Fall Out: A Year of Political Mayhem

DExEU officials told Leadsom she would need to hire five hundred more staff but she initially recruited only thirty. ‘They’ve got to redesign forty years of agriculture policy and the entire system of subsidy,’ a DExEU source said. ‘Meetings with her were embarrassing.’ A cabinet colleague said, ‘She was completely out of her depth at the beginning. She is a genuine and decent person, but massively underpowered for what was needed at secretary of state level. She’s very stubborn and basically not really bright enough.’ Several ministers recalled that Leadsom’s most memorable contribution in cabinet that year was nothing to do with Brexit. Leadsom had been subjected to ridicule from MPs when she used leadership hustings in June 2016 to discuss the neonatal charity she had set up, which advocated massaging babies’ brains. During a health discussion that autumn, she raised the subject again, to the bemusement of her cabinet colleagues. One said, ‘She only ever talks about exports of British produce and babies’ brains.’

Philip Hammond’s time as foreign secretary during Cameron’s renegotiation gave him an advantage over most of his colleagues. Combined with the institutional clout of the Treasury, he quickly began to assert himself. The chancellor was ‘very gloomy’ about Brexit for three reasons. A former minister with whom he discussed his concerns that autumn said, ‘One was the economic cost of it. The second was they could see the impact on financial services. Companies were making decisions about whether to leave. Third, they were feeling a bit overwhelmed by all the problems – like creating a customs system at the border.’

A cabinet committee paper discussed in mid-October warned that the Treasury could lose up to £66 billion a year in tax revenues if there was a hard Brexit. It also predicted a worst-case scenario that GDP could fall by as much as 9.5 per cent after fifteen years if Britain left the single market and traded on World Trade Organisation terms. ‘In headline terms trade would be around a fifth lower than it otherwise would have been,’ it said. The paper drew on the work Treasury officials had done for George Osborne during the referendum campaign. Jeremy Heywood ordered a rewrite of key sections for ‘more balance’, but even the revised draft drew complaints from Brexiteers that Hammond was ‘trying to make leaving the single market look bad’.1 Publication of the leak drove the pound to a thirty-one-year low against the dollar.

Hammond’s vociferous stance and the institutional activism of the Treasury enraged the senior Brexiteers. ‘The Treasury for months after the vote was absolutely determined to frustrate the outcome as much as it possibly could,’ a senior cabinet minister said. ‘They believed that membership of the single market would be seen by everybody as an unalloyed good. But to leave the EU you have to leave the legislative rule-making system, which is the single market.’

Realising after the first cabinet committee meeting on Brexit that they needed to stick together, Boris Johnson, Liam Fox and David Davis met in a waiting room in 10 Downing Street to confirm to each other that they accepted the logic that Brexit meant leaving both the single market and the customs union. ‘If you’re going to do it, do it right,’ Johnson said. ‘It’s like Theresa says, you’ve got to stop thinking about what we hold on to, you have to imagine Britain free and think of what you want.’ Fox’s ability to secure free trade deals depended on Britain leaving both arrangements: ‘To be in the single market would mean unrestricted freedom of movement which is politically not possible,’ he said. ‘To remain fully in the customs union we’re not allowed to have separate free trade agreements with the rest of the world outside of the EU.’ Fox regarded these arguments as ‘unanswerable’.

Davis was sceptical of the ‘clever people with a uniform set of views’ in the Treasury and the ‘gravity model’ they used on trade, which decreed that the closer you are to a country the more you trade. He believed it was ineffective because services were ‘weightless’ and traditional constraints on long-distance trade, like transport costs, were a small fraction of what they had been decades earlier. ‘David felt they massively overestimated the negative impact of a no-deal WTO scenario and then underestimated the advantages of deals with the rest of the world because they’re all a long way away from us,’ a source said. When Hammond told him there might be a 25 per cent fall in trade, Davis replied, ‘That’s bollocks!’

