our universities or the NHS, and that is saying something.

Two weeks ago, I attended an NHS awards ceremony in Liverpool to celebrate the new health products and services being generated by some of our finest minds. We saw great examples of products and innovations generated out of the real-life experience of our northern hospitals. But when you dug below the surface, you could hear the frustration of a young generation of entrepreneurs and innovators in our health world who were swimming through treacle with their hands tied behind their backs. We are asking them to dance with lead weights on their shoulders. There was also a sense of despair and resignation about the NHS culture from the senior managers present, who were looking forward to retirement.

I read recently in the Financial Times that in the City, a lot of business analysts are losing their jobs because it has finally dawned on people that no one was actually reading the reports they produced. The emperor has no clothes. Instead, businesses are developing real-time dashboards to give them information about what is happening to their businesses right now, not three or 12 months ago. I found myself wondering whether central government, local authorities or NHS trusts might take this approach. We might develop some world-beating technology to sell around the world. I am not exactly holding out hope because it is rare to find examples of real learning organisations in the statutory sector. Sadly, I feel that may be true for some large businesses and some charities; it may also be true in a lot of Europe. But unless we can make this sort of change, what will our world standing be in the post-Brexit world?

One assumption that I find fascinating in the Brexit debate is the idea that British bureaucracy, and rule from Westminster rather than Brussels, will inherently or automatically be more imaginative—more responsive, more forward-looking—as suggested by these examples. If we do not manage this, I fear that future generations will scratch their heads as to why people thought Brexit would lead to real and positive change.

I am sorry that sometimes at our meetings, I sound a little crusty and difficult. I am only trying to ensure that the voices and experiences of this next generation of entrepreneurs and innovators I have described is heard and experienced. Our future economy and trade, post-Brexit, depends upon them. The noble Lord, Lord Howell, reminded us that the great repeal Bill is a real opportunity to help them get hold of our regulatory and bureaucratic world and bend it in favour of that new generation, for the reasons that the noble Lord, Lord Green, has just articulated to us.

I think that the noble Lord, Lord Howell, is right: there is an opportunity to remove lots of treacle and create more flexibility to boost our trade, products and services. But has anyone seen this important opportunity marching up this new road? I say to the noble Lord, Lord Whitty, that perhaps our committee should look at that. Perhaps we should try to get into a different kind of conversation about this emerging entrepreneurial world, focused on innovation, that affects both us and our partners in Europe. It affects all of our trading, and will do into the future.

I suspect that we have more in common in this new trading world than we may think as we negotiate a new trade treaty. It may be that all of us, in this country and Europe, need to start to think a little more outside the box.

Photo of Lord Lansley Lord Lansley Conservative 7:05 pm, 2nd March 2017

My Lords, I am delighted to have the opportunity to contribute. I will attempt to be as brief as I possibly can. I am helped not least by the fact that our two chairs introduced the debate and distilled the report with such clarity. I am further helped not least by my noble friends Lord Gadhia and Lord Green of Hurstpierpoint, who respectively, in brilliant forensic fashion, talked about both the substance of the negotiations and some of the broader challenges for the United Kingdom in achieving success in global free trade. It is not enough simply to open markets; one has to win in markets.

I follow up on one issue to which my noble friend Lady Verma referred, and that is the question of the future customs arrangement. We talked about the customs union in our report, and I remember that when we were preparing it, we said that we knew that one of the first issues that the Government will have to decide is whether they are in or out of the customs union. Indeed, they have decided to be out of the customs union. When the Prime Minister made her speech on 17 January and said that we are out of the customs union because we cannot agree with the common commercial policy or a common external tariff, I may not have been alone in wondering what our customs arrangement will look like in future.

My noble friend Lord Bridges touched on this on Monday evening and talked about how the US and Canada are able to achieve sophisticated supply-chain activity across borders where they do not have a customs union. He also reminded us, as other Ministers have rightly done, that digitalisation of documentation for customs purposes has proceeded apace, not least in the past decade. The United Kingdom is probably best in class for customs documentation by digital means. My noble friend said that,

“99% of customs declarations are received electronically and 96% are cleared in seconds”.—[Official Report, 27/2/17; col. 669.]

He also, interestingly, referred to “authorised economic operator” status, and said that 60% of UK imports and 74% of UK exports are accounted for by UK companies with AEO status. We are starting to see a bit, therefore, what the Government might have in mind and what frictionless trade across borders may look like.

The central, prior issue is achieving a zero-tariff relationship with the European Union, but let me for the moment say that that is clearly part of the negotiations. Let us assume that that can be achieved—it may not be and, if it is not, serious inherent problems emerge. Leaving that on one side, the customs and border relationship none the less involves some pretty serious issues. There is reconciling all this transfer of data electronically with the physical transfer of goods. There is the business of understanding how rules of origin will apply in the supply chain and certification to comply with them.

