Hard Bargaining Brexit into Trumpland

Theresa May has pinned her hopes on a quick trade deal with the United States. But with Britain in such a desperate negotiating position the Trump administration will be looking to drive a hard bargain.
Prime Minister Theresa May with her foreign secretary, Boris Johnson.

British Prime Minister Theresa May is leading the United Kingdom toward a very “hard” Brexit in 2019 – and potentially off a cliff, if the U.K. leaves the European Union without an exit or trade deal.

In her January 17 speech, Ms. May outlined her objectives for negotiating with the E.U., and made it clear that she will prioritize hardline Brexiteers’ demands over the country’s economic interests.

It isn’t surprising that Ms. May would choose a Brexit variant whereby Britain leaves both the E.U.’s single market and its customs union: she knows little, and cares even less, about economics. Her ultimate objective is to survive as prime minister, and she believes that controlling immigration – a longtime personal obsession – will endear her to “Leave” voters, and that ending the European Court of Justice’s jurisdiction in Britain will pacify the nationalists in her Conservative Party.

This stance rules out continued membership in the single market. Until now, Brexiteers had denied the existence of any political tradeoff between rejecting free movement and maintaining free trade with the E.U. As Foreign Secretary Boris Johnson fatuously claimed, Britons could have their cake and eat it. May has now belatedly admitted that this is impossible.

Economically, this is a lose-lose proposition for the U.K., which will now forego the benefits of free exchange with the rest of the E.U., as well as the contributions of hard-working, tax-paying E.U. migrants. U.K.-based services providers, notably financial firms, will lose the “passporting” privileges that allow them to operate freely within the E.U.

Ms. May has no electoral mandate to pursue a hard Brexit.

Ms. May was less honest about the implications of leaving the customs union. She wants Britain to set its own tariffs and other trade commitments at the World Trade Organization, and then independently negotiate preferential arrangements – misleadingly called “free-trade agreements” – with some countries.

But this will entail customs controls on trade between Britain and the E.U., including goods and services crossing the border between Northern Ireland and the Republic of Ireland. A new border bureaucracy will have to check customs compliance, calculate import duties depending on where goods are deemed to have originated, ensure payments, verify that goods comply with E.U. standards, and so forth. This will be particularly costly and disruptive for manufacturers with complex, just-in-time supply chains: cars that are “Made in Britain” actually include many components that cross borders repeatedly during the manufacturing process.

Rather than come clean about this, Ms. May is seeking “frictionless” trade through “associate membership” in the customs union, even though this directly contradicts her assertion that Britain does not want to be “half-in, half-out” of the E.U. Either way, such an arrangement is politically implausible, logistically impossible and illegal under WTO rules.

Ms. May’s promise to pursue an exit deal and a trade deal simultaneously – and both within two years of the formal start of the withdrawal process (which she aims to initiate by the end of March) – is similarly unrealistic. For starters, the E.U. insists on settling the divorce terms before discussing any future relationship. This is no mere formality: While both sides could agree that E.U. citizens already in the U.K., and Britons in the E.U., can remain, an attempt by either side to use these people’s status as a bargaining chip could backfire. What’s more, the E.U. is seeking up to €60 billion ($64 billion) from the U.K. to settle outstanding liabilities.

Ms. May’s threat to walk away from a bad deal may be credible, because she could blame the E.U. for the resulting chaos. But the same cannot be said for her threat to hit back at the E.U. by slashing U.K. taxes and regulations. There is little political support for such a move, and stripping away financial regulations would breach Britain’s international commitments. Moreover, Ms. May has pledged to help the working class, strengthen labor rights and ensure that global businesses pay their fair share of U.K. taxes.

Even if Ms. May can strike an exit deal, it is impossible to negotiate and ratify a sector-by-sector trade agreement in under two years. The E.U.-Canada Comprehensive Economic and Trade Agreement, for example, took seven years to hash out – and was almost scotched by the parliament of Belgium’s Wallonia region. There can be no “phased implementation” of a trade deal that has not been finalized, so U.K.-based car companies, financial institutions, and other businesses that export to the E.U. now should start preparing for the “cliff edge” that Ms. May wants to avoid.

Ms. May has no electoral mandate to pursue a hard Brexit. Many of the 52 percent of Britons who voted for Leave want to stay in the single market, as do all of those who voted for Remain. Furthermore, elected parliamentarians have been given no say in setting the government’s negotiating agenda. While Ms. May has promised them a vote on the final deal, Britain will still leave the E.U. if they reject it.

This makes a mockery of democracy. And with U.S. President Donald Trump threatening to start trade wars and abandon Europe to Russian President Vladimir Putin’s revanchist predations, this is an especially dangerous time for the U.K. to go it alone.

Ms. May claims that Brexit will enable Britain to strike better trade deals with non-E.U. countries, and she is pinning her hopes on a quick deal with Mr. Trump’s America. But with Britain in such a desperate negotiating position, even an administration headed by Hillary Clinton would have driven a hard bargain on behalf of American industry. U.S. pharmaceutical companies, for example, want the U.K.’s cash-strapped National Health Service to pay more for drugs.

The Trump administration will drive an even harder bargain. Like China and Germany, Britain exports much more to America than it imports from the U.S. Mr. Trump hates such “unfair” trade deficits, and has pledged to eliminate them. Be careful what you wish for, Prime Minister.

 

Copyright: Project Syndicate, 2017.www.project-syndicate.org

 

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