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21 January 2017

The Economist: Doing Brexit the hard way


Theresa May opts for a clean break with Europe. Negotiations will still be tricky.

[...] There is a liberal vision of a post-Brexit future in which Britain escapes the most protectionist features of the EU and opens its economy to the rest of the world. It is one that includes lower taxes, less pettifogging regulation and freer trade. During the referendum campaign it was sometimes talked of as “Singapore on steroids”: a dynamic, open Britain capable of competing not just with other EU countries but with the whole world.

The trouble is that, for all her pleasing rhetoric, Mrs May is not really pursuing this vision. She has set immigration control as her priority, even though today’s service businesses depend on being able to move people around at short notice, as does high-tech industry. A similar drawback attaches to her insistence on escaping the jurisdiction of the European Court of Justice (ECJ). Free-trade deals require a neutral umpire. So would any effort, hinted at again by Mrs May, to secure post-Brexit barrier-free access to the EU’s single market for such key industries as cars and financial services.

Such a sectoral approach is anyway unlikely to work, for two reasons. One is that the EU will not offer favoured access to its market only for certain industries. The second is that the World Trade Organisation does not allow it. The WTO accepts free-trade deals and customs unions, but only if they embrace “substantially all the trade”. Were the EU to single out cars, say, for barrier-free trade with Britain, the EU would be obliged by the WTO’s non-discrimination rules to offer the same deal to all WTO members, including China and India.

Mrs May was frank about the trade-off between being in the single market and taking back control of borders and laws. She even declared that to stay in the single market would mean “to all intents and purposes” not leaving the EU at all. But she was less honest in not admitting that Brexit will impose costs, and that a hard Brexit will make them heavier. A YouGov poll for Open Britain, a pro-EU group, finds that even a majority of Leave voters are not prepared to be made worse off in order to control immigration.

Mrs May’s response that the economy has done better since the referendum than economists forecast is disingenuous. Not only have easier monetary and fiscal policy and the fall in sterling cushioned the impact but Brexit has not yet happened—and until recently many firms hoped to stay in the single market. Nor did Mrs May offer any solution to the problems that leaving the single market and customs union will cause for the border with Ireland, where there are currently no customs checks.

Negotiating free-trade agreements will be harder and more time-consuming than Mrs May suggests. She expressed hope that a comprehensive deal with the EU could be done in two years. But experience suggests this is highly unlikely. Many EU countries say they need to settle divorce terms (dividing up property, pensions and so on) before even talking about trade. Canada’s free-trade deal with the EU has taken seven years and is not yet in force. For Britain to replicate the EU’s trade deals with 53 third countries will be more testing than today’s enthusiastic talk of an early agreement with America suggests. And ratification is always tricky: a recent ECJ ruling makes a free-trade deal with Britain a “mixed” agreement that must be approved by every parliament in the EU, including regional ones.

The truth is that when Mrs May formally triggers Brexit she will find the cards stacked against her. Subject to an imminent Supreme Court ruling on needing parliamentary approval, she plans to initiate the process in March. The divorce proceedings then have an extremely tight two-year deadline. Mrs May acknowledged the need for transition, but only as an implementation process towards a final deal. As she conceded, the other 27 EU countries have been impressively united over Brexit. They may welcome her new clarity, but for them the preservation of the union is more pressing than all else. As several leaders have said, Britain cannot have a better deal outside than inside the club.

Mrs May made helpful noises about not wishing to see the EU unravel, unlike Donald Trump. She stressed the need to retain co-operation on foreign policy and security. And she said Britain might pay modestly into the EU budget (though no longer “vast contributions”, so talk in Brussels of an initial Brexit bill of upwards of €50bn, or $53bn, may not go down well). But she also threatened her partners, calling it an act of “calamitous self-harm” if they pushed for a punitive settlement; Britain could retaliate by slashing taxes, she said. She believes her predecessor, David Cameron, made a mistake by not being ready to walk out rather than accept inadequate new membership terms. In her speech, indeed, she insisted that no deal was better than a bad deal.

As Malcolm Barr of J.P. Morgan points out, this is a dangerous line. No deal would mean falling back on WTO terms, implying not just non-tariff barriers and lost access to the single market but actual tariffs on exports of cars, pharmaceuticals, processed foods and much else. The EU would suffer too, but its goods exports to Britain are worth only 3% of its GDP; Britain’s to the EU are worth 12% of its own GDP. Mrs May has made a powerful case for her version of a hard Brexit. But it is Britain, not the 27, that is the demandeur in these negotiations. And that will make securing a good outcome hard in every sense.

Full article on The Economist



© The Economist


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