Brexit: Sailing Ahead

Published on January 24, 2017

*** This morning’s Supreme Court ruling is unlikely to change the timing or substance of the UK government’s plan or position vis-à-vis “Brexit” – that is to exit the Single Market, negotiating first a transition agreement, and then a Free Trade Agreement with the European Union. ***

*** In a largely unnoticed softening on the EU side, there is also an acknowledged willingness now to engage and embark upon a transitional period on both sides to avoid a “cliff edge” approach by EU member states and the UK. ***

*** Although it is clearly too early to speculate on this, we understand a possible practical solution down the road to facilitate an FTA could be to adopt EU standards for UK companies that export to the EU, and to simplify rules for purely domestic businesses. ***

Full Throttle Ahead

Today’s United Kingdom Supreme Court ruling stating that the government has to obtain Parliament’s go ahead to trigger Article 50 is unlikely to delay the EU-UK divorce process. It is also unlikely to significantly shift the government’s negotiating position on the matter, nor its decision to exit the single market.

That is because Parliament’s position on Brexit is not in conflict with the government’s, in the sense that it does not question the red lines put forward by PM Theresa May. Parliament is simply likely to identify different priorities – or to reinforce identified ones – such as protecting workers’ rights, privileged access for manufacturing industries over financial services, and protection of working standards which have been achieved during Britain’s membership of the EU.

Parliament will demand to be kept in the loop during the negotiations, and will put pressure on the government to obtain the widest possible access to the Single Market, seen as paramount by the overwhelming majority of UK political parties, without, however, any prejudice to the principles that clearly came out of the June 23, 2016 referendum.

The Changing Tone

With all the focus on the UK, gone unnoticed has been a major shift in mood in many European capitals (see SGH 1/13/17, “UK: A ‘Grey’ Brexit”), with EU leaders now openly keen on a “grey” Brexit which they believe to be more appealing than a disorderly process that could have resulted in a longer delay in the triggering of Article 50, or a second referendum, or even the UK walking back from withdrawal altogether. For all the old rancor leading to here, at this point both the EU and the UK want to get through negotiations in a rational, non-contentious way, with the potential for a transition period now being opened.

The need for a transition period has been for months an open secret, but neither the EU nor the UK has wanted to talk about it for fear of weakening their negotiating hands. But now the reality has hit that the infamous “cliff edge” would be a negative for both sides, and that such transition period will have to be openly negotiated for an “orderly” and successful Brexit to happen.

That transition would allow time for the UK to negotiate an FTA with the EU, but also to intensify talks – which we assume would have already started by then – with other countries, including the United States who, under President Donald Trump, seems keen on restoring the old-style special relationship with the UK.

On the Substance

In the big picture, EU capitals are relieved the UK has acknowledged it will not be intending to push for full, but rather conditional, membership of the single market, while at the same time asking for restrictions on free movement: this gives EU negotiators much more clarity, as both sides now acknowledge the new relationship will surely be something “less” than the old one (as per German Chancellor Angela Merkel’s words).

On specifics, one of the ideas recently floated by officials within the UK Trade Department is to have domestic-looking businesses follow different regulatory and legislative standards than exporting ones. Ironically this solution was originally suggested by some among the hardline Brexiters within the Conservative Party to former Prime Minister David Cameron, when he entered into renegotiation talks with the other 27 member states in late 2015.

The idea at that time was to change the Treaty in a way that all member states would have been able to follow a double standard in industry regulations, with harmonization only limited to companies who effectively conduct cross-border trade. This was clearly too hard a sell back then, as the EU is defined by an increasing movement towards harmonization. But it looks like a no brainer for the UK now that the parties are negotiating a much more flexible Free Trade Agreement.

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