Brexit - What The Hell Happens Now?

Alternative Relationships with the EU

On June 23, 2016, the United Kingdom’s European Union membership referendum resulted in a win for the “Leave” campaign. But the campaign and vote did not specify just how Britain would leave the EU or what relationship it would subsequently seek to have with the EU. Currently, a number of extra-EU members enjoy various political, legal and trade connections with the EU. Norway, Iceland and Liechtenstein are members of the European Economic Area (EEA), which gives them trade access to the EU’s single market at a cost of partial membership payments to the EU budget. Norway cares deeply about its fishing industry, which it has defended quite effectively. In contrast, Britain’s financial services sector will be a harder interest group to defend in such an arrangement. Fundamentally, the Norway model cedes a great deal of sovereignty to the EU – and Norway has little say in the EU parliament, since it isn’t a member state. However, because sovereignty and the “take back control” slogan were important to Leave voters, the Norway model appears to be a nonstarter for the UK and its financial sector.

“Brexit [is] a problem with countless actors, millions of trade implications, numerous political agendas and a volatile, emotional debate.”

Switzerland, a successful, relatively small country that remains outside the EU but at the heart of Europe, might seem to offer a blueprint for Britain, but its tailored arrangements with the EU took six years of negotiation after a 1992 referendum, and neither party is overly enamored with the relationship. “Essentially the Swiss agreement is a stalemate which fossilized into a status quo.” When the EU made compromises with the Swiss and allowed exceptions to rules that were intended to be universal, it created enormous headaches. The EU is “unlikely to want to go down that road again” with the UK.

“Leave wasn’t an alternate economic or political model. It was a blank canvas which people could project their hopes, aspirations and frustrations onto.”

Turkey, a member of the European Customs Union but not the European Single Market, presents another possible scenario for the UK. Customs Union members apply a common tariff to imported goods from nonmembers, allowing Turkey to reap the benefits of EU trade negotiations. Turkey also enjoys tariff-free trade with the EU. Yet, unlike the EEA, the Customs Union doesn’t permit free movement of goods, capital, services or people among member states. Since membership removes nations’ authority to negotiate trade deals, the UK is unlikely to opt for this solution.

“When Brexiters say that they want to leave Europe to trade with the rest of the world, they fail to realize that leaving Europe is an obstacle to trading with the rest of the world.”

Canada enjoys a relationship with the EU that is perhaps most attractive to Britain: a straightforward free trade deal. However, Canada’s deal took seven years to negotiate, starting in 2009, and proceeded only “after a tortuous progression through all the national parliaments of the EU.” The agreement focused largely on traded goods, but the UK will confront extra difficulties in trade negotiations for services, which are much more complex, particularly in the financial sector. Canada’s deal was also free from the political dimension facing the UK, since many of the other 27 EU countries will be wary of encouraging further leave campaigns. And at this point, trade deals themselves seem to be losing political popularity.

The City

The financial services industry in the City of London is a major consideration for Britain’s Brexit negotiations. Currently, London wins a great deal of banking business from European and non-European countries. That advantage is at risk if the UK doesn’t replace the regulations and laws that permit such business with alternative favorable methods of “passporting” that allow financial institutions to perform transactions across Europe. Financial firms from other countries including the US and Japan currently treat London as a portal to the EU. American investment banks maintain about 87% of their European personnel in the UK. Although no other European city is capable of completely replacing London in performing its specialty, a gradual drain of a few percentage points of business could easily cost the UK billions in lost revenue. And some European politicians have their eye on increasing their own share of business in this sector.

A Lack of Time and Negotiating Capability

Implementing Brexit involves an unprecedented amount of preparation and negotiation; it’s “tantamount to switching a country off and on again.” The task is daunting, because so many aspects of trade, commerce and law are intertwined and so many interests are involved. And because Britain has not negotiated for itself since it joined the common market in 1973, it has to find and develop teams of trade experts, analysts, diplomats and negotiators from scratch. After the Brexit referendum, Britain had 40 trained trade negotiators, compared to 550 in the EU.

