Why UK firms are losing patience with the ideological fantasies of Brexiteers

'Close your eyes and envisage a new technology, which doesn’t currently exist but which we very much hope will soon come along...'

Checks at borders, like the one between Northern Ireland and the Republic, risk severing manufacturing firms' supply chains (PA)

Comparisons between politicians and business leaders are generally to be avoided. But sometimes they can be instructive.

Imagine if a chief executive was explaining to her governing board how she planned to tackle a major looming economic threat to the company’s profitability. Imagine if she started her presentation with the words: “Close your eyes and envisage a new technology, which doesn’t currently exist but which we very much hope will soon come along...”

How long would she be likely to remain in her job? Indeed. But standards appear to be somewhat lower in politics. Or at least different.

There seems to be confusion about the nature of the EU’s customs union. Many commentators (and even some economists) talk about it as essentially a problem of tariffs: levies on goods as they cross borders. But this is only part of the story, and not the most important share.

The biggest economic hazard facing UK firms when we leave the EU customs union is not charges on imports and exports but disruptive new inspections and the effective severing of vital corporate supply chains.

According to a recent analysis by the Institute for Fiscal Studies, more than half of the UK’s imports from the EU are “intermediate” goods and services. This means they are not for immediate consumption by households, but rather are used in the production processes of British firms. The intermediates share of UK exports to the EU is even higher, at almost 70 per cent.

The UK-EU goods trade is predominantly corporate supply chain trade.

The crucial point is that outside the EU customs union, this formerly free flow of goods between UK and the EU firms would have to be subject to intrusive checks – checks for compliance with local safety standards and also checks that all the applicable levies have been paid. Even if the UK agreed a comprehensive free trade deal with the rest of the EU which abolished all goods tariffs, inspections on standards compliance and checks for possession of the requisite tariff waivers would remain.

UK-based car manufacturers are extremely dependent on component imports from mainland Europe, with parts often delivered “just-in-time”, and are, therefore, highly financially vulnerable to any disruption to these supply chains. But the same also goes for a host of manufacturing sectors, such as pharmaceuticals, chemicals and electronics. This all applies too, of course, to the border between Northern Ireland and the Republic, with the particular historic and political headache overlaid there.

That is why the director-general of the CBI, Carolyn Fairbairn, made an almost desperate plea this week for the Government to put evidence ahead of “ideology” and commit to a new customs union with the EU after the (hoped-for) Brexit transition phase ends in around 2021.

While this would not eliminate the need for all checks – Turkey has a customs union with the EU but its goods still have to be inspected when they enter Europe – it would be considerably less punitive for UK trading firms. “A practical, real-world answer” is Fairbairn’s description.

But ideology clearly doesn’t like being put in the corner. Boris Johnson took to Twitter to slap down the CBI’s recommendation, asserting: “Staying in the customs union means effectively staying in the EU: the EU is a customs union ... it means no new free trade deals, no new leading role in the WTO [World Trade Organisation]”.

“I’m confident British business can profit from the new opportunities,” he concluded, presumably while puffing out his chest.

Leave aside the typical Johnsonian sloppiness over some important detail (the CBI is suggesting the UK form “a” customs union with the EU, not remain in “the” existing customs union), his argument can be boiled down to the view that the pain of UK firms arising from this disruption will be swamped by the fantastic gains of new trade deals with non-EU countries that the UK will be liberated to sign by leaving the customs bloc.

Yet manufacturing firms are not so sanguine, which is precisely why they have been pressing the CBI to make its latest customs union recommendation to the Government. Incidentally, research by Monique Ebell of the National Institute of Economic and Social Research suggests the overall trade benefits for the UK of any new free trade deals with non-EU countries are likely to be underwhelming, certainly relative to the severe trade damage from leaving the single market and customs union. That’s some actual evidence that firms might weigh against Johnson’s indomitable personal faith.

Yet Johnson, among cabinet members, has no monopoly on wishful thinking. The Government’s official white paper on the UK’s future customs arrangements, released last August, addresses the issue of looming customs checks for British firms with little more than vague talk of “increased automation and better use of data”.

Meanwhile, the Legatum Institute, a think tank that has a firm grip on the ear of the Brexit Secretary, David Davis, has even proposed that the job of patrolling the Irish border after Brexit could be delegated to “unmanned aerial vehicle assets” and “aerostats” instead of traditional customs offices. In other words: drones and airships.

The airborne technology that could perform such a job doesn’t, of course, yet exist. But Legatum suggests “awarding a prize for technological solutions to incentivise the development of innovative solutions from the private sector, and universities”. They are no doubt as confident as Johnson that something will turn up in time.

This truly is the voice of irresponsible ideology. Small wonder that UK exporters, who would actually have to trade in this new world, rather than merely fantasise about it, are losing their patience.