There is the business of dealing with anti-dumping. I remember nearly 40 years ago being responsible for the generalised scheme of preferences for chemicals in the Department of Trade and Industry, as then was. If we are to align ourselves with the European Union long-term, it will be looking for us to have a generalised scheme of preferences. In general, it will not want any external aspect of its tariff—be it anti-dumping, tariff impositions or quantitative restrictions—to be circumvented by those who are able to bring their goods into the United Kingdom and re-export them to the rest of the EU. We can see this whole string of potential difficulties which could, of course, lead to cost, delay, relative lack of competitiveness and bottlenecks at borders.

At the same time, I want to ask Ministers whether they will do one thing for me. Will they tell us more about the possibilities for dealing with this, and involve us directly in thinking about this? It is not part of the negotiations. I do not think it would prejudice the negotiations in any respect for us to be working hard now to try to put in place the practical mechanisms for facilitating trade and reducing the cost and delay involved in trade across borders for the longer term. We are going to have a customs Bill, a piece of customs legislation. We should have an opportunity to have the Government come forward with their proposals at an early and draft stage to follow up the External Affairs Committee’s report with pre-legislative scrutiny in order to get the Bill right and have a better chance of having our legal framework, as well as our administrative framework, in place before the two years, or a further transitional period, are completed.

What does it look like? We know that the current customs declaration system—the so-called CHIEF, or Customs Handling of Import and Export Freight, system—has about 90 million transactions. After Brexit, the number could rise fourfold. As it happens, there is going to be a new customs declaration system in 2019. It has to be a project that is configured for, and capable of, handling that dramatic increase in the potential complexity and number of those customs declarations.

I think there are only a few hundred authorised economic operators in this country because to get to be an AEO is costly and difficult. We need some additional mechanism by which small and medium-sized enterprises can acquire some of the trusted status which goes along with AEO status for security and customs simplification purposes so that they can access the same kind of cross-border mechanisms. There is technology which allows us to track vehicles, goods and shipments in ways that mean that we do not necessarily have to stop people at borders, and in so far as they are stopped at borders, it will be on a risk-based assessment, rather than having long queues with everybody having to be checked through.

As a former—some 30 years ago—deputy director-general of the British Chambers of Commerce, I know that all over the world chambers of commerce help to make trade work. In this country, we have chambers which have a long history of certification of origin and trade facilitation. We have hundreds of trade facilitation experts—they are not international trade negotiators—in chambers of commerce. In future, we need to have new customs arrangements and, through designing a UK customs code to replace the EU customs code, an opportunity to improve the circumstances for businesses in this country, reduce the cost of compliance and make trade easier for small businesses in particular. I urge Minister to work with us in the way I have described and to work with my friends in the chambers of commerce movement to try to put that kind of trade facilitation in place for small businesses for the future.

Photo of Lord Liddle Lord Liddle Labour 7:13 pm, 2nd March 2017

My Lords, I rise somewhat hesitantly and, I hope, briefly, to add to a remarkable cross-party consensus of gloom and apprehension about the prospects for a successful outcome of the Government’s wish to conclude an ambitious and comprehensive trade agreement with what we are no longer allowed to call our “partners”. I noticed that the noble Lord, Lord Bridges, yesterday was calling them “counterparts”, which is an interesting shift. Our chances of concluding the agreement successfully are not very good.

It has been a privilege to serve on the committee that produced the report, which provides a very balanced assessment. I have personally learned a lot. I trade on the fact that I know a bit about Europe, but I certainly learned an awful lot in the process of these hearings. It is an excellent report, for which we owe an awful lot to the clerks, officers and witnesses, very ably chaired by the noble Lord, Lord Whitty, on the Internal Market Sub-Committee, to which I am very grateful.

What is true of the report is that its balanced assessment contrasts with the kind of bluster and assertion of the Government’s position, which I find worrying. Where are the Government getting it wrong? The starting point is the self-deluding proposition that we are in a very strong and good position in these negotiations. I do not think that we are. One of the comments to justify this confidence is made in the response to recommendation 18 in our report, where they say that we are starting from a very different position to other countries looking to agree free trade agreements with the EU because, unlike most negotiations, these talks will not be about bringing two divergent systems together—they will be about managing the continued co-operation of the UK and the EU. They say that they are confident that it is in everyone’s interests to arrive at a mutually beneficial deal. That is false optimism. If you think about it, maybe the rules are at present both the same, because we are all members of the EU as it is, but will they automatically in future stay the same and will we commit to keep our rules in line with European rules to have access to those markets?

Elsewhere the Government say in response to our report that equivalence will of course be an important part of any discussion on our future trading relationship, but we are committed to taking control of our own laws as the people of the United Kingdom have demanded that we must. So will the Government seek to maintain equivalence in future or are they going to exercise sovereignty in determining their own rules affecting our trading position? A very obvious example of this is coming up right now, with the key sector of automobiles—very important in terms of our manufactured exports. We are clearly going to have to devise a lot of rules to deal with the coming of autonomous vehicles; that is happening in the next 10 years. Will we follow the Brussels rules to guarantee access for our manufacturers, or will we have a completely independent approach and say, “We have a right to determine our own rules on safety and everything else”—in which case we will create tremendous trade problems for ourselves? I do not think that the Government are giving a clear answer on that at all.