“The EU is a well-meaning but internally contradictory experiment in transnational political organization.”

The UK must try to reach agreements with the EU and the World Trade Organization (WTO) at the same time, so the much-hyped bilateral trade deals with other nations present an even greater resource demand. Time is also short: While other countries’ EU trade pacts took several years to finalize, Article 50, an EU treaty clause a member triggers to notify the EU of its intent to depart, lets only two years pass from when a member invokes it to when all treaty conditions expire. This deadline “gives Europe the advantage of knowing [the UK’s] back is up against the wall.”

“Unfortunately Britain’s team going into Article 50 lacks trade expertise or experience, works…without clear lines of accountability, and has stroppy, combative individuals at its head. It appears doomed to fail.”

The UK also must put a complicated commercial infrastructure in place by the time of separation. This includes, for example, designated food inspection posts, proof of country-of-origin documentation systems and a British medicines authority. These nontariff infrastructure issues will be sink-or-swim factors for future trade. Meanwhile, if an exporting country like China seeks to take advantage of the chaos and flux in Britain’s trade relations, for instance, by dumping cheap steel, the UK would struggle to respond effectively to a challenge on another trade front.

“Chancellor [Angela] Merkel is a friend of Britain and will want a good deal, but even she can’t allow [the UK] to secure a better position because of Brexit.”

The proposed approach to addressing the present entanglement of British and EU law and regulation is a “Great Repeal Bill,” which – in one move – would copy and paste much of the existing EU law now governing the UK into British law, therefore assuming continuity until British lawmakers deliberately change any part of it. This approach is no doubt sensible but not as easy to do, nor as all-encompassing, as it sounds.

Relying on the WTO Is Not the Easy Option

Before and after the referendum, Brexit supporters made a misleading claim that worries over the outcome of negotiations with a slighted EU were unfounded. They asserted that the WTO would provide a “safety net,” preventing Brexit from being too punishing on Britain. This argument fails to show an understanding of how the WTO’s mechanisms work. The main device the WTO uses to reduce world tariffs is its “most favored nation” rule. It means that members of the WTO must treat all their fellow WTO-member trading partners with equal favor if no specific trade deal is in place. If the UK and the EU can’t reach a trade agreement, the UK can’t make any concessions to an EU country that are more favorable than those it extends to any WTO member.

“Trade negotiations are not the place for a group hug. States go into them with a very firm focus on their own interests and they take advantage of vulnerability.”

In some ways, the WTO’s existence makes completing Britain’s negotiations with the EU more crucial, not less, if the UK wants to continue any favorable EU trading arrangements. Britain should benefit from some goodwill at the WTO, since it helped start the organization and is a pro-free trade nation that abides by the rules. Yet, the negotiations and technical heavy lifting required to establish Britain in the WTO could be more complex and demanding than the EU negotiations themselves.

Britain Is as Vulnerable to Lobbying as It Is to a Weak Negotiating Position

Brexit will create winners and losers, and many interest groups are mobilizing to lobby for their interests. Politicians may also see opportunities – for example, lawmakers might be tempted to cut workers’ rights. During a period in which economic growth will be under strain, “ministers will be able to make bits of law vanish.” The heavily subsidized agricultural sector could see great changes, and farmers are already lobbying hard. The fishing industry makes only a small contribution to Britain’s GDP, but due to EU quotas it was prominently pro-leave in the referendum, and it’s agitating for attention.

“British and EU law are like two vines which have been crawling over each other and entwining for 40 years…No one knows which bits belong to one and which bits to the other.”

