Britain’s Options Outside the European Union

On Monday 19 June negotiations opened between the UK and the European Union to discuss the terms of Britain’s exit.  Theresa May had hoped to strengthen her hand in the negotiations with a large Conservative majority in Britain’s Parliament. However, the result of the election she called earlier this month has left her weakened. While public opinion polls were in her favour by as much as 20 percentage points when she called the election, she lost out to the Labour opposition which gained 33 seats. The election was fought, surprisingly perhaps, on domestic issues. The Conservatives’ members fell from 330 members to 317, and those of the Labour Party rose from 229 to 262.

Prior to the election she had an overall majority of sixteen Conservative Party deputies in the House of Commons constituted of 650 members. (Figures exclude the Speaker and Sinn Fein party who do not vote). After the election, the Conservatives were eight votes short of an overall majority; however, allied with the Democratic Unionist Party (10 votes) they would have a total of 327 votes giving a narrow majority (also bear in mind that the 7 Sinn Fein members do not vote).

Labour capitalised on support from younger voters and their middle class parents who were influenced by the prospect of free university education, from the working classes who were promised a reversal of government austerity, and a popular policy of greater state control and ownership of public utilities (such as energy, transport and water).  The Conservatives alienated many older voters by qualifying payments for pensions and indicating the introduction of taxes which would lead to greater burdens on care in old age.

The implications of Britain’s exit from the European Union, though a major issue for the Liberal Democratic Party (which secured only 12 parliamentary seats) did not figure significantly in the election. The Labour Party endorsed a Brexit strategy in a low key way and focussed on domestic policies. Reversing Brexit is not an option.

What then are the Brexit Options?

The vote to exit the EU implied the implementation of two fundamental principles. First, that the UK would no longer be bound by decisions of the European Court of Justice. Second, that the UK would not be subject to the underlying economic principles of the EU – the unrestricted mobility of goods, services, people, and capital within the European Union. The functions performed by the European Union, by its courts and the open market, would in future be under the legislative control of the UK Parliament.

The  question which faces both EU and the British negotiators, currently led by David Davis, is how much of the existing agreements between the two sides could and should be maintained when the UK finally leaves the EU in two years’ time – by March 2019. This presents a policy minefield for both sides.

In the past the EU has shown some flexibility with regard to exemptions for its member states. For example, many countries, including the UK, have secured a presence outside the monetary Euro zone and have not joined the Schengen arrangements which have abolished borders between EU member states. The UK has maintained its own currency and border controls, though it has no controls with the Republic of Ireland.  The EU, however, has made it clear that leaving will cancel many of the rights currently enjoyed by the UK within the Union.  

Initial Discussions

The initial discussions involve the rights of the citizens of the 27 remaining states who currently reside in the UK and those of UK citizens living in the European Union. The perpetuation of existing rights for those resident before the UK signed the declaration of intent to leave (Article 50) could be solved with good will on both sides. More problematic is the ‘exit bill’ to be paid by the UK for policies (disputably) binding on the UK continuing after 2019 – these include payments for foreign aid, for example. The UK also makes claims for its previous contributions to EU assets (such as EU buildings). The land boundary of the EU will come to the border of the UK between the Republic of Ireland and Northern Ireland and will certainly require some kind of border controls. However, the issue is complicated by the majority of people in Northern Ireland having voted to ‘remain’ in the EU and the desire of many to leave the UK and to join the Republic of Ireland.

Problems of Trade

More intractable are the trading relationships. At present the European Union is a single market contained within a Customs Union. The important conditions here are that there are no duties on goods trading within the EU; moreover, there is a process of reciprocity by which the nature of goods produced in member countries can be exported to others. This means that goods can flow freely without any checks on their content which are deemed to be in keeping with EU standards. Aspiring member states (such as Ukraine) have faced considerable costs in bringing their standards in line with EU ones. Unless some agreement can be made with the various forms of such ‘pass porting’ of commodities, traders will need to resort to an administrative process to ensure compatibility of standards. Both sides can gain by keeping these agreements in place

Being in a Customs’ Union entails that all member states have the same import and export tariffs with third parties. The UK would benefit if it were able to keep its existing export tariffs (zero) to the EU and concurrently negotiate separate tariffs with third parties. It could, for example, negotiate a low tariff for Argentinean or Brazilian beef which is cheaper than European beef but currently subject to high EU tariffs. The problem in such a case is that Latin American farmers would benefit at European farmers’ expense.  EU negotiators then might retaliate by raising their import tariffs on UK exports.