Another problem is that I do not think that the negotiating position that we are in is very strong. We have much more to lose from a breakdown of these talks than do the EU 27. Our trade with the EU is a much bigger proportion of our GDP than it is of the GDP of the EU 27 and the Government do not seem to understand that point. The timetable that the Government have set themselves, without willingness to contemplate a proper transition phase, is truly frightening, because we are not actually talking about two years. As I see it, in practice, we are talking about the period between the end of the negotiations for the new German coalition, which is when we will see a German Government who are able to make political compromises and will probably be in November or December this year, and the autumn of the following year, when the draft agreements would have to start being put to the European Parliament if they are going to be agreed by March 2019. This is a frighteningly short timetable for issues of huge complexity. If the talks break down, the cost to us will be enormous. There are some sectors where we do not even have the WTO to fall back on.

We heard yesterday in the Article 50 debate about Euratom. The nuclear industry is one of the strategic ambitions in our industrial strategy White Paper yet, if we do not reach agreement with the EU, Euratom comes to an end and there can be no transport of nuclear fuels or nuclear materials with other countries because there is no regulatory regime to cover them. The same is true of aviation and broadcasting. There is a terrible cliff edge for a lot of key sectors of the British economy. If it was not so tragic I would laugh. It is a bit like someone who has been a member of the golf club for 44 years and decides, “Oh, no, I am not going to be a member any more, but I still want to play on the course every day. However, I am not prepared to pay a membership fee for this privilege, I want to determine rules of my own as to who works on this course, because I am not having your free movement rule, and I also claim the right to rewrite the rules to suit myself because I insist that I have the national sovereignty to do so”. This is ludicrous. This is not a sensible way of behaving.

If you are going to leave a club but you want to stay in it, you have to make lots of adjustments to make that possible. I hope that this whole experience does not turn out badly, but I fear that it will and I fear for the country.

Photo of Lord Risby Lord Risby Conservative 7:23 pm, 2nd March 2017

My Lords, it is always worthwhile listening to the noble Lord: he asked one or two very pertinent questions about the future situation of our mutual relationship. It gives me great pleasure to thank the noble Lord, Lord Whitty, for introducing this debate so well and for chairing the proceedings of his committee, but most particularly I want to thank my noble friend Lady Verma, who also made such a good contribution and chaired our proceedings so well. I add my appreciation for the staff who did such a brilliant job in pulling all this together; they really are the unsung heroes of the situation.

Since the report’s publication, as has been indicated, we now have a much clearer view of the Government’s intent, but the details of our pursuit of a free trade agreement are certainly not yet at hand. This is our dilemma in the discussion this evening. The possibility also exists, as we have discussed, of our just having to deal with the WTO, if the whole process fails. Indeed, we do not know very much more than that at this point. I should therefore like to focus on some elements of the topography of trade post our formal departure, including, of course, non-tariff barriers. While we will initially be incorporating EU legislation into our own legislation, the challenge thereafter is how we manage the inevitable regulatory and other changes as the EU itself evolves.

As we have often heard, supply chains are uppermost in business’s mind. We could, in theory, see tariffs levied at different production levels across borders several times, with all the difficulties that that brings. While there appears to be a template offered by NAFTA, particularly between the USA and Canada, with simplified customs procedures, the issue of a pan-European supply chain is a hugely significant factor to manufacturers, most notably in the successful automotive sector. Both the supply chain and regulations on quality assurance are fundamentally important as we seek a new trade agreement with both the EU and others. We naturally would favour preferential rules of origin, and such rules apply currently, but I wonder whether my noble friend the Minister could expand further on how possible preferential rates of origin might apply as we leave the currently structured customs union, as presumably there would still be an issue of more burdensome administrative checks to be undertaken.

Regrettably, the UK traditionally suffers a considerable trade deficit. What is left of our manufacturing industry is modern, productive and in many instances a great success story, for example in our car industry, although it is mostly foreign-owned. So what every Government have had to do, for decades, is continuously try to attract foreign direct investment to fill the trade-balance void. Successive UK Governments have sought to minimise any disincentives to the purchase of British assets, and this has broadly been a success. Traditionally, we have remained the single most favoured European investment destination. But of course, as we have heard, access to the single market is at least a substantial part of the reason why this investment comes in in the first place, to avoid not only tariff disincentives but potential non-tariff barriers as well. Concluding an FTA is therefore—for all the reasons so perfectly and thoughtfully put by your Lordships this evening—crucial for our continuing survival.