Despite her conference speech, May did not wish to be boxed in or hurried into stating her views publicly. ‘The system was moving too rapidly to tell her what the right answer would be without giving any evidence,’ one mandarin admitted. Some officials found it difficult to adapt from the free-wheeling briefings of the Cameron days to a female prime minister who wanted things done more formally. Both Mark Lyall-Grant, the national security adviser, and Andrew Parker, the director general of MI5, attracted May’s ire for interrupting her, talking over her and ‘mansplaining’ in condescending tones.2 Ivan Rogers had a similar effect. Some saw the same trait in Hammond, who did not trouble to disguise his disdain for those with lesser intellects or job titles. A cabinet minister said, ‘He was patronising. Boris, in particular, had a rough time at some of these meetings.’ Another cabinet colleague explained, ‘He thinks Boris is a plonker.’ May’s team saw Hammond’s spats with Johnson as evidence that he, too, was seeking to justify his vote on 23 June: ‘It does feel a little bit like an exchange of blows over things that are long gone. Phil made such a song and dance about his Euroscepticism over the years – then he campaigned to stay in. Having then lost he feels he can’t re-rat.’

When May made Hammond her chancellor, the conventional wisdom was that they were old university friends and that she wanted someone she could trust next door. While they were Oxford contemporaries, Hammond had a very different approach to economics from May and Nick Timothy and felt himself to be no less able than May. Hammond told a former cabinet minister, ‘If Theresa May can be the prime minister, so can I.’ The source said, ‘They’re not friends. He doesn’t like her.’

Hammond’s personality also irritated May’s team. A cabinet colleague said, ‘There is something mildly Aspergic about him. Philip is not very user friendly.’ The chancellor clung to the security blanket of single market membership long after others had given it up as impossible. A senior mandarin said, ‘Phil was beating a dead horse. That’s the charm and the irritation of the man. He usually picks the wrong battle.’

For his part, the chancellor became highly frustrated that he was blocked by the chiefs from seeing May alone, without their presence. A Downing Street official said, ‘Philip used to get very frustrated that he could not see the PM. He thought he had the right to see her any time he liked.’ A senior civil servant said Hammond would hover outside May’s office but would be intercepted by Timothy or Hill: ‘He would want to see her on her own but they would say, “You’re not going in there without us.”’ Another Downing Street source said, ‘He was made to feel unwelcome. They never spoke to DD like that.’

In October it was reported that Hammond had threatened to resign, in part because he had been excluded from the 8.30 a.m. planning meeting in Number 10 at which George Osborne had been an habitué. In fact, Hammond had never threatened to resign but he had told friends that he had thought about doing so. ‘He went around – in a gallows humour kind of way – saying, “Well, I won’t be in this government very long,”’ one ally said. ‘He doesn’t get on with her at all.’ Fiona Hill put ‘face time’ with Hammond in May’s diary but the chancellor demanded meetings about the autumn statement alone with May, which the chiefs viewed as unacceptable. Hammond’s marginalisation was also painful for his officials. ‘The Treasury was running the country under George Osborne and Gordon Brown,’ one said nostalgically. As a result of this episode it was agreed that Hammond would have regular dinners or breakfasts with May. ‘Phil insisted on having his weekly time with her,’ a fellow minister said. Nick Timothy explained later, ‘They go for dinner or breakfast with one another probably every fortnight.’3 The arrangement was publicised by Hammond’s aides. By contrast, David Davis was able to wander in to see Hill and Timothy – both of whom were firm DD fans – whenever he liked.

May’s aides believed Hammond – while not a leaker to the media himself – was too ready to sound off to people who shared his thoughts with journalists. A cabinet colleague said, ‘Philip talks too freely.’ A May aide stated, ‘On Brexit he quite willingly talks against her to Mark Carney, who tells everyone in his circle and that feeds back. I think he’s a bit naïve, actually.’ In discussions with third parties Hammond did little to disguise his scepticism about May’s approach. ‘The economy almost certainly will slow down,’ he said privately. As chancellor, Hammond wanted more headroom in the public finances to cushion against turbulence. His personal assessment that autumn, shared with political and media contacts, was that a Remain vote would have provided ‘a growth kick of half a per cent of GDP a year for several years’ and that growth in 2017 would have been 2.5 per cent, a figure he now expected to be just 1 per cent. Nick Timothy, in particular, regarded Hammond’s views on the economy as excessively pessimistic. A DExEU official said, ‘The way they talked to the chancellor of the exchequer was totally outrageous. I’ve seen DD in meetings roll his eyes as Hammond tries to say something sensible about Brexit. They don’t want to hear anything about problems.’

