UK’S Brexit deal May take a while
Theresa May is about to discover that breaking up is not the hardest thing to do.
As Brexit Secretary David Davis declares the UK can be ‘‘nimble’’ in establishing a fresh free-trade accord with the European Union at the same time as it quits the bloc, lawmakers and bankers are warning the prime minister that a new relationship will almost certainly take longer to establish.
Failure to seal a new pact before Brexit occurs threatens to harm the UK economy as manufacturers potentially find themselves slapped with tariffs and serviceproviders lose access to the EU. That risk is fanning calls for May to seek a short-term agreement, perhaps similar to Norway’s, to protect the economy and win time to secure a more permanent deal.
Time is not on May’s side. While she has pledged not to start formal talks until 2017, once she does she has just two years to pull the UK from rules and regulations four-decades in the making.
As she does so the question will be asked, what comes next given EU members buy 44 percent of Britain’s exports. May talks of a bespoke deal that will prove the best possible for the economy so long as she gets to control immigration, twin ambitions that governments in countries from Germany to Poland have signalled are incompatible.
Even if the separation agreement can be established without rancor, past performance suggests no free-trade accord can be struck speedily given the complexities involved.
The EU discussed a free-trade deal with Canada for the past seven years, yet it’s still to be ratified and contains few provisions for services, a driver of the UK economy. The bloc’s relationship with Switzerland is governed by 20 major agreements and 100 side ones. Indeed, a Morgan Stanley study found the 1958 Treaty of Rome was the EU’S only major accord settled in less than 24 months.
Even if a deal could be sealed, it would need to be rubber-stamped by all 27 states as well as the parliaments of the UK and Europe, with May also likely keen to secure the buy-in of domestic companies first.
The risk for Britain is that if it ejects from the EU before establishing new ties, commerce will automatically be governed by World Trade Organization rules.
Although the UK could drop its taxes on European products to zero and hope for that to be matched, WTO rules require it to then do so for other members, undermining Britain’s ability to negotiate deals elsewhere.
More customs checks, non-tariff barriers and a requirement to prove goods comply with European rules would only add to the cost. And that’s just for producers of goods; serviceproviders would lose access too with banks already worried about the loss of the right to sell their services in the EU.
Lawmaker John Redwood and Tim Martin of the JD Wetherspoon Plc pub chain are among those arguing for a ‘‘hard Brexit’’. Their rationale is the EU sells far more goods to the UK than the UK sells back so a free trade deal is either not important or in the interest of the EU too.
Among those who are concerned, Robin Niblett, director of the Chatham House think tank, urges May to delay formal negotiations for as long as feasible. Malcolm Barr, an economist at Jpmorgan Chase & Co, suggests trying to win an extension for the article 50 talks beyond two years.
The upshot may be that May needs a stop-gap. Banks are already requesting one for their industry to safeguard access and Japan’s government has recommended a plan for a ‘‘provisional period’’ if needed to avoid uncertainty for businesses.
The ‘‘least bad option’’ is mimicking Norway,according to former UK deputy prime minister Nick Clegg. That means extending membership of the single market while allowing Britain to have trade deals outside, at the price of losing the ability to shape rules and likely still having to contribute to the EU budget.
‘‘There are no obviously better choices on offer,’’ said Clegg.