EU relations are the missing piece of Labour’s growth plan

Good afternoon. The English political party conference season is over and in many ways ‘we are where we were’ — a fatigued Tory party continues to languish in the polls while Labour’s core strategy is caution: to do nothing that will distract from their opponent’s divisions.

Sir Keir Starmer’s speech in Liverpool this week was actually beautifully written (a better orator could have made it genuinely inspiring) but as expected, it was light on policy that will deliver on the Labour party leader’s aspiration for “more growth, more demand, more jobs”.

This being a newsletter about life outside the EU, I’ll naturally focus on the Brexit elements of Labour delivering on its pledge for a new industrial strategy, without wanting to give the impression that it’s ‘all about Brexit’. It isn’t. 

Reform begins at home (though with limited cash) and streamlined planning, targeted tax incentives, infrastructure investment and boosting skills are all good places to start.

But there are key elements of Starmer’s promise to “attract new investment to our industrial heartlands from Bridgend to Burnley” that are much more intertwined with Brexit policy issues than you’d ever know from attending Labour’s conference.

The “long-term stability for researchers, investors [and] innovators” that Starmer identified as necessary to attract that investment is — like it or not — a significant post-Brexit issue for the UK.

The government is currently reviewing how to attract foreign direct investment and a public submission to the review from the Chemical Industries Association reveals the Brexit element of the problem — other issues include tax rates, skills shortages and research visa constraints.

Chemicals is a non-glamorous, energy-intensive sector, but it’s at the heart of advanced manufacturing and employs 150,000 people directly in the UK in jobs that typically pay 25 per cent more than average. These are the manufacturing jobs Starmer is pledging to revive.

Two of the CIA’s four key ‘asks’ — stabilising UK carbon market policy and delivering a workable arrangement for the UK version of the EU’s Reach regulatory scheme for chemicals — are both post-Brexit challenges.

If he’s elected, Starmer will have to decide if he wants to try to legally link the UK’s emissions trading scheme with the EU’s in order to avoid ‘Brexit 2.0’ border frictions caused by new carbon border taxes being introduced by Brussels. 

And because part of fixing Brexit also requires domestic action, he’ll also have to work out how to improve the UK’s underpowered domestic regulators. 

From speaking to business leaders in Liverpool this week, it is clear that if Labour is to drive investment and trade it needs to build bureaucratic and regulatory capacity to deal with post-Brexit friction. This includes the party’s promised ‘green revolution’.

One major EU-headquartered manufacturer told me, for example, that it was not investing in UK green energy projects because, post-Brexit, they could not obtain transferable certificates of origin for renewable electricity that needed to be counted in the EU against their net zero commitments. So they’ve spent their money on projects in the EU. 

On a different tack, my colleague Madeleine Speed reported on how big food retailers like Tesco and M&S are still waiting for legislation to implement the UK version of new EU rules due to take effect at the end of 2024 on creating “deforestation-free supply chains”.

Retailers need the legislation because, without it, their global suppliers aren’t obliged to provide documentation to prove that products like soyabeans and palm oil are sustainably produced — attestations that will soon be needed to participate in EU supply chains. This also matters because high-tech food manufacturing is also a big UK strength. 

The result, the retailers warned, is that UK supply chains are being left “uniquely exposed” because of the lack of a legislative process in the UK. 

The government promises the legislation will come, but it’s just another illustration of the uncertainty and the marginal ‘hassle factor’ associated with doing business in Britain that makes it harder to attract investment.

Creating a new industrial revolution

I list these examples not because they’re doorstep issues, or subjects for Starmer’s speech, but to illustrate the gap between the stated ambition of what Labour wants to deliver and its caution in confronting the realities of managing a post-Brexit world. 

Starmer wants a new industrial revolution. He wants to be the fastest growing economy in the G7. He wants to attract foreign investment. But he also wants to do all that while remaining outside the EU single market or a customs union.

Shortly after Starmer’s speech, I chaired a panel on the UK’s trade prospects with Sophie Hale, the economist at the Resolution Foundation who co-authored a report earlier this year which brilliantly explains how Brexit squeezes the UK out of high-value EU supply chains over time.

“Working on the EU deal is really important in your future strategy,” she told the audience, while also questioning how big a role advanced manufacturing could play in lifting the UK out of current stagnation. “The UK does need to get serious about fixing the issues at the border,” she said.

And yet except on those fringes, there was no debate on relations with Europe at the conference. The leadership scotched attempts by the Labour Movement for Europe to force the conference to debate a motion calling on Labour to make rebuilding relations with Europe a priority for Starmer’s first term in government.

The general torpor in the wider debate was summed up by some new UK in a Changing Europe polling out this week exploring the nature of ‘Bregret’. It found that, in focus groups, even Leave voters struggled to cite benefits from Brexit, but the majority (61 per cent) still think Brexit will “turn out well” in the end. Hope springs eternal, I suppose.

The deeper strategic question

But the tactical internal fight to get the Labour leadership to be braver on Brexit obscures the much deeper strategic question about how Labour can deliver on its ambitions for the UK outside the EU.

Fixing the nuts and bolts of the relationship with Europe seems absent from Labour’s growth story, when actually it should be the catalyst. By confronting these issues the urgent need for domestic reforms will become apparent.

The real challenge, as the three examples above illustrate, is that the old New Labour slogan that “things can only get better” doesn’t apply to Brexit. As we will keep discovering, and industry keeps warning, things will only get more complicated. 

Labour’s stated ambitions on repairing EU relations will provide only limited mitigation. The logical implication of which is either to do something quite dramatic to arrest the ratchet of divergence with the EU, or something quite dramatic to make the UK attractive to investors as a go-it-alone nation. 

The first has been ruled out and Labour’s ability to deliver the second is questionable.

Brexit by numbers

This week’s chart, taken from the British Chambers of Commerce’s Quarterly Economic Survey for the third quarter provides a reminder of the deep-seated challenges Starmer faces in reviving UK industry.

The survey of over 5,000 firms — more than 90 per cent of which are SMEs — found that despite a return of some business confidence the long-term trend of UK business investment (which predates Brexit and is consistently lower than European peers) is continuing.

The survey finds that the percentage of respondents reporting an increase to investment in plant/equipment remains stuck at 23 per cent, while 59 per cent reported no change and 18 per cent saw a decrease.  

For context, over the past six years the number of firms increasing investment has dropped as low as 9 per cent, at the start of the pandemic, but it has never exceeded 28 per cent, which it hit in the first quarter of 2018. 

David Bharier, the head of research at the BCC, said inflation, labour shortages, global trade barriers and higher borrowing costs were all creating headwinds to further investment — alongside uncertainty caused by the recent announcement on the cancellation of HS2 rail line and the Brexit 2.0 issues mentioned above. 

“Most firms continue to report no increase to their investment intentions. This is in part a reflection of broader uncertainty, with little clarity on major long-term projects and yet more trade barriers to come with the EU,” he added.

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Britain after Brexit is edited by Gordon Smith. Premium subscribers can sign up here to have it delivered straight to their inbox every Thursday afternoon. Or you can take out a Premium subscription here. Read earlier editions of the newsletter here.