As the autumn went on the daunting complexity of Brexit became clearer to the cabinet. At the end of September, Carlos Ghosn, the CEO of Nissan, warned that he could scrap potential new investment in the car firm’s Sunderland plant unless the government promised to compensate the company for any tariffs imposed after Brexit. WTO rules stipulated tariffs of 10 per cent on car imports and exports, wreaking havoc with cross-border supply chains. One senior cabinet minister admitted, ‘Brexit was a surprise for the Japanese and they don’t like surprises.’

Theresa May and Greg Clark, the business secretary, set to work to put Nissan’s mind at rest. They did not offer tariff relief but privately made clear that Britain would be pursuing a bespoke trade deal with the aim of keeping tariffs at zero and borders as frictionless as possible. A minister said, ‘Assurances were given about investment in training but there were no financial inducements.’ It was enough for Ghosn to announce, on 27 October, that Nissan would build its new Qashqai II and X-Trail models in Sunderland, safeguarding seven thousand jobs. It was a propaganda win for the Brexiteers. The Remainers responded by pointing out that insurance giant Lloyd’s of London was planning to open a series of subsidiary offices elsewhere in the EU so they could continue to operate post Brexit.

Ministers were quickly aware that moving EU law into British law could not be done at the stroke of a pen, since many laws referred to rulings by the European Commission or various EU regulatory bodies. Each of these would need to be rewritten to refer to new British regulators. A cabinet minister said, ‘People made an initial scan and thought, “Fuck!” The number of statutes affected started off in the tens of thousands. It came down significantly to around one thousand.’ The number fell because government lawyers ‘found ways of doing things once’ which would ‘cross over to other statutes’.

Davis set up fifty-eight projects inside DExEU to analyse the implications of Brexit for different sectors of the economy and public life and make recommendations about which had to be protected. Separately, Davis asked a bright civil servant called Tom Shinner to oversee a risk register of key projects and institute a ‘critical path analysis’ which would send alarm bells to Davis if progress on preparing for Brexit was too tardy. May’s conference speech brought home to civil servants across Whitehall what was at stake. ‘You could go from no impact on the automative industry if you replicate tariff-free trade to total disaster if we have hard Brexit with all the tariffs,’ one said. ‘We realised that we had to prepare for the worst-case scenario.’

The implications of May’s approach to the European Court of Justice raised alarm bells in several departments. The court played a role in overseeing Euratom, the nuclear materials regulator, the Open Skies Agreement, which gave British airlines parity of access to European airports; the European Medicines Agency, which regulated medicines; and the European Broadcasting Union, which granted licences to television companies, prompting the Discovery Channel to warn ministers they might have to relocate elsewhere in Europe. Ivan Rogers sought to explain to ministers some of the benefits of ECJ oversight. ‘On aeroplanes, access to the single market means planes can land at EU airports and return from them. Membership of the single market means you get slot, gate and lounge allocation on the same terms as local airlines – not 3.00 a.m. slots a mile away from the terminal, and the airlines can fly within the EU, not just to and from the EU. Access means that your banks can only lend via a local subsidiary. Membership means there is no need for your banks to be separately supervised, regulated, managed and capitalised subsidiaries in other countries. Access means that Scotch can be sold into France or Germany; membership of the single market means that all taxes and duties for comparable products to Scotch must be the same as for Scotch, and if they are not, we can take them to the ECJ and say, “Why are they not?”’4

In each case a new deal or a domestic solution was possible, but they would need to be found. A DExEU official said, ‘It was clear we were leaving not just the single market but every European agency. The Department of Health people said, “We can’t leave the European Medicines Agency”. Well, you just have. When we asked each department what their preferred outcome was they all said, “Everything to remain as it is.”’ That meant officials needed to concentrate on finding ways to replicate the status quo and resist contingency planning for a scenario in which there was no deal. Davis was forced to ‘kick them hard’ to prepare.

