May’s Brexit: Going it alone, hoping for an EU trade deal

Prime Minister Theresa May has finally outlined what Brexit really means for her: Britain going it alone, fully disentangled from the European Union while hoping the bloc will agree to a comprehensive trade deal. Britain will exit the EU’s vast internal market for goods and services and will instead try for a “bold and ambitious” free trade agreement (FTA), rejecting the kind of arrangements some other European countries, such as Norway and Switzerland, have for trade with the world’s biggest economic region.

In her speech on Tuesday, May called for a deal to be done within two years, emphasized cooperation with the bloc and called for a “phased-in” transition to Brexit. The value of the pound reversed recent losses and staged its biggest single-day rally against the US dollar since at least 1998. But there was a lukewarm reception from political leaders in EU countries, a reminder that agreeing the kind of trade deal May wants will be an arduous - even painful - task.

“Where is the give for all the take?” asked the Czech Republic’s secretary of state for EU affairs, Tomas Prouza, on Twitter. Ireland’s government said it was under no illusion about the scale of Brexit. May outlined 12 negotiating priorities, including limiting immigration, exiting jurisdiction of the European Court of Justice, and ending full membership of the customs union that sets external tariffs for goods imported into the bloc. Aiming for a comprehensive free trade agreement (FTA) means she can enter negotiations with an almost blank canvas, largely free of politically unpopular compromises around freedom of movement or large payments into the EU’s budget.

FTA chance

But the process of agreeing an FTA is fraught with risk. May has said she wants to agree Britain’s future relationship with the EU within two years, followed by a period of implementation. Free trade deals usually take far longer than two years to agree - Canada’s FTA with the EU will have taken seven years by the time it is expected to come into force. “(The) prolonged uncertainty over forming agreements will present a significant challenge to the economy and one from which consumers cannot be called upon to buy our way out,” said Jagjit Chadha, director of Britain’s National Institute of Economic and Social Research.

Consumer spending has been a main driver of Britain’s economy recently, with other sources of growth like trade and investment lagging. Getting rid of barriers to trade in services, the dominant sector in Britain’s economy, is also likely to be hard, although those backing Brexit argue barriers already exist within the EU. And the deeper the trade agreement, the more EU regulation Britain would have to abide by, according to the Centre for European Reform think tank.

Supporters of the FTA option argue this would allow Britain to trade with the EU largely as before while also leaving it free to agree trade deals directly with other countries such as the United States, its biggest individual export partner, and emerging markets such as Brazil and India. Brexit supporters also point to Britain’s large goods deficit with the EU - a record 8.59 billion pounds in November 2016. They say the bloc could not afford to cut it off.

Nuclear option

May seems to see this as a bargaining chip, stating in her speech that no deal is better than a bad deal effectively acknowledging that Britain could resort to World Trade Organization rules, which set upper limits on tariffs countries can impose. In such a scenario, Britain would face barriers on services, particularly in highly regulated sectors such as finance. That would be a “very dangerous path”, according to J P Morgan economist Malcolm Barr.

“One might expect a successful negotiating strategy to have ambitious objectives and a credible fallback position. May certainly has the former. But we doubt the prime minister has the latter,” he said in a note to clients. Tellingly, just as May was setting out her pitch for an internationalist Britain built on cooperation, her finance minister Philip Hammond told parliament that Britain could get tough if a comprehensive FTA with the EU is not forthcoming, and slash business taxes in retaliation. “If we don’t (get a sensible Brexit deal) the people of this country are not simply going to lie down and accept that they will be poorer,” Hammond said. “We will do whatever it takes to maintain our competitiveness and protect our standard of living.” — Reuters