Theresa May is warning Tory rebels that if Parliament gets a meaningful vote on Brexit, the European Union will be 'incentivised' to offer the UK a 'bad deal'. She is right. But that doesn’t mean the Prime Minister should dismiss the prospect of the House of Lords inflicting a second defeat on the government, with peers today set to back an amendment requiring Parliament to endorse the UK’s final Brexit deal. May should, in contrast, turn what looks like an inconvenience to her political and diplomatic advantage.

Theresa May responded to the first Parliamentary defeat to the government's Article 50 bill, on an amendment designed to guarantee residency rights for all EU citizens currently living in the UK, by insisting her plan to trigger Article 50 before the end of March 'remains unchanged'. She could say this because even if a dozen or more Tory MPs rebel, countless Labour members are likely to vote with the government, petrified that being seen to obstruct Brexit will go down badly in the party’s northern heartlands. Despite that, the government should now still offer to accept this earlier Lords amendment, guaranteeing that the three million or so UK-based EU citizens can stay, even before the same assurances are extended to their 1.2m EU-based British counterparts. May should have done this almost immediately after last summer’s referendum, as some of us argued at the time. With the Lords now forcing the issue, such a unilateral guarantee will be seen as something of a climb-down. But it’s still worth doing. Not only will it put the rest of the EU on the back foot, as Article 50 is triggered and negotiations get started. It could also be used to split the Parliamentary rebels, exposing those hiding behind a cloak of virtue as the anti-democratic Brexit blockers they truly are.

A unilateral guarantee now, ahead of what are likely to be testy Brexit negotiations, would allow the UK to occupy the moral high ground, demonstrating that we want to be neighbourly and constructive. Both UK and EU citizens will eventually be granted such rights anyway, not least as they are enshrined in other non-EU treaties. So we may as well gain some diplomatic advantage by offering them first. There's also a more pressing reason for doing this: the government can publicly say to Article 50 rebels in both Houses of Parliament that it will accept the Lords' amendment on EU citizens as long as the 'meaningful vote' referendum is then dropped. That will appease many moderate Remainers, in Parliament and across the country. Offering such a deal wouldn't only be a great relief to numerous EU citizens. It would also smoke out die-in-the-ditch rebels whose real aim is to deny the Brexit vote - or at least delay Brexit for as long as possible, waiting for an economic downturn they can then blame on the prospect of leaving, in a bid to change public opinion and push for a referendum re-run.

After all, the Prime Minister has already offered a 'binding vote' on the deal that emerges after the two-year Article 50 negotiation. Parliament would be entitled to reject any deal struck between the UK and EU, but we would still leave, reverting to trade with the EU under World Trade Organisation rules. Portrayed by stubborn Remainers as some kind of disaster, 'WTO rules' are actually a pretty good option. Almost all the UK’s existing non-EU trade is conducted under WTO rules. Such trade accounts for the majority of our international commerce, is growing fast and registers a surplus. Trade between the US and China - the world’s two biggest economies - is conducted under WTO rules. So is that between America and the EU. Under WTO rules, the US sold more than $250bn (£204bn) of exports to the EU last year - and we can similarly trade with Europe, outside the single market, under WTO rules. Exporters in some UK sectors would face tariffs, yes. But they can be compensated, and any tariffs they might face are anyway offset by the recent fall in sterling and can hopefully be negotiated lower once we're outside the EU.

The Parliament vote that May has offered would strengthen the government’s negotiating hand. During our Article 50 talks, MP and peers of all parties would become greedy for EU trade concessions that benefit UK firms and jobs. Unless they’re forthcoming, Parliament could credibly threaten to scupper the deal, resulting in the EU losing sector-specific concessions offered by our negotiators to trade tariff-free in the UK. The government, and Parliament, would be working together to secure the best deal for Britain.

What the Lords rebels are trying to do today, in contrast, is pass an amendment that allows Parliament to reject the deal, with the UK then staying in the EU as it stands. That is very different. The UK’s multi-billion pound net contribution, and the perceived blow to the 'European project' represented by Brexit, means the EU, as the Prime Minister has identified, has every incentive to offer us a stinker of a deal. We would doubtless be presented with onerous terms, not least on the high-profile matter of the UK’s 'final payment' - in the hope that Parliamentary rebels then gain public support to reverse Brexit entirely. By granting EU citizens the UK residency rights now that they will eventually get anyway, the government will reassure many Remain voters, winning ministers the time and space to explain why the Lords and Commons rebels, although presenting themselves as being honourable, are actually on extremely dubious ground. Parliament already voted by a margin of six-to-one, ahead of our referendum, to hand the decision over our future EU membership to the broader electorate. Official government leaflets delivered to every British home during the campaign said 'this is your decision - the government will implement what you decide'. The prospect of a second referendum, the real goal of many of the Parliamentary rebels, would not only encourage the EU to give us a bad deal. On-going uncertainty would hinder investment, threatening growth and jobs. And, if Parliament ultimately votes against the deal, we could find ourselves in a Quebec-style 'neverendum' situation. The UK would become paralysed by political splits and confusion. Financial markets would become, at the very least, unstable - undermining sterling, equities and the broader business environment. The prospect of a Parliamentary 'reversal', and an even more bitter referendum campaign, would threaten Britain’s reputation as a relative haven of stability. And that’s to say nothing of possible civic unrest if voters believe the political classes are closing ranks.

Brexit is, of course, ultimately about the supremacy of the UK Parliament. But Parliament can only make decisions on borders and vast swathes of labour market policy, freeing itself of European Court of Justice subjugation and becoming truly sovereign again, once we've actually left. And the fact that most Parliamentarians clearly want to stay in the EU, even though the majority of the electorate doesn’t, is the reason we had a referendum in the first place. The Prime Minister could probably thumb her nose at the Lords rebels, if they get their way today, relying on them being voted down in the Commons. But she would use up political capital in doing so - capital she will no doubt need during what will be an arduous Article 50 negotiation.

Better that she is seen partly to accommodate the Lords, accepting their amendment on EU citizens, while taking this opportunity to expose the 'binding vote' demand for what it truly is - a blatant attempt to reverse the Brexit referendum result, the biggest demonstration of democracy in British political history.

Liam Halligan writes his weekly 'Economics Agenda Column' in The Sunday Telegraph