After initial concerns that the Brexit secretary did not like detail and would not put in a full five-day week, by Christmas most saw him as a serious figure striving to get to grips with the task in hand. ‘My aim,’ he told his staff, ‘is to imagine a huge Venn diagram of the different groups – politicians, the City, industry, the diplomatic corps – and find somewhere in that bloody great Venn diagram where everybody overlaps.’ At the centre of the diagram, Davis sought to ‘ensure Number 9 and Number 10 [Downing Street] are as close as they sound like they are’. A cabinet minister observed of May, ‘It takes her time to make decisions. It also takes her time to trust people. You have to work at it.’

Despite Philip Hammond’s agitation, the cabinet quickly came to the view that Britain would leave the single market. Their most heated debates throughout autumn 2016 concerned whether the country would remain a full member of the customs union, within which countries set common external tariffs and do not require customs checks. Also at issue was whether the UK could begin negotiating its own free trade deals with other countries, which was not possible with full membership.

In October a leaked cabinet paper showed ministers had been warned that pulling out of the customs union could lead to a 4.5 per cent fall in GDP by 2030 and the clogging up of trade through ports like Dover and Holyhead. It estimated that the UK would need to grow trade with its ten largest partners outside the EU by 37 per cent by 2030 to make up the difference. But the cabinet Brexiteers did not believe the Treasury’s figures, after their referendum campaign warnings about an immediate economic shock had proved incorrect. Davis dismissed them as ‘pessimistic’, while Johnson branded the modelling ‘Project Fear crap’ reminiscent of the referendum campaign.

Hammond, backed up by Greg Clark, challenged Fox’s Department for International Trade to quantify the benefits that could be accrued from new trade deals with non-EU countries, but the figures were not forthcoming. ‘This was why Hammond was saying, “We’re not leaving the customs union” – because he didn’t believe these other trade deals are going to make up the difference,’ a senior civil servant said. Trade deals with even friendly countries like the US, Australia and New Zealand presented difficulties, since they would open the border to hormone-infused beef, chlorinated chickens from the States and cheap lamb from Australasia. ‘The Welsh Office said, “Hang on a minute, that will kill the Welsh lamb industry,”’ a source recalled.

There were also practical problems at the border. A former minister said, ‘Phil told me that for every hour at Dover, 30 kilometres of lorries go through. They just don’t have any system at all for stopping and checking them.’ Customs were installing a new computer system, the Customs Declaration System, a fact which raised alarm bells following previous government IT failures. Officials advised Davis that they would need one thousand lorry bays to inspect incoming freight at Dover. There were currently ten. The dawning realisation that Britain would also need thousands of new customs officers strengthened the hand of Hammond and other ministers who were pressing for a transitional arrangement, to buy Britain more time to move from EU membership to the new order. Put simply, unlike May and Davis the chancellor believed there was no chance of having the necessary people and systems in place by the end of March 2019. ‘That’s why the Treasury began to kick back violently,’ a source said.

As the row rumbled on, Fox remained confident that Britain would be outside the customs union, a view he was quick to share with EU officials. A DIT trade strategy paper leaked in September warned that staying in the customs union ‘would constrain our ability to act independently’ and could also be ‘portrayed by some that remaining means we have not left the EU’. A senior civil servant observed, ‘Liam, of course, was fighting for his job. But unless May was going to sack him and shut his department down, the customs decision was taken on the day they created DIT.’

However, when Ivan Rogers sought clarity from Downing Street he was told nothing had been decided. In Number 10, despite her conference speech, allies say May was engaged in the search for a halfway house. ‘On the customs union, I think she genuinely wanted to try and find another way,’ one said. With some ministers, May even used an old phrase of Tony Blair’s. ‘She kept saying, “Maybe there’s some third way …”’ When quizzed by reporters, May would say, ‘It’s not a binary decision.’ A source close to the prime minister explained, ‘Membership itself is a binary choice but access is not.’ There was even talk of keeping certain sectors of the economy or parts of the country inside the customs union – an idea soon dropped as impractical. This hedging created friction with the Brexiteers, particularly Boris Johnson, who wanted a clear statement that the UK was leaving.