Foreign lobbyists also might seek to influence trade deals. For example, the American pharmaceutical industry could pressure US trade negotiators to rein in the UK’s value-for-money health service watchdog, the National Institute for Health and Care Excellence, which keeps out some expensive US drugs. Silicon Valley might petition to lower UK data protection and right-to-be-forgotten laws to US standards. Industry lobbyists could call for more relaxed regulations on chemicals. India may negotiate for more student visas as a quid pro quo in trade talks, while China is likely to want a bigger share in financing the UK’s energy infrastructure. Having so many of these lobbying opportunities unfold in the space of a few years is likely to swamp the British government and its negotiators. The EU’s systems are imperfect and, critics say, not always democratic, but Brexit may mean that British “sovereignty will be bartered for commerce” during the even more secretive, undemocratic process of trade talks.

“The idea that Britain has grown stronger by leaving the EU will be seen as a bad joke when it is being bounced from pillar to post by bigger negotiating partners.”

Although Brexiters’ rhetoric features “baseless optimism,” Britain and its economy are actually quite vulnerable. As far-right and euro-skeptic political parties are gaining popularity, European leaders are “on a damage limitation exercise” to prove that Brexit is a bad idea. Brexit leaders who mention possible trade deals with other countries don’t acknowledge that important trade partners such as the US and Japan see the relationship with the EU as a pivotal factor in the UK’s desirability as an investment destination. The EU’s refusal to hold preliminary talks and its exclusion of the UK from some meetings – moves that emphasize the EU’s two-year deadline advantage – already reveal the weakness of Britain’s position.

“Britain is about to experience a toxic mix of weak law and strong lobbying.”

The situation is not all bleak, however. The UK imports more from the EU than it exports to the EU, and the strong British consumer economy is a sweet spot for European businesses. Brexiters argue that Britain buys one-fifth of all Germany’s new car exports, making the UK Germany’s biggest car customer, and this point is valid. But as the sanctions with Russia show, German leaders are capable of putting political considerations above purely economic ones when they see fit. A strong factor in Britain’s advantage is that it remains “Western Europe’s dominant military power, with considerably more capacity and willingness to engage than its closest competitor, France.” That might keep crucial eastern EU countries such as Poland on Britain’s side.

Two Years Is a Long Time in Politics

While the British government appears for now to be heading for a “hard Brexit,” or a clean break, that depends on many variables. The state of the economy often dictates the weather in politics. The UK seems to be doing fine so far, but the situation could turn when businesses absorb the real scale of the changes. Supporters of a closer outcome with the EU wish for a possible interim deal and a longer negotiation and adjustment period to prevent the “cliff edge” deadline effect.

“The Brexit ball of fuzzy mandate and heated emotion is about to crash headfirst into an immovable object: European bureaucracy.”

A factor that can change the picture considerably could arise from the EU’s attitude toward its rules on the free movement of people. The UK has been one of the most popular emigration destinations within the EU, and the numbers of EU citizens relocating to the UK (270,000 in 2015) was an important factor in the outcome of the Brexit referendum. But other EU members with strong economies are also seeing signs of public dissatisfaction on this issue. Thus, it is not inconceivable that a movement could arise in the coming years to water down the free movement principle – perhaps something like an “emergency brake” that would temporarily keep immigration numbers at predetermined levels, bringing the EU closer to Brexit voter opinion.

“The cruelest element is time. There is just not enough of it.”

Another aspect of the EU that influenced Brexit voters is the obvious move toward a “federal state of Europe,” exemplified by projects such as the euro currency and the European Central Bank. But even this movement is weakening, and concepts of a “two-speed Europe” are already gaining preliminary but cautious support among some EU policy makers. That could lead to the UK entering into a “continental partnership” with the EU.

“Both the EU and Britain suffer from a chaotic Brexit, but Britain suffers the most.”

A final wild card is that a hard Brexit will have political implications for the Scots and Northern Irish, who strongly favor remaining in the EU. Politicians who’ve always supported leaving the EU are wary of any plan from the EU that might hold out hope for a compromise or a lengthening of the Brexit process. Thus, they could be unwisely rushing Britain into one of the biggest upheavals in modern times.

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About the Author

Ian Dunt is the editor of Politics.co.uk. He also writes for a variety of British newspapers and magazines, including The Guardian and The Times.