Our report relates to the EU, of course, but we need to address the impact on other markets as well. For example, in two key markets, Japan and China, the demand for high standards is increasingly marked. We are currently signed up to the EU, and that is one thing, but a common EU-wide regulatory system is also both efficacious and avoids higher administration costs. Consider the case of the pharmaceutical industry. The quality of our pharmaceutical companies is bound to be put under a spotlight during these negotiations. The quality of these companies—often ultimately owned by non-British enterprises—as well as food and beverage suppliers, is bound to be tested. While we may start with the assurance that common regulation and standards provides, our export destination countries need to understand how our regulatory and therefore quality system will prevail post Brexit. While we know that the EU-Korea and EU-Switzerland agreements provide useful templates for mutual recognition and certification, this is going to be an increasing challenge as living standards improve in our key export markets, and as we seek to create new business agreements with those countries which enjoy a trade agreement with the EU at present.

In a recent speech my noble friend Lord Hill reminded us that there are 27 other countries now directly or indirectly engaged in our negotiation process—with all the potential pitfalls, as we saw in the Wallonia problem in the EU-Canada agreement. But it is interesting to note, on a rather more optimistic note, that the European Commission has just published a working paper on equivalence in financial services which at least accepts the need for compliance in international standards in tax and money laundering, as well as potential reciprocal trading rights with third countries. This is incredibly important for our financial services industry, and I hope that this sort of realism will prevail during our direct negotiations with the European Commission over the broad range of goods and services, rather than what my noble friend Lord Horam described as a fist to the face. Therefore it goes without saying—I emphasise this—in the language we deploy, a prosperous EU is completely in our own national interest, and we have to go on saying that.

My noble friend Lady Verma mentioned the complexities of the agricultural sector, for example, in any negotiations. I ask noble Lords for forbearance in mentioning one rather personal instance of how deeply our current agreements reach within the EU. I declare an interest as a government-appointed director of the Horserace Betting Levy Board and as the former Member of Parliament for Newmarket. Freedom of movement usually implies human beings, but I want to bring an equine dimension to this discussion. A tripartite agreement between the UK, France and Ireland currently allows thoroughbred horses to travel freely between the three countries for race meetings. Under an EU directive, horses need only a simple passport arrangement, with no customs documentation or veterinary export health certificate. I can only hope that a frictionless trade agreement will be extended to this valued part of British life, but it simply illustrates how far we are embedded in the totality of EU architecture. Therefore, I hope that the next two years will bear fruit; but it will be a challenge. I make a plea to the Minister to communicate this as appropriate.

It is certainly gratifying, as we have heard, that skilled individuals are now being deployed in our negotiations to forge new trade relationships with the EU. However, may I highlight how, with some notable exceptions, our embassies are underresourced and insufficiently manned, compared with our soon-to-be rival neighbours? As one of the Prime Minister’s trade envoys, I see how actively EU countries—particularly currently, because they sense an opportunity—are hard at work in a number of promising export destinations. It is a matter of the utmost concern to me and others that, while some embassies have liberal funds specifically for social or political projects, their ability to promote trade is wholly inadequate. If our embassies are to be part of developing our post-Brexit strategy, as promised, the ludicrous resources available to them need to be dealt with with the utmost speed. Any other trade envoy would tell your Lordships exactly the same thing. We can only hope that a free trade agreement can be secured to avoid the additional burden that WTO tariffs imply. How necessary it could well be to secure transitional arrangements we all accept, to give assurance to those foreign investors and businesses that are so important to our national economic life, survival and prosperity.

Photo of Baroness Randerson Baroness Randerson Liberal Democrat Lords Spokesperson (Transport) 7:32 pm, 2nd March 2017

My Lords, let me thank the chairs of both committees, the staff who have produced this excellent report with us and, indeed, the witnesses who prepared so carefully for evidence sessions. This has been an excellent debate. I have found myself in agreement with almost everything that has been said so eloquently on all sides of the House. This whole process of preparing for Brexit I find infinitely depressing. Thursday mornings are a very depressing part of the week, despite the excellent company of my fellow committee members, because one witness after another—experts, practitioners, trade bodies and so on—parade before us the complexities of the situation we are in. Such warnings are all around us. Last night the president of the CBI talked about his fears for the whole process, calling it a rollercoaster, and warning that no deal with the EU would hit 90% of our exports to the EU, either in tariffs or non-tariff barriers.

It is a great pity that none of the strongest opponents of the EU is here this evening to hear the variety and depth of the debate. The Government’s very late response to our report also makes a depressing read. Either the Government have very few words in their lexicon, as envisaged by my noble friend, or they have very few ideas, because the same banal, generalised, high-level statements are repeated over and over again: “ambitious and comprehensive”, “frictionless”, “no cliff edge” and so on. The endless repetition was so intense that at the end of reading the response I felt that I was being brainwashed.

As with the White Paper, I was also distressed by the Government’s apparent smug self-confidence. I have referred to this before as hubris. I believe that the use of the terms “world class” and “world leading” show that overconfidence. However, there is a new line that appears in the Government’s response to the report, which is that it will be all right because we are already well integrated with the EU and currently have no trade barriers, so apparently we are unlikely to have any in the future. If the Government seriously believe that, they have been deaf to the statements coming from our current EU partners, who have said, in terms, that if you leave the club, cease to pay the membership fee and no longer agree to play by the rules, you can no longer enjoy the benefits of membership. We have already announced not just that we want to leave the club but that we do not even want associate membership.