Staying in the Single Market?

The upshot of the argument so far is that to leave the EU and concurrently to remain in the single market and customs’ union is a completely contradictory position. The best ‘deal’ that the UK could expect would be to negotiate a bilateral or Association Agreement with the EU.  This would not give membership of, but it would give access to, the EU market. However, as Norway (and more recently Ukraine) have recognised, the terms of such agreements are not easy to negotiate as they directly impinge on the interests within each trading area as well as with outsiders.

It seems likely that social and political agreements on such measures as educational exchanges, mutual recognition of standards, security and counter-terrorism measures would be able to continue without much change.  Immigration from the European Union would be subject to similar controls as non-EU immigration.  It is not so much an issue of whether there is an ‘agreement’ or ‘no agreement’ as often dichotomised in the popular media. It is a matter of what kind of agreement.

The Worst Scene Scenario

From the point of view of trade policy, the fall back scenario is one based on reliance on WTO agreements.  In this case, the UK would not remain part of the single market and there would be no obligation to meet the four economic ‘freedoms’ of the EU. There would be no contributions to the EU budget. If strictly interpreted, the UK would not only have to face the tariffs and quotas allowed under the WTO-rules, but would also be subject to non-tariff obligations such as the content and quality of products. The denial of pass porting rights to financial services (which currently allow UK banks to trade freely in the EU) would also apply to some financial products (such as bonds) but UK based investment banks would suffer least.  

Withdrawing from agreements on mutual recognition, however, would appear to be perverse on the part of the EU as it would invite retaliation from the UK over EU imports. As the latter are higher than UK’s exports, EU companies would lose out to one of their largest markets for EU agricultural and industrial goods. The EU would also lose any ongoing UK contribution to its budget - which came to some 35 billion pounds in 2016.

Association Agreement Options

An association agreement is the most likely outcome. A number of countries have already completed association agreements with the EU; these include Norway, Canada, Switzerland, Singapore and Turkey. The common features of these agreements are that they provide some form of access to the EU market but exclude participation in the institutions of the EU.  Some agreements (such as with Norway) allow for freedom of movement of labour, but others do not (such as with Turkey).  Some countries pay into the budget (Norway and Switzerland) but the sums are relatively minor (being some 420 million Euros per year for Switzerland). Both sides would have a mutual interest in adopting an association agreement which may not include the full range of goods and services.

The problem is what would be put into it and at what cost. Turkey excludes agriculture and Norway excludes fisheries. Unlike other countries which have had to negotiate these agreements with the EU (Canada’s agreements codified into the Comprehensive Economic and Trade Agreement – CETA -- were built up over ten years), the UK already has in place trade agreements and other reciprocal arrangements.  These are a basis for discussion as to which could be kept in place for mutual benefit.

Future Prospects

Theresa May’s bargaining position has been weakened by the loss of her Party’s parliamentary majority. However, the Labour Party is most unlikely to seek the reversal of Brexit but to press for a better deal for its working class constituents and the maintenance of certain human rights. The challenge domestically facing the UK in leaving the EU is the provision of better training and education for its citizens to alleviate the withdrawal from the labour market of European immigrants. 

Internationally, Britain will be faced with widening the scope of its trade and finding new markets to replace those lost in the European Union. Consequently, there is likely to be a strengthening of links between members of the ‘Anglo-sphere’ (the English speaking countries).

The other side of the process is the future of the European Union. Without the membership of the UK, Germany will become the hegemonic power and dissatisfaction with the current policies of the EU will no doubt lead to its reform. Further secession (for countries such as Greece and Hungary) are unlikely, as the costs of exit greatly outweigh the benefits of staying in.  In this context, it seems probable that the EU negotiators will seek to achieve a divorce with the UK which is beneficial to both sides.

David Lane is a Fellow of the Academy of Social Sciences (UK) and Emeritus Fellow of Emmanuel College, Cambridge University.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.