What Will Brexit Mean? A Review
Memes bemoaning 2016 and longing for the year’s death went viral shortly before New Year’s. Friend Dog Studios, a comedy group, even posted a mock horror-flick trailer for 2016: The Movie. Alongside tragedies like the death of celebrities and a gorilla plus Samsung phones exploding, the video alludes shockingly to Brexit: “England just left Europe.”
Part of me wonders if the trailer’s creators understand the line’s irony and political nuance. In one way, yes, a majority of English and Welsh voters did vote to leave the European Union (but not Europe—plate tectonics don’t heed referenda), whereas Scotland and Northern Ireland voted to remain. However, the creators may simply misunderstand the United Kingdom and consider “England” synonymous with “Britain”.
There’s a second irony: Brexit hasn’t happened yet. Though I suspect most Americans who regularly follow the news already understand this, I have heard some mention what has happened since or after Brexit. To clarify, in a June 23 referendum, 52 percent of British voters chose to leave the EU. Nevertheless, the UK has not triggered “Article 50”, the provision in the EU’s Lisbon Treaty that allows a state to leave. (NPR’s Planet Money has a good podcast explaining Article 50.) British Prime Minister Theresa May said she would trigger the article by the end of March. Afterwards, the UK and EU will have two years to negotiate a new relationship, and only then can we truly say that Brexit has occurred.
Because the referendum only asked voters if they wanted to leave the EU without defining what Brexit would entail, there is uncertainty over what voters want from the EU post-Brexit. (Do they want to be part of the EU single market or customs union, or a relationship similar to Canada’s or Norway’s?) Theresa May was also selected as prime minister by Tory Members of Parliament (MPs) without a general election, so there was never a national public debate over her vision for Brexit or a public mandate endorsing her plans. This morning, Theresa May delivered a speech thankfully detailing her vision beyond vague references to “red, white, and blue” (i.e., patriotic) Brexit. Still, continued uncertainty makes this drama one of the top stories I’ll be watching through 2017 and 2018.
Over the last six months, two hypothetical scenarios for Brexit have dominated political risk analysis: soft and hard. “Soft Brexit” usually means Britain would remain part of the EU’s single market so that it could continue to sell goods and services freely across Europe, its largest export market. Norway has a similar deal, though London would need a different (and better) arrangement. “Hard Brexit” usually means Britain leaves the single market, though questions remain over the customs union. It could establish a free trade agreement with the EU, as Canada has negotiated.
British banks, a key pillar of the economy, would have probably benefited from soft Brexit because they would have likely retained “passporting rights”, the ability for a bank in one country to sell services across the European Economic Area (the EU plus Iceland, Liechtenstein, and Norway). If British banks lose these rights, they would need to move probably thousands of employees from London to places like Frankfurt and Paris. Outside the EU and without passporting rights, Swiss banks have been forced to move thousands of jobs to EU countries and endure higher operating costs. Some have suggested another option, “equivalence”, which would require the UK to follow EU banking standards, but not all rules and legislation. To its disadvantage, the EU could easily revoke equivalence, which has a vague definition.
Many who supported Vote Leave disliked soft Brexit because Britain would likely have to follow EU regulations, accept the free movement of people (i.e., the UK could not limit immigration from the EU), and pay into the EU budget (as Norway and Switzerland do). Meanwhile, the UK would have no say on those EU regulations. Before the referendum, I made the argument that this situation would mean London would have less sovereignty overall.
Soft Brexit could, in my opinion, easily become “Brexit-in-Name-Only”. Effectively ruling out soft Brexit, Theresa May said in her speech this morning:
What I am proposing cannot mean membership of the single market. European leaders have said many times that membership means accepting the “four freedoms” of goods, capital, services, and people…It would to all intents and purposes mean not leaving the EU at all.
Hard Brexit would give Parliament the most control over the country, especially over immigration. There have even been suggestions some British people may accept a poorer UK in exchange for immigration control. While many pro-Brexit politicians sometimes insist the referendum had little or nothing to do with immigration, pro-Brexit voters tweeted about immigration more than any other topic.
Those findings should be taken with a grain of salt, but May appears greatly concerned over immigration. This morning she listed immigration as a key reason why she will not seek membership of the single market: “We will ensure we can control immigration to Britain from Europe.”
After a hard Brexit, London would have greater flexibility to negotiate various bilateral free trade agreements. Deals with countries like the United States would be the UK’s best hope, and President-elect Trump appears willing to sign a deal, though what kind of deal remains unclear.
Throughout her speech, May explained her vision for a “Global Britain” and used that phrase at least ten times. She said Britain “voted to leave the European Union and embrace the world”. Her country would be “more outward-looking than ever before”, and she wants “a country that reaches beyond the borders of Europe”. May emphasized the UK’s “profoundly internationalist” character and global trading history. She said that “it is time for Britain to get out into the world and rediscover its role as a great, global, trading nation”.
Her vision is hopeful, and post-Brexit Britain would probably have no other choice but to become a global trading nation if it wants to prosper and recover from any trade losses with Europe. However, not all trade deals are good, and they may not save the UK. First, some businesses may have difficulty following various bilateral trade agreements. Complicated rules-of-origin laws can add so much red tape for some exporters that ignoring the trade agreements and paying the tariff could make more economic sense. So just because a trade deal between two countries exists on paper doesn’t mean that companies take advantage of that deal, or that the deal causes trade to increase.
Another problem is that trade agreements often remove tariffs on goods but omit services, like banking. The UK needs deals that include services, which their economy excels in. It is also unclear how much trade with the United States would increase if a trade agreement only reduces tariffs on goods. Tariffs between the US and Europe are already low (3 percent on average), so reducing tariffs further may not expand the UK economy enough to compensate British businesses for lost access to Europe’s single market and possibly the customs union. Services and non-tariff barriers should be the focus.
There is a risk that the British government could quickly sign trade deals and tout them publically even though they are not good deals. For Brexit to succeed, Britain must make certain deals actually benefit them economically and are not just near-worthless political documents that don’t increase their economy enough to compensate them for loss trade with Europe.
While the UK seeks new trade deals with other countries, trade with the EU will remain essential. It must not be forgotten, however, that May’s government represents only one side of the table. Twenty-seven other European governments, who can each veto any deal, sit on the other side. Key at that table is German Chancellor Angela Merkel.
Germany, according to some Brexiteers, could offer May a lifeline. Based on their logic, car manufacturers and other industries, dependent on British exports, may pressure Merkel to compromise. This morning, May similarly reiterated that a good deal between the UK and EU is “the economically rational thing”.
Merkel may cave and offer Britain a sweet arrangement, but there are good reasons to be doubtful. First, a survey of German businesses released last week found that 90 percent did not expect a serious decline in exports to the UK because of Brexit. Plus, manufacturers may not control German politics the way they once did. Finally, German businesses appear willing to suffer for the national interest, such as by tolerating sanctions against Russia. As I’ve written previously, the European project is in Germany’s interest, so it appears unlikely Germany would allow a deal that could tempt other Europeans to leave the Union.
In fact, when May admits the UK will not seek access to the single market, she acknowledges Europe’s position on the “four freedoms” is so inflexible that trade with the UK is not enough to entice them, even if it is economically rational. Giving up on the single market, though, could allow the UK and Europe to reach a mutually-beneficial arrangement. Whether Germany and others finally offer the UK concessions will be worth watching.
The prime minister’s speech today was touted as finally giving clarity to the government’s position. It did clarify that soft Brexit is off the table, which many already suspected, and some version of hard Brexit appears inevitable on this trajectory. But there are numerous questions, and May remains open to the criticism that she is still seeking a pro-having-cake-pro-eating-it-too deal. When asked if May’s proposals were achievable, Richard Haas, president at the Council on Foreign Relations, said on Bloomberg:
No. This is a cake and eat it approach: We’re going to cherry-pick all the benefits of EU membership in terms of trade, but we’re not going to do the financial transfers. We’re not going to accept most of the regulations. We’re going to set our own immigration policy. Good game if you can get it, but the bottom line is you can’t get it. What seems to me is it doesn’t begin the political process of preparing the British people and the Parliament for the inevitable choices, the inevitable compromises. This is fine as an opening position, but this is truly unsustainable.
Of course, we cannot know what Brexit means until after Theresa May triggers Article 50. Given how Providence contributors and readers were interested in how Brexit plays into sovereignty, democracy, nationalism, economics, and so on, I suspect this topic is worth monitoring.
It’s still early days yet, and there’s everything to play for.
Mark Melton is the Deputy Editor for Providence. He earned his Master’s degree in International Relations from the University of St. Andrews and focuses on Europe.
Photo Credit: “Brexit Tea”. By frankieleon, via Flickr.
For a great tool to follow Brexit developments, Bloomberg’s Brexit Bulletin offers a daily email newsletter with the latest articles and analysis.