Johnson compared the customs union to the Zollverein, the nineteenth-century arrangement which broke down tariff barriers between German states while maintaining tariffs with the outside world. He wanted Britain to ‘come out of the Zollverein’ as it related to the rest of the world, but retain free movement of goods between the UK and the rest of the zone. The foreign secretary was unable to keep his views private. On a trip to Prague on 15 November he told a Czech newspaper, ‘Probably, we will need to leave the customs union.’ He also dismissed the notion that freedom of movement was a founding principle of the EU, with customary relish, as ‘bollocks’. May was not amused. Her official spokeswoman Helen Bower told journalists, ‘The foreign secretary reflected the government’s position which is that a decision hasn’t been taken.’

On his return, Johnson was summoned to Downing Street for a ‘meeting without coffee’ with May and Timothy. ‘Boris, why are you so obsessed with the customs union?’ May asked. The foreign secretary replied, ‘It doesn’t make any sense.’ They had a long argument. Johnson pointed out, ‘You could have frictionless trade from outside the customs union and continue to have goods and services circulating inside the single market.’ He cited the example of integrated automotive supply chains that cross the US-Canadian border. Johnson left and told aides that May was concerned business would be ‘spooked’ by the idea of leaving the customs union. Privately he was critical that Davis was not backing him up. A source close to Johnson said, ‘DD’s position was, “God, it’s all so difficult” because he had a vested interest in intensifying the magnitude of the task in order to intensify his triumph when it comes. Boris was worried that the whole tone of the government was becoming defeatist.’

Johnson did have an ally in Fox. In a wing of the Foreign Office overlooking Whitehall, which had been annexed by DIT, the international trade secretary got on with the job as if he had no doubts Britain was leaving. He saw four main tasks. The first was securing Britain separate ‘schedules’ at the World Trade Organisation, in effect deciding how much of the EU’s trade concessions would be taken over by Britain. It was not just a case of taking ownership of a fixed percentage. The vast bulk of New Zealand lamb coming into the whole EU ended up in Britain, for example. Fox argued that the schedules should apply based on the percentage of any quota ending up in the UK market.

The second task was arranging deals for Britain with countries who already had a free trade deal with the EU so that the UK could keep trading with them on the same terms after Brexit. That meant trying to transplant forty agreements covering fifty-eight countries. Two were worth a disproportionate amount of the trade: Switzerland and South Korea. Fox told those countries, ‘We want to adopt the EU FTA [free trade agreement] into UK law. We’ll come to a more bespoke agreement that’s more liberal later on.’

The third task was to begin talks to secure new free trade agreements. He regarded the US as the main target, but Australia, New Zealand and the Gulf Cooperation Council all indicated interest, with China and India as the other main prizes. This work could not begin in earnest until Davis made progress on trade talks with the EU, because these countries wanted to know what access to the EU a deal with Britain would bring. A paper prepared for a cabinet Brexit committee meeting in September (leaked in November) showed that the DIT had divided countries he wanted Britain to trade with into ‘gold’ and ‘silver’ categories.

The fourth and final strand of his work was to talk to Britain’s EU partners about how the EU negotiations, led by Davis, would affect world trade. Fox warned that they had a responsibility not to damage global prosperity: ‘If Europe comes to an agreement that limits trade and investment that will impact the global economy.’ He explained his approach in a speech in Manchester on 29 September, vowing to make Britain a ‘world leader in free trade’ and exploit the ‘golden opportunity’ to forge new links. He urged the EU to avoid tariffs which he said would ‘harm the people of Europe’.

Things weren’t plain sailing, though. Fox received legal advice that there was a ‘high risk’ that the European Commission would take Britain to court and seek to fine the UK if he sought to sign or negotiate trade deals with third countries while it remained in the EU. The paper revealed that even discussing a trade deal with a country not actively negotiating with the EU would still ‘carry a medium/low risk’ of being sued by Brussels. A Downing Street official said, ‘There was a lot of bravado from ministers about what they were going to achieve, which very quickly proved to be unrealistic and legally impossible.’ Some civil servants believed that Fox’s focus on trade tariffs – and his belief that a trade deal with the EU would be the ‘easiest in the world’ – was missing the point, since the real problems were encountered trying to secure a deal on services, where the refusal to recognise professional qualifications and other non-tariff barriers were more significant. ‘It’s not all about tariffs,’ a senior mandarin said. ‘Liam believes you just unilaterally disarm and then take all your tariffs down.’