Making sense of trends and data

May outlines 'hard' Brexit

Published 1.23.2017
Last week, Theresa May finally outlined her vision of Brexit, although not in any real detail. She committed to be votes in both houses of Parliament, though not on whether to invoke Article 50. That's a done deal. She also warned Europe that a punitive deal would hurt them too. Tough talk, but time will tell. There will be no membership in the single market after leaving the European Union (EU)— that wasn’t a realistic option anyway.

May emphasized that Britain will control its own borders, which runs afoul of the EU's border crossing policy. Britain will no longer be part of the European Court of Justice because it will have not left if the country doesn’t control their own laws. This assertion actually makes negotiating trade deals difficult, because typically, a third party is designated to resolve any disputes under the trade agreement.

Article 50 is to be triggered March 31, barring a loss in the Brit Supreme Court case regarding whether Parliament must vote on the invocation. Britain will not going to follow any other country’s exit or model. She wants to negotiate a singular deal for Britain. Labour’s Jeremy Corbyn is still around and says Britain’s economic markers are heading the wrong way.

The EU constitutes 500 million consumers. Parliament can’t stop Brexit, but they could veto the break that May creates. There will be consequences, and Tim Farron the leader of Liberal Democrats (described as centrists) said there could be higher prices, instability, and fuel costs. Analysts quoted don’t think the Brits will get access to the full EU market, It’s the financial services “passport” that Britain will lose most expect. Which means that British banks can’t offer services throughout the EU.

Another crucial issue is whether Britain will negotiate a transitional agreement to avoid a sudden change in the rules for business — the so-called cliff edge — in 2019, with the possible introduction of tariffs under rules laid down by the World Trade Organization.

This suggests that Britain could lower taxes to attract business, which is what the US government under Trump is talking about doing. There is still a lot that is unknown. Firms in Europe might miss the British banks, but somehow I think Germany and Ireland will make up the difference. Germany’s Foreign Minister was glad for a bit more clarity, and was happy May wants constructive engagement with the EU. But the Germans still refuse to begin negotiations until Article 50 is invoked. The pound recovered a bit after May's comments, but the lower pound is starting to affect ordinary Brits.

Investors keep asking May for details because they hope to hear something different from “hard” Brexit. As with Trump deniers, it’s time to awaken and face reality. Markets did like her verbiage about a “Global Britain,” and the fact that she wants to remain friendly with Europe.

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.

But per The Economist, May isn’t actually pursuing that course of action. Instead she is focusing on immigration limits. Her promise to “take back the courts” is problematic from a free trade standpoint because such agreements typically include a neutral court in which to take disputes. One side does not get to control the courts covering the agreement.

Because of the World trade Organization rules, it will be unlikely to gain favored status for only some industries. Free trade means free trade, as May might say if she was making the argument. You don’t get to pick and choose what you want to freely trade or not. She isn’t being honest about the costs of Brexit either. The economy is fine under Brexit doesn’t wash because most companies were still hoping that either Brexit wouldn’t happen at all, or that it would be a “soft Brexit.”

It takes time to negotiate deals, it’s unlikely that the two years Britain has (and Europeans refuse to begin before the clock starts ticking). Unlike Trump, May isn’t hoping the EU implodes, but thinks the European will hurt themselves more than Britain if they play too hard ball. She says Britain could simply slash taxes and attract business that way. May says no deal is better than a bad deal, but no deal leaves the Brits with the 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.


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