Britain Heading Towards a ‘Hard’ Brexit
After months of speculation, British Prime Minister Theresa May finally revealed her plans for Britain’s clean break from the European Union (Brexit). In a much-anticipated speech to European diplomats at Lancaster House (London) on Tuesday, May outlined her government’s strategy for Brexit by confirming that Britain wants a wants a complete break from the EU’s single market, which allows free movement of goods, services, capital and people within 28-nation bloc. Instead, her government will pursue a “new, comprehensive, bold and ambitious” free trade agreement with the EU.
Opting for a so-called ‘hard’ Brexit strategy, she said: “I want to be clear: What I am proposing cannot mean membership of the single market…Not partial membership of the European Union, associate membership of the European Union, or anything that leaves us half-in, half-out. We do not seek to adopt a model already enjoyed by other countries. We do not seek to hold on to bits of membership as we leave.” Such a clear positioning strategy was missing following the June referendum even though the PM had stated many times “Brexit means Brexit.”
Her speech has moved the country closer to triggering Article 50 of the Lisbon Treaty – the two year legal process the exit the EU. May has pledged to trigger Article 50 by March 31, 2017. On January 24, the Supreme Court will deliver its judgment on whether the UK government can formally trigger Article 50 without the explicit approval of Parliament.
In her speech, May outlined 12 key objectives for the negotiations adding up to “one big goal: a new, positive and constructive partnership between Britain and the European Union.” Following are the key components of her plan.
* There would be drastic changes in immigration rules to “control the number of people who come to Britain from Europe.”
* The UK will seek a new bespoke customs arrangement with the EU to retain tariff-free trade with the European bloc.
* The UK will pursue bilateral trade agreements with non-EU countries like the US, China, India and Australia.
* The Brexit process will be gradually implemented in phases to ensure a “smooth and orderly Brexit.”
* The final Brexit deal will be put to a vote in both Houses of Parliament.
* There would be greater engagement of devolved administrations in the Brexit process. British laws will be devised in Westminster, Edinburgh, Cardiff, and Belfast.
* The UK will not contribute large amounts of money to the EU budget.
* The UK will seek an early agreement to guarantee the rights of EU nationals in Britain and British nationals in the EU.
* The workers’ rights will be fully protected after Brexit.
* The UK will continue its co-operation with the EU member-states on science, research and technology initiatives. Similarly, the UK will continue its cooperation with EU nations on fighting crime and terrorism.
* A practical solution to maintain the common travel area with Republic of Ireland will be explored.
There is no denying that by publicly declaring her intentions and plans, Prime Minister May has addressed lingering concerns but there is still plenty of uncertainty as many questions need to be resolved to ensure a smooth Brexit and future trading with the EU and the rest of the world. For instance, take the plan on immigration. It is not clear what kind of legal framework (bilateral or regional) will protect the rights of British and EU citizens, post-Brexit.
Weak Bargaining Power
It is a well-known fact that bargaining power affects the outcome of trade negotiations. As a small country, the UK has less bargaining power than the EU. The EU trade matters more for the UK economy than UK trade for the EU economy.
As trade agreements take a long time to negotiate, the UK is in a far less advantageous negotiating position. The two-year time limit on exit negotiations weakens the UK’s position. It is in the UK’s interest to secure a quick trade deal with the EU. If the UK is unable to clinch a deal within two years, it would continue to trade with the EU but under the rules of the World Trade Organization.
Michel Barnier, the EU’s chief Brexit negotiator, has already described divorce as a “prerequisite” to a future trade deal with the UK and there is complete unanimity among 27 member-countries to stick to this mantra. Since considerable amount of time would be spent in working out the exit process, it is highly unlikely that a comprehensive new trade deal between the UK and EU could be worked out quickly.
The UK is aiming for the freest possible trade in goods and services with the bloc. Unlike trade in goods, trade in services can take place through four different modes of supply – cross-border trade, consumption abroad, investment, and movement of service professionals.
Trade in services is very important for the UK as services account for nearly 80% of country’s economy. In financial services, the UK enjoys a strong competitive edge but may face regulatory hurdles in serving European markets in the absence of an agreement covering cross-border trade and investments in financial services. Outside of the scope of single market, financial services are more difficult to negotiate as it requires harmonization of countries’ domestic regulations. This factor would also act as an important impediment when the UK will seek liberalization of financial services under bilateral trade agreements with the US, China, India, Brazil and Australia.
The European leaders are unlikely to approve a more favorable trade deal with the UK as it would encourage other member-states to seek out a similar deal in future. Already demands for similar referendums is gaining momentum in a number of EU member-states. Hence, the prospects of having a free trade agreement with the EU which could undermine the basic membership of the bloc are very weak.
Further, difficulties may also arise from the ratification process because any new trade and investment agreement will have to be ratified by national parliaments of all 27 EU members. Not an easy task in the present times when the public support for free trade agreements are plunging throughout the world.
Singapore of Europe?
What is alarming is the PM’s veiled threat to turn the UK into a low-tax economy if the country fails to negotiate a satisfactory Brexit deal.
“I am equally clear that no deal for Britain is better than a bad deal for Britain. Because we would still be able to trade with Europe. We would be free to strike trade deals across the world. And we would have the freedom to set the competitive tax rates and embrace the policies that would attract the world’s best companies and biggest investors to Britain. And – if we were excluded from accessing the Single Market – we would be free to change the basis of Britain’s economic model,” she added.
It is too early to judge whether this is purely a negotiating threat to the European bloc or something else. Certainly, transforming Britain into a corporate tax haven (Europe’s Singapore) is not what the people voted to leave the EU.