I think that in reality, like ducks on a lake, the Government are paddling furiously just below the waterline. Indeed, the impressive list of meetings that they have held with business organisations, set out in the government response, and the hundreds of additional civil servants they have recruited are signs of the effort and work going on. I just reflect that it is a pity that those extra civil servants are needed in order for us to fight just to stay still. I would have preferred them to do something rather more creative.

What I looked for in the government response was some acknowledgement of the sheer complexity of the situation. The committee report that we are discussing today makes that complexity plain—albeit this is only an introductory taster to the true difficulties. This morning our committee discussed its next report, which looks behind and beyond the level of detail in the report we are discussing here to a further level of complexity. I believe it should be compulsory for everyone who tells us that it is all quite straightforward to read not just the summary but the body of this report. Only by doing so can you understand the complexity. It does not need to be this report; it can be any one of the excellent reports produced by our EU committees. They are authoritative and comprehensive but, as I have said before, they are also depressing.

In my inbox and on Twitter there are two categories of pro-Brexit campaigners. Just to clarify matters, I do not put everyone who is pro-Brexit in these two categories, but I want to refer to two types of correspondents. One is what I call Brexit bullies, who feel that, by shouting loudly and heaping sometimes personal insults on those who oppose Brexit, they will drown out the arguments being put before them. Then there are the lemmings—those who blindly follow their leaders towards the Government’s famous cliff edge. This report and others in the series should be read by all lemmings. It sets in context, in factual, precise detail, the enormous complex task that the Government face. I will briefly refer to a couple of detailed issues.

Our report refers to potential costs and delays associated with more complex border and customs processes. The Government’s response that that is all done electronically now has been put forward in the Northern Ireland and Republic of Ireland context. I very much hope that it could be a contribution, although that should not be overestimated in its potential. But in general terms, the value of electronic processes needs to be considered. I draw noble Lords’ attention to an article in this week’s Times about the considerable delays at the Turkish/Bulgarian border—up to 30 hours. Reference was made to bulky sheets of documents. Turkey is in the customs union with the EU. The point made in the article is that EU states can and do impose significant transit fees and permits based on a quota system. Each EU country sets its own fees. That is despite the customs union.

The Road Haulage Association has warned of the need for significant investment in infrastructure of ports and customs. We have very little such infrastructure because we have not needed it for 40 years. It warns of the total lack of experience and knowledge in the road haulage industry on these matters. Can the Minister tell us precisely what the Government are doing to prepare for this?

On dispute resolution procedures, our report refers to the advantages of the EU system and the disadvantages of the WTO system. We need to ask ourselves, why would the EU agree, as the Government suggest in their response, to a separate and new system that the Government hope to set up with the EU when one already exists from their perspective? Any new system that is established has to be accessible to small businesses and just as accessible as the current system.

The Government’s response, beyond the Prime Minister’s statement that we would not remain within the single market or the EEA, does not have much detail. In debate earlier this week, one noble Lord, when referring to negotiating and revealing our hand, compared our negotiations to those with the IRA and the DUP in Northern Ireland. I want to examine that. Negotiations in Northern Ireland were between groups who had been seeking to kill each other. We are talking about negotiating with our EU partners and friends who have sat on the same side of the table with us for 40 years. The Government place too much emphasis on keeping their powder dry and keeping their cards close to their chest. Those other countries which have been our friends for 40 years know every nook and cranny of what we are trying to negotiate and what we want to do.

These days, there is global interdependence. If we want to trade we effectively have to pool sovereignty with others. The irony is that because the EU is the world’s biggest customs union, it dictates many of the terms and standards of world trade and we will have to accept that, whatever the Government lead us to in terms of negotiations on Brexit.

Photo of Lord Mendelsohn Lord Mendelsohn Shadow Spokesperson (Business, Energy and Industrial Strategy), Shadow Spokesperson (International Trade) 7:44 pm, 2nd March 2017

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.

Photo of Baroness Mobarik Baroness Mobarik Lord in Waiting (HM Household) (Whip) 7:54 pm, 2nd March 2017

My Lords, I am very grateful to the noble Lord, Lord Whitty, for tabling this debate and for his excellent speech. I also thank the EU Internal Market Sub-Committee and the EU External Affairs Sub-Committee for their report, Brexit: The Options for Trade, which provides a rigorous analysis of how the Government might approach a new trading relationship with the European Union. The committees will now have received the Government’s response to their report.

As your Lordships will know, my noble friend Lord Price appeared with my noble friend Lord Bridges before the committees in October last year, and again last month to discuss the upcoming publications, Brexit: Future Trade Between the UK and EU in Services and Brexit: Future Trade Between the UK and EU in Goods. I am looking forward to the contents of these two reports, which have been informed by evidence from key sectors as diverse as pharmaceuticals, food and automotive.

