British Brexiters Call The Shots

BRUSSELS - Theresa May, the British prime minister, is repeating the mistake of David Cameron, her predecessor: appeasing Euroskeptical members of her Conservative Party rather than defending the national interest. She has unnecessarily promised to notify the European Union officially by March 2017 of her government’s intention to pull the country out of the EU, to keep impatient Brexiters loyal. This self-imposed deadline falls just two months before the French presidential election and less than seven months before the German general election. France or Germany will refuse any significant concessions to Britain during this pre-electoral period. Chancellor Angela Merkel told German industry this week that EU values are not tradeable.

As there will be no serious negotiations until after the German elections, the British prime minister has effectively cut down Britain’s period for agreeing a new deal with EU to less than 18 months. This might be just long enough to agree to the divorce settlement: sharing out joint property, agreeing who pays the pensions of British EU officials, and residence rights for each other’s citizens. There is no chance whatever that a permanent arrangement between Britain and the EU can be concluded within this period. Absent such an agreement, or at least a standstill transitional arrangement, keeping Britain in the EU customs union, and, perhaps, the single market, Britain will become a “third country” with regard to the EU, with no closer links than Japan, the United States, Russia, or China. British exporters will then face tariffs when selling to the EU, with spikes as high as 10 percent for some industrial goods.  Financial services companies based in Britain may no longer have free access to the EU market.

Britain will not be able to benefit from its membership in the World Trade Organization (WTO) until all 164 members have agreed to the U.K.’s own schedule of commitments. The British government plans simply to take over the EU’s commitments. But several agricultural exporters, like Australia, New Zealand, Canada, the United States, Brazil, and Argentina, which face high EU tariffs for some farm goods, may not be ready to allow Britain to assume its WTO membership on the basis of the EU’s trade commitments, as the U.K. market is much smaller than the EU’s. They will also scrutinize Britain’s future farm support scheme and may want Britain to offer more favorable market access for their agricultural exports before agreeing to its WTO schedule. Until this happens, Britain, outside the EU, would find itself in a worse situation than other WTO members, lacking even “Most Favored Nation” trade benefits. 

Until Britain’s WTO status and its future relations with the EU are clarified, it will be impossible for the British government to make good on the prime minister’s promise to negotiate free trade agreements with eight major countries around the world. Even with these parameters clarified, five to ten years are a reasonable estimate of the period needed to conclude a network of FTAs with key trading partners. An FTA with the EU would have to be approved by up to 39 regional, national, and EU parliamentary chambers and would probably never be ratified. So the prime minister’s trade agenda is likely to be impossible to realize.

This agenda faces two further difficulties. First, the civil service needs to recruit some 500 trade experts in order to negotiate future agreements with the EU and other partners. At the moment Britain has few such experts as the EU has handled trade negotiations for the best part of half a century. Secondly and more fundamentally, many of those who voted to leave the EU were people who felt they had lost out from globalization, including the EU’s liberal trade policies. The “truly global Britain” evoked by the prime minister in such glowing, some might say jingoistic, terms, is exactly what they voted against.

So why on earth did May choose to put an 18-month negotiating guillotine over her head? She gave in to pressure from militant “Leavers” in her party who were afraid that any delay would allow the negative economic impact of Brexit to become widely felt. Public opinion might then shift in favor of a “soft Brexit,” keeping Britain close to the EU. This is anathema to the prime minister and many Brexiters in her party as it would require continued free movement of labor and financial contributions to the EU budget. This would split the Conservative Party, before the prime minister faces her first electoral test.

Uncertainty over Britain’s future relations with the EU has already affected the business climate. Sterling had fallen to a 30 year low and major companies are delaying investment decisions. Any boost to exports from a lower exchange rate will be outweighed by more expensive imports, including inputs to British industry. This will create chaos in integrated supply chains for planes, cars, and other complex industrial products. Young graduates entering the job markets will be among the first to pay the price. May should rethink her flawed strategy before the British people wake up to what is in store for them.