What is 'Brexit'
Brexit is an abbreviation for "British exit," referring to the UK's decision in a June 23, 2016 referendum to leave the European Union (EU). The vote's result defied expectations and roiled global markets, causing the British pound to fall to its lowest level against the dollar in 30 years. Prime Minister David Cameron, who called the referendum and campaigned for Britain to remain in the EU, resigned the following month. Home Secretary Theresa May replaced him as leader of the Conservative party and as Prime Minister. Following a snap election (skip to section) on June 8, 2017, she remains Prime Minister. The Conservatives have lost their outright majority in Parliament, though, and with it – May's critics argue – a mandate for a "hard Brexit," in which Britain leaves the EU's single market and customs union. (Alternatives are known as "soft Brexit.")
"Leave" won the June 2016 referendum with 51.9% of the ballot, or 17.4 million votes; "Remain" received 48.1%, or 16.1 million. Turnout was 72.2%. The results were tallied on a UK-wide basis, but the overall figures conceal stark regional differences: 53.4% of English voters supported Brexit, compared to just 38.0% of Scottish voters. Because England accounts for the vast majority of the UK's population, support there swayed the result in Brexit's favor. If the vote had been conducted only in Wales (where "Leave" also won), Scotland and Northern Ireland, Brexit would have received just 43.6% of the vote.
The process of leaving the EU formally began on March 29, 2017, when May triggered Article 50 of the Lisbon Treaty. The UK has two years from that date to negotiate a new relationship with the EU. Talks began on June 19. Questions have swirled around the process, in part because Britain's constitution is unwritten and in part because no country has left the EU using Article 50 before (Algeria left the EU's predecessor through its independence from France in 1962, and Greenland – a self-governing Danish territory – left through a special treaty in 1985). (See also, Countdown to Brexit: What Is Article 50?)
On Dec. 8, British and EU negotiators announced an agreement regarding the country's divorce settlement with the bloc: Britain will pay an exit bill of £35 billion to £39 billion, there will be no "hard border" between Northern Ireland (part of the UK) and the Republic of Ireland (an EU member), and EU citizens in Britain – and vice-versa – will retain a number of key rights. The agreement paves the way for talks on Britain's future relationship with the EU, which had been delayed by gridlock over the issues involved in divorce.
BREAKING DOWN 'Brexit'
Britain's lead negotiator in the talks with Brussels is David Davis, a Yorkshire MP, while the EU's is Michel Barnier, a French politician. Preparatory "talks about talks" exposed divisions in the two sides' approaches to the process. The UK wanted to negotiate the terms of its withdrawal alongside the terms of its post-Brexit relationship with Europe, while Brussels wanted to make "sufficient progress" on divorce terms by October, only then moving on to a trade deal. In a concession that both pro- and anti-Brexit commentators took as a sign of weakness, British negotiators accepted the EU's sequenced approach. Due to the tight two-year window set by Article 50, Britain is seeking a transitional period in which to iron out its post-Brexit relationship with the EU.
On Oct. 12 Barnier told a press conference that sufficient progress had not been achieved, describing the talks as mired in a "very disturbing state of deadlock" and bringing up the specter of "no deal." On Dec. 8, however, the two sides released a joint statement describing an "agreement in principle" regarding the most complicated separation issues, paving the way for talks about a future trade relationship to begin.
With just over a year remaining until the scheduled exit date of March 29, 2019, however, the complicated negotiations will have to proceed rapidly, or the EU's 27 remaining members will have to agree unanimously to extend the deadline.
One of the most politically thorny issues facing Brexit negotiators has been the rights of EU citizens living in the UK and UK citizens living in the EU. According to Migration Watch UK, a think tank that advocates lower levels of net immigration to the country, there were 3.3 million EU-born migrants living in the UK in 2015, compared to 1.2 million UK-born migrants living in the EU.
Britain's Parliament has already fought over the rights of EU citizens to remain in the UK after Brexit, publicly airing domestic divisions over migration. Following the referendum and Cameron's resignation, May's government concluded that it had the right under the "royal prerogative" to trigger Article 50 and begin the formal withdrawal process on its own. The British Supreme Court intervened, ruling that Parliament had to authorize the measure, and the House of Lords amended the resulting bill to guarantee the rights of EU-born residents. The House of Commons – which had a Tory majority at the time – struck the amendment down and the unamended bill became law on March 16.
