Brexit Bulletin: Planning for Retreat?

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(Bloomberg) -- Today in Brexit: Leave supporters are dialing back their rhetoric on the customs union as the campaign to force Prime Minister Theresa May to stay in gains momentum.

Pressure is mounting on Theresa May to stay in the European Union’s trading bloc in a U-turn that would enrage Brexit enthusiasts. But the Brexit backers in her Cabinet are hardly lining up to threaten resignation if she goes ahead.

Foreign Secretary Boris Johnson dodged the question on Monday when asked if he would resign if Parliament forces May to stay in the customs union, reiterating his view that Brexit means leaving the trading regime too. Meanwhile Trade Secretary Liam Fox, whose main job is to make the independent trade policy that would be impossible inside the customs union, made a good case for why staying in wouldn’t be such an obstacle to a new “global Britain.”

The House of Lords has voted in favor of the customs union – an arrangement that businesses, the opposition Labour Party and many Conservatives want to maintain as it helps cross-border trade – and the House of Commons is expected to vote to keep it in a debate as soon as next month. The Cabinet is divided, but May’s inner circle thinks she could be forced to concede because of the parliamentary arithmetic. While such a move would be risky at home, it would help reboot talks in Brussels.

Fox, a veteran Brexit supporter, hinted that given the U.K.’s strength lies in the service industries that make up 80 percent of the economy, the rules governing manufacturing goods such as cars are less important. The customs union only deals with goods, and some Brexit-watchers say that the government could justify a U-turn by saying it can still go out in the world to sign deals on services and the industries of the future.

“The point that I am making, though, is that discussions around trade and export policy can often be too focused on the movement of physical goods, to the detriment of our comparative advantage in services,” Fox told a conference in London.

Fox argues that free-trade agreements have done little for the service industries that are key to Britain. “While the system has many strengths, its provisions remain under-equipped to effectively govern the global trade in services,” he said on Monday. “It would be remiss for developed nations such as ours not to recognize this potential and lead the way on trade in services liberalization.”

He went on to say: “Often, there is broad agreement between nations on the need to liberalize this trade. As a result, barriers can often be removed more swiftly and easily when compared to traditional FTAs.”

There seems to be a growing sense that FTAs aren’t all they are cracked up to be. And signing new FTAs with non-EU countries was the main point of leaving the customs union. Tim Ross reported earlier this month that some of May’s officials think that trade deals with third countries can take a long time to negotiate and end up mired in litigation, while measures short of formal FTAs can still deliver significant benefits.

All eyes will be on Brexit Secretary David Davis at Parliament’s Brexit Committee tomorrow for signs he’s trying to justify a U-turn before it happens.

Today’s Must-Reads

Brexit in Brief

Rolls-Royce Has a Plan | Rolls-Royce Holdings has outlined a workaround that would enable it to continue seamless production of jet engines after Brexit even if the U.K. were to find itself outside the remit of the European regulator responsible for signing off on each turbine delivery. It would shift the approval process to Rolls-Royce’s business-jet facility in Dahlewitz, Germany, so it can continue to get endorsements from the European Aviation Safety Agency.

Could Be Worse | There’s at least one aspect of Brexit negotiations the EU is grateful for: having Theresa May as prime minister rather than arch-euroskeptic Jacob Rees-Mogg. European officials aren’t supposed to stray into domestic affairs, but Irish commissioner Phil Hogan couldn’t resist when asked about Rees-Mogg’s proposal for some hardball negotiating tactics: “That’s why we’re very pleased in the European Union that we’re dealing with the prime minister of the United Kingdom, not with Mr. Rees-Mogg.”

London Still Relevant | Societe Generale Chairman Lorenzo Bini Smaghi, a former ECB board member, argued for London’s relevance after Brexit and for pragmatism. “The euro zone needs a capital markets union and we need to build it with London,” he told a conference. “Brexit is going to make it much more complicated.” SocGen itself expects to “continue to be present and relevant in London, in Canary Wharf,” he said. 

Footballer Against Brexit | Jurgen Klopp, the manager of Liverpool FC, says Brexit makes “no sense at all” and the British people should get another vote. “The EU is not perfect but it was the best idea we had. History has always shown that when we stay together we can sort out problems. When we split then we start fighting. There was not one time in history where division creates success,” he told the Guardian. (The city of Liverpool voted to remain in the referendum.)

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