As a businesswoman and former chairman of CBI Scotland, I know that trading continuity is vital during times of change. That is why the Government have held thousands of visits, meetings and events with businesses since the referendum. My noble friend Lord Price alone has met more than 50 Ministers from foreign Governments since the referendum, 18 of whom are in the EU. The reason he is unable to attend this debate is that he is on his way to attend the informal Foreign Affairs Council on trade in Malta. I take this opportunity to pay tribute to him for the work that he is undertaking, and to wish him a happy birthday. In addition, Ministers from the Department for Exiting the European Union have met more than 150 businesses through round-table meetings with key sectors.

I am very pleased to be able to wind up for the Government in this debate, and will now address the points raised. I will also set out the Government’s plans. Since the publication of this report, the Prime Minister has set out Our Plan for Britain, including the 12 principles which will guide the Government during negotiations on the UK’s withdrawal from the European Union. The Government have also published a White Paper on the UK’s exit from and new partnership with the EU. In response to the points raised by some noble Lords on the Government’s narrative on these issues, our strength is speaking with one voice. Speaking with one consistent voice is a negotiating strength.

As the Prime Minister has said, we will not seek membership of the single market but will pursue instead a new strategic partnership with the EU, including an ambitious and comprehensive free trade agreement. We want the UK to be able to negotiate its own trade agreements. We want our new relationship with the EU to aim for the freest possible trade in goods and services, and for cross-border trade to be as frictionless as possible. I thank my noble friend Lady Verma for her question on a customs agreement with the EU. We are seeking a new customs agreement with the EU. There are a number of options for any new customs arrangement, including a completely new agreement or for the UK to retain some elements of the existing arrangements. The precise form of this new agreement will be subject to negotiation.

I remind noble Lords that we start from a unique position. On day 1, we will have exactly the same regulations and standards as our negotiating partners. This provides an unprecedented starting point for our negotiations with the EU. We will aim to have reached an agreement about our future partnership by the time the two-year Article 50 process has concluded. Article 50 states that the process of withdrawal will take account of the framework of the leaving member state’s future relationship with the EU, and there is a clear connection between the terms of our withdrawal and the future relationship we want to establish.

As we have said before, it is in no one’s interest for there to be a cliff edge for business as we change from our existing relationship to a new partnership with the European Union. That is why the Government have announced that we will establish the UK’s independent position at the WTO, of which the UK is a full and founding member. We are currently represented by the EU at the WTO, but as a post-EU member we will need to separate our schedules of commitments, which are currently integrated into the schedule for the EU as a whole. We will do this in a way that causes the least disruption possible to our trading partners. To address the concern raised by my noble friend Lady Verma about the UK’s technical rectification of WTO schedules, I tell the House that the WTO director-general, Roberto Azevêdo, stated in support of the UK’s position:

The UK is a member of the WTO today, it will continue to be a member tomorrow. There will be no discontinuity in membership”.

Our ambition is clear: we want Britain to become a champion of free trade, working with our partners across the world to remove barriers. As the Prime Minister has said, we want to build a truly global Britain that is one of the foremost advocates for free trade anywhere in the world. We cannot negotiate and conclude trade agreements while a member of the EU, but we can have discussions on our future trading relationships. We have announced a series of working groups with key partners and are seeking to ensure that we deploy the right trading tools with each market to take best advantage of the opportunities available to us, both now and as we leave the EU. With some of our partners an FTA might be the right solution. In other cases, other trading arrangements may be more appropriate.

I am keen to address the concerns of the business sector. I hope I am able to answer the very important question raised by my noble friend Lady Verma. The noble Lord, Lord Aberdare, asked a very sensible question: what criteria will the Government use in assessing when they have achieved a good deal? The key is engagement. The Department for International Trade and the Department for Exiting the European Union have been engaging widely with businesses at all levels since the referendum, as have other departments, such as the Foreign and Commonwealth Office, the Department for Environment, Food and Rural Affairs, the Department for Culture, Media and Sport and HM Revenue & Customs.

I thank the noble Baroness, Lady Donaghy, for her point on ensuring engagement with industry. I can assure her that, as we prepare for the negotiations over the UK’s future relationship with the EU, the Government will continue to have open and honest conversations with businesses and trade associations to understand issues, limit uncertainty and ensure that our new relationship with the EU works for business.

The insight we are gaining from our engagement will play a vital role in informing the development of trade policy that works for the whole of the UK. I confirm the intention raised by my noble friend Lord Green. The Government are determined not to allow any part or nation of the United Kingdom—Scotland, Wales, Northern Ireland or England—to lose out in this process. The Department for International Trade is dedicated to serving the whole of the UK, now and when we leave the EU. Officials from DIT have been engaging with counterparts in each of the devolved Administrations.

