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by GK Strategy 14th July, 2016

A question of free trade

The first, and probably biggest, surprise of Theresa May’s new cabinet is the troika of Boris Johnson, David Davis and Liam Fox appointed to be the face of the UK to the rest of the World. This is a strong sign that she is bringing in the ‘right’ of the Conservative Party in an attempt to allay their fears of having a Prime Minister who voted to remain. There is also much to be said for the refrain ‘keep your friends close but your enemies closer’. All three had the potential to be rabble-rousers on the back benches but will be somewhat constrained by their ministerial positions.

Boris’ political rehabilitation comes just a couple of weeks after he was unceremoniously usurped by Michael Gove. The latter has not fared so well and finds himself out of a job. For Fox and Davis their time in the political wilderness has been longer. Fox resigned as Defence Secretary following a scandal in 2011 while Davis stood down as Shadow Home Secretary in 2008, preferring not to take a government job under David Cameron.

These three appointments more than anything confirm May’s statement that ‘Brexit means Brexit’ and start to provide an inkling into what the UK’s negotiating position will be once Article 50 has been triggered.

Davis helpfully outlined his approach to Brexit here, highlighting that he had been sounded out about the role some time ago. Surprisingly, he is optimistic that the UK can still maintain access to the single market while opting out of the free movement of labour. He posits that once Europeans understand that the UK will not budge on this and that it will be in their interest to have a free trade agreement, they will accept such a position. This is more an ultimatum than a negotiation and while the approach of Juncker and others towards the UK has softened in the weeks following the referendum, it’s not yet politically feasible for Davis’ ideal model to become a reality.

He raises the prospect of using new freedoms away from state aid regulation to subsidise a range of sectors should the EU raise tariff barriers. Conversely, he also wants to quickly gain free trade agreements with China, India and other large economies. The practical difficulties of the UK’s diplomatic capacity aside, such agreements would run counter to his vision of rebalancing the UK economy towards manufacturing and indeed raise the prospect of cheaper Chinese products having an interesting impact on, for example, the steel industry.

Further afield, he proposes negotiating ‘a free trade area massively larger than the EU,’ something he envisages the Government can engineer within 24 months. While it might not be likely that these new markets will jump into agreements with the UK before the outcome of the UK-EU negotiation is complete, there is considerable scepticism that these agreements will provide the substantial boost to the UK economy that Davis foresees.

Davis’ position can be described as UK-centric at best and strategically unrealisable at worst. The key question is how the Government modifies its position in the face of a harsh response from the EU and with the recognition that the UK’s capacity for negotiating trade deals, with Europe or elsewhere, may not be able to deliver what Davis, Fox and Johnson would like.

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