The Continuing Uncertainty Of Brexit

On this day in two years’ time, the UK will likely have left the European Union as the Prime Minister Theresa May has today sent formal notification to the EU to trigger Article 50 of the EU treaty that starts the Brexit process. Brexit will then have taken place less than three years after the EU referendum of June 2016.

That is the most certain outcome of Brexit thus far, though that is less than 100% certain because there is the possibility of extending the two-year negotiating window if all 28 nations agree that more time is needed.

It’s not to say that we don’t have more detail than before. We know that Britain will prioritise the ability to control migration. The PM believes that means that Britain will not have unfettered access to the EU Single Market. Rejecting the free movement of people also means the Norway model of being in the European Economic Association is out. Yet, there are murmurings from Switzerland, which has its own migration issues, and even reportedly from Germany that some degree of control may be possible, though perhaps not that likely.

Similarly, PM May wants the UK to negotiate its own trade deals, so that excludes being part of the EU Customs Union which requires members to have a common external tariff with the rest of the world. A piecemeal approach has been deemed unlikely by European policymakers and may also violate World Trade Organisation rules too. Still, could some kind of deal be done since the UK is prioritising getting tariff-free access for its biggest manufactured goods export, cars, for instance? Minimising customs requirements at the border is another reason to seek some type of Customs Union associational membership, as the PM puts it.

What about financial and other services? That will require a separate agreement since Customs Union only covers goods, so the PM will have to negotiate a free trade agreement (FTA) with the EU to determine what access the services sector will have to the European Single Market. Since services comprise nearly 4/5th of the UK economy and Britain is the world’s second largest exporter of services, this is hugely important and a complicated area since non-trade barriers like standards are more relevant than tariffs and customs arrangements. There are few FTAs that comprehensively cover services. In fact, the most advanced FTA, the EU Single Market, is undergoing continuing liberalisation of the services market, so it is likely to take some time to craft such an agreement.

Finally, we also know that the British government will contemplate an implementation or transitional period after leaving the EU. But, until we know what the trade arrangements are with the European Union, which will likely take years to negotiate, what are Britain and the EU transitioning towards? That is clearly better than a “cliff edge” where current EU trade rules don’t apply on March 30, 2019. Still, what would transition itself look like? That’s another area of uncertainty.

The WTO regime would apply then, which would help. But, given the gulf between the preferential access to the EU at present and what the WTO rules cover, that still leaves ambiguity. At least in terms of the WTO, there is more economic certainty. Of course, between now and then, the UK and EU have to agree to split their current quotas, etc. to establish new WTO membership terms for both sides which needs to be agreed by the WTO member countries. Even if the rest of the 160 or so WTO members don’t agree to the new terms for the UK, the WTO rules dictate that the old rules would apply which in Britain’s case will be largely the same terms anyways. It doesn’t cross the T’s or dot the I’s, but the working arrangement will offer some certainty at least.

The European principle that nothing is agreed until everything is agreed means that we will unlikely see the end of economic uncertainty until March 2019 at the earliest. In one sense, less than three years from the vote to departure seems fairly quick in terms of unravelling international treaties. But, in another sense, it’s rather a long time to know where everything stands in post-Brexit Britain and in an EU that excludes the UK.

Linda Yueh wrote this article for Forbes