This engagement is stepping up. Last week, DIT hosted officials from the Governments of Scotland, Wales and Northern Ireland for an in-depth discussion of our WTO membership, the rights and obligations that come with membership, and the impact that Brexit will have on our relationship with the WTO. The Department for International Trade will be engaging further on a wide variety of trade-related topics over the coming weeks and months, and the Government are of course taking into account the specific circumstances faced by businesses in Northern Ireland. The Prime Minister has been clear that there will be no return to the borders of the past and that retaining trade will be important. She agreed with the Taoiseach that we will work to ensure as seamless a border as possible with Ireland and to continue the common travel area.

We are clear that we want Britain to have the greatest possible tariff and barrier-free trade in goods and services with our European neighbours, and to be able to negotiate our own trade agreements. As the Prime Minister said, we want to have reached an agreement about our future partnership by the time the two-year Article 50 process has concluded. We approach these negotiations not expecting failure but anticipating success. As we have always said, of course there will have to be give and take, as in any negotiation, but a punitive approach by the EU that punishes Britain would be an act of self-harm for the countries of Europe. Britain would not and could not accept such an approach.

My noble friend Lady Verma and other noble Lords were concerned, I think, about the costs of leaving and trading on WTO terms alone. In the event that it is not possible to reach a positive agreement—a scenario the Government are confident need never arise—the Government are clear that no deal for Britain is better than a bad deal for Britain, because we would still be able to trade within Europe and free to strike trade deals across the world.

Ahead of and throughout the negotiations, we will provide certainty wherever we can, and as much information as we can without undermining the national interest. Noble Lords will recall that the publication of impact assessments was discussed in detail in Committee on the European Union (Notification of Withdrawal) Bill earlier this week. The challenge we face is to get the balance right between enabling scrutiny and ensuring that our negotiating position is not revealed. A cardinal rule of negotiation is not to tell those on the other side how much certain scenarios and outcomes would cost or benefit you, but that is what publication of an impact assessment would do.

A number of noble Lords have asked whether the Government are able to deliver Brexit. Do we have the right staff? Will our customs arrangements be sufficient? The Civil Service is well equipped to deliver the UK’s exit from the EU and has substantial experience of negotiations with it. Alongside the increase in staff and resourcing in my department, the Department for International Trade, and the Department for Exiting the European Union, as part of the Autumn Statement, we also secured funding for additional staff in key posts overseas. Our diplomatic network will be absolutely key in delivering the best for the UK. As I said, DIT is working closely with the Department for Exiting the European Union and other departments to contribute to the Government’s preparations for Brexit, advising on the implications and operational aspects of EU exit for our trading relationships.

At the end of 2016, DIT’s trade policy team consisted of around 150 staff. This team of trade policy officials has now increased to 185 and is continuing to grow. This includes policy and country specialists as well as expert economic analysts and lawyers. We will continue to develop our existing expertise as well as hire the brightest and best talent from within and outside the UK Civil Service to deliver the best outcomes for the UK. The Department for Exiting the European Union now has more than 300 staff, and is growing fast. It is also supported by 120 UKRep staff based in Brussels, who report to Ministers in the Foreign and Commonwealth Office and the Department for Exiting the European Union.

Parliament will of course be involved in helping to shape the UK’s future as we leave the European Union. There have already been 70 parliamentary debates on Brexit, as well as 36 Select Committee inquiries. The House of Commons voted overwhelmingly for the Article 50 Bill to pass Third Reading unamended. As noble Lords know, the Bill passed the House of Lords Committee stage with an amendment last night. It will now pass back to the House of Commons and approval of the Bill will provide a key step towards a smooth and orderly exit from the EU.

The Government will bring forward legislation in the next Session that, when enacted, will repeal the European Communities Act 1972 on the day we leave the EU. We will bring forward a White Paper on this great repeal Bill, which will set out our approach to giving effect to withdrawal on the domestic statute book. We will ensure that it is published in time to allow Parliament to digest its contents in advance of the introduction of the Bill in the next Session. Many noble Lords, including the noble Lord, Lord Liddle, and my noble friend Lord Risby, asked whether the Government would seek equivalence of EU regulations and standards. Equivalence will be an important part of any discussion on our future trading relationship and the great repeal Bill will convert current EU law into domestic law while allowing for amendment in future. How we go about ensuring the fewest possible barriers to trade between the UK and EU is a matter of negotiation. We will inform the House about the detail and timing of the repeal Bill legislation in due course. We have always been clear that Parliament will have every opportunity to scrutinise the great repeal Bill and we are considering the best way to enable that. Of course, Parliament must be consulted before ratification of any future trade agreements that we negotiate.

We recognise the importance of access to EU markets. As my noble friend Lord Gadhia and others have raised, financial services contribute more than 7% of UK GDP and its exports account for over 12% of the UK total. Around half of the world’s largest financial firms have their European headquarters in the UK. We are listening to what the financial services industry has to say on the key issues it faces and we will be looking for a sensible discussion in negotiations.

On the UK being outside the jurisdiction of the ECJ, we are preparing a UK trade remedies framework for when we leave the EU, which will enable the UK to be a leading proponent for free trade while providing a safety net for its industries if dumped, subsidised or surges of imports cause injury to UK producers, as set out by WTO agreements. The UK remains committed to pursuing free trade, and this includes seeking to achieve continuity in our trade and investment relationships with third countries, including those covered by EU FTAs or other EU preferential arrangements. We are actively exploring what may be possible with our trading partners to achieve this.

I want to respond to some of the points raised by my noble friend Lord Green with regard to UK trade statistics. In 2016, UK exports were £544.8 billion—up by 22.6% from 2010. While there was a trade deficit in goods last year, there was a £98.1 billion surplus in trade in services. This is a positive picture, but the Government wish to build on it and ensure that the benefits of trade reach as many across the UK as possible.

Many have commented on the complexity of the task ahead; I assure noble Lords that the Government do not underestimate this—the Government will not, and must not, do this alone. We must take a “whole of the UK” approach, drawing on the skills and expertise of the Members of this House and the other place and the key learnings that we can draw from business and civil society. I am confident that if we seek to work together we can get the very best outcomes for the UK.

I conclude by thanking noble Lords for their contributions over the course of this debate. I am sure that this House will continue to play a valuable role and will work pragmatically towards building our future.

Photo of Lord Whitty Lord Whitty Chair, EU Internal Market Sub-Committee 8:14 pm, 2nd March 2017

My Lords, I thank the Minister for that contribution to the debate. I join her in sending birthday greetings to the noble Lord, Lord Price. I gently say to her, though, that there was not much new in her speech. I had hoped that there would be a little more engagement with some of the points made by noble Lords. One of the difficulties as we go forward in this House, and in Parliament generally, is that if the Government continually repeat the same phrases it will increasingly sound like whistling in the dark. It might be whistling in the dark to keep their own spirits up, or it might be to make sure that we do not quite know what is going on. Either way, we need a little more than that. It was a good run-through, but it was only a run-through of things that we had heard before, generally speaking.

There was one little bit that might be new, although I am not sure whether the noble Lord, Lord Lansley, would agree with me with his interest in customs, I thought the phraseology on the customs union was slightly different, and I will look at the precise text on that and see if there is a new measure there.

I am not going to make a great speech tonight; I thank everybody who has participated in the debate, particularly the noble Lord, Lord Gadhia, my noble friend Lord Mendelsohn, and others who had not participated in the debate; everybody else who spoke had participated in committees. I thank them very much for their work, as I thank again the staff. I just wanted to mention one thing in relation to staff: the clerk to our committee, Alicia Cunningham, has actually left for separate duties in this House this very week. I would like to put on record in this debate the work that she has done for us.

Of all the experts that were going to be quoted in this debate, I had not expected Mike Tyson to be one of them. However, knowing how the EU negotiators react is an important missing part of the jigsaw in most of this debate. There was a point in one of our debates, and the noble Baroness, Lady Verma, and I are probably the only ones who remember it, when one of our colleagues—he was a noble and gallant Member of the House—said, “In these situations, I like to see it through the eyes of the enemy”. That might be going a bit far—I prefer the term “counterpart”—but nevertheless, we did not get much of an inkling during the course of our discussions with the Government that they were really getting enough intelligence on where the EU is coming from.

One of the things my noble friend Lord Lea and my noble friend Lady Donaghy will remember is our irritation, in trade union discussions, when the press always said that the trade unions made a demand and the employers made an offer. The reality of this is that that is how Europe sees this: we are the demander and it has to deign to make an offer to us. It has interests to preserve, but those are not necessarily the same as ours. We want to maintain a good relationship and so does it, but it sees us as the people who are walking away and, to some extent, stopping paying the rent at the same time. We start from that psychological disadvantage. If we do not try to understand and cultivate a better understanding of our position among our EU partners—I will still call them that for the moment—then this negotiation will fail. I hope the Government are up to this.

We need proper engagement in this Parliament. We are going to discuss parliamentary scrutiny again on the Bill, but whatever the results, there has to be a greater degree of candour between the Government and Parliament as we go through this process. We do not expect the Government to give their total negotiating hand to the world at large. I think my noble friend Lord Lea said of our report that it was ruthless and realistic.

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour

Ruthlessly realistic.

Photo of Lord Whitty Lord Whitty Chair, EU Internal Market Sub-Committee

I thought for a moment that he was talking about me; it would have been the nicest thing he has ever said about me.

We need to be realistic and some of the statements by the Government are self-evidently not realistic at this point. If this House is to be taken along with the Government during this very difficult process, we need to have an honest and realistic discussion of what the options are and how we are to deal with them. We need that to be on a systematic basis and I hope that the Government have taken that lesson from this debate. Certainly, we in our committees will be both honest and realistic. We will also recognise the limitations. But the Government will not get through this if they do not get parliamentary support in both Houses. I hope they recognise that and that we can therefore have a perhaps slightly greater engagement than we have had so far with Ministers and government. That way, maybe we can get through this difficult process. In the meantime, I thank everybody who has participated in the debate.

Motion agreed.

House adjourned at 8.21 pm.