Conservative opponents of the amendment argued that unilateral guarantees eroded Britain's negotiating position, while those in favor of it said EU citizens should not be used as "bargaining chips." Economic arguments also featured: while a third of British expats in Europe are pensioners, EU migrants are more likely to be in work than native-born Brits. That fact suggests EU migrants are greater contributors to the economy than their British counterparts; then again, "Leave" supporters read these data as pointing to foreign competition for scarce jobs in Britain.
On Dec. 8, British and EU negotiators presented an agreement laying out the basic structure of the citizens' rights agreement. It promised "reciprocal protection for Union and UK citizens, to enable the effective exercise of rights derived from Union law and based on past life choices." It places limits on the cost and difficulty of the verification processes national governments can impose. It requires Britain to introduce a Withdrawal Agreement and Implementation Bill to Parliament, which will supercede other national laws pertaining to EU nationals in Britain before the withdrawal date. And it gives EU citizens in Britain the right to appeal to the European Court of Justice, whose jurisdiction Brexiteers have long been determined to escape.
The "Brexit bill," or financial settlement the UK owes Brussels following its withdrawal, has been a major point of contention for both sides. During the campaign, "Leave" supporters often cited the money that British taxpayers pay into EU coffers, though the figure they used was inflated (see below). A large financial settlement would therefore rankle many Brexit supporters, some of whom believe the UK should refuse to pay anything.
According to the Dec. 8 agreement, the UK and EU have agreed to a methodology whereby Britain will participate in and contribute to the 2019 and 2020 EU budgets and pay outstanding commitments through 2020 (the "reste à liquider"). The payments will be denominated in euro. Downing Street estimated that they would amount to the equivalent of £35 billion to £39 billion.
The agreement resolves a long-standing sticking point that threatened to derail negotiations entirely. Barnier's team launched the first volley in May with the released of a document listing the 70-odd entities it would take into account when tabulating the bill. The Financial Times estimated that the gross amount requested would be €100 billion; net of certain UK assets, the final bill would be "in the region of €55bn to €75bn."
Davis' team, meanwhile, refused EU demands to submit the UK's preferred methodology for tallying the bill. In August he told the BBC he would not commit to a figure by October, the deadline for assessing "sufficient progress" on issues such as the bill. The following month he told the House of Commons that Brexit bill negotiations could go on "for the full duration of the negotiation," adding that the UK would not necessarily accept the "legal basis" for the settlement.
Davis has presented this refusal to the House of Lords as a negotiating tactic, but domestic politics probably explain his reticence. Foreign Secretary Boris Johnson, who campaigned for Brexit, called EU estimates "extortionate" on July 11 and agreed with a Tory MP that Brussels could "go whistle" if they wanted "a penny."
In her September speech in Florence, however, May said the UK would "honor commitments we have made during the period of our membership" and offered to make an "ongoing contribution" to any educational, cultural and security programs Britain might continue to participate in. The statements helped to cool tensions with Brussels, but domestic tensions over the bill are likely to continue in the UK.
Northern Irish Border
For decades during the second half of the 20th century, violence between Protestants and Catholics marred Northern Ireland, and the border between the British country and the Republic of Ireland to the south was militarized. The 1998 Good Friday Agreement turned the border almost invisible, except for speed limit signs, which switch from miles per hour in the north to kilometers per hour in the south.
Both British and EU negotiators worry about the consequences of reinstating border controls, as Britain may have to do in order to end freedom of movement from the EU. The Dec. 8 agreement reiterated the UK's commitment to "the avoidance of a hard border, including any physical infrastructure or related checks and controls." It also stressed "the integrity of [the UK's] internal market and Northern Ireland's place within it, as the United Kingdom leaves the European Union's Internal Market and Customs Union."
Yet leaving the customs union without imposing customs checks at the Northern Irish border or between Northern Ireland and the rest of Britain leaves the door wide open for smuggling. This "significant and unique challenge" is one of the reasons that "soft Brexit" advocates most cite in favor of staying in the EU's customs union and perhaps its single market. The agreement, in a section that is likely to infuriate some "hard Brexit" supporters, stipulates that,
"In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement."
In other words, the Northern Ireland conundrum may have created a back door for a soft Brexit.
The issue is further complicated by the Tories' choice of the Northern Irish Democratic Unionist Party as a coalition partner: the DUP opposed the Good Friday Agreement and – unlike the Conservatives' leader at the time – campaigned for Brexit. Under the Good Friday Agreement, the British government is required to oversee Northern Ireland with "rigorous impartiality"; that may prove difficult for a government that depends on the cooperation of a party with an overwhelmingly Protestant support base and historical connections to Protestant paramilitary groups. Legal challenges to the Tory-DUP coalition agreement are reportedly being prepared.
Arguments For and Against Brexit
"Leave" voters base their support for Brexit on a variety of factors, including the European debt crisis, immigration, terrorism and the perceived drag of Brussels' bureaucracy on the British economy. Britain has long been wary of the European Union's projects, which Leavers feel threatens the UK's sovereignty: the country never opted into the European Union's monetary union, meaning that it uses the pound instead of the euro. It also remained outside the Schengen Area, meaning that it does not share open borders with a number of other European nations.
Opponents of Brexit also cite a number of rationales for their position. One is the risk involved in pulling out of the EU's decision-making process, given that it is by far the largest destination for British exports. Another is the economic and societal benefits of the EU's "four freedoms": the free movement of goods, services, capital and people across borders. A common thread in both arguments is that leaving the EU would destabilize the British economy in the short term and make the country poorer in the long term.
British exports by destination, 2015 (total = $428 billion)
Some state institutions backed the Remainers' economic arguments: Bank of England governor Mark Carney called Brexit "the biggest domestic risk to financial stability" in March 2016 and the following month the Treasury projected lasting damage to the economy under any of three possible post-Brexit scenarios: European Economic Area (EEA) membership such as Norway has; a negotiated trade deal such as the one signed between the EU and Canada in October 2016; and World Trade Organization (WTO) membership.
|Annual impact of leaving the EU on the UK after 15 years (difference from being in the EU)|
|EEA||Negotiated bilateral agreement||WTO|
|GDP level – central||-3.8%||-6.2%||-7.5%|
|GDP level||-3.4% to -4.3%||-4.6% to -7.8%||-5.4% to -9.5%|
|GDP per capita – central*||-£1,100||-£1,800||-£2,100|
|GDP per capita*||-£1,000 to -£1,200||-£1,300 to -£2,200||-£1,500 to -£2,700|
|GPD per household – central*||-£2,600||-£4,300||-£5,200|
|GDP per household*||-£2,400 to -£2,900||-£3,200 to -£5,400||-£3,700 to -£6,600|
|Net impact on receipts||-£20 billion||-£36 billion||-£45 billion|
|Adapted from HM Treasury analysis: the long-term economic impact of EU membership and the alternatives, April 2016; *expressed in terms of 2015 GDP in 2015 prices, rounded to the nearest £100.|
Leave supporters tended to discount such economic projections under the label "Project Fear." A pro-Brexit outfit associated with the UK Independence Party (UKIP), which was founded to oppose EU membership, responded by saying that the Treasury's "worst-case scenario of £4,300 per household is a bargain basement price for the restoration of national independence and safe, secure borders" (the worst-case scenario was in fact £6,600).
Although Leavers have tended to stress issues of national pride, safety and sovereignty, they also muster economic arguments. For example Boris Johnson, who was mayor of London until May 2016 and became Foreign Secretary when May took office, said on the eve of the vote, "EU politicians would be banging down the door for a trade deal" the day after the vote, in light of their "commercial interests." Labour Leave, pro-Brexit Labour group, co-authored a report with a group of economists in September 2017 that forecasted a 7% boost to annual GDP, with the largest gains going to the lowest earners.
Vote Leave, the official pro-Brexit campaign, topped the "Why Vote Leave" page on its website with the claim that the UK could save £350 million per week: "we can spend our money on our priorities like the NHS [National Health Service], schools, and housing." In May 2016 the UK Statistics Authority, an independent public body, said the figure is gross rather than net, "is misleading and undermines trust in official statistics." A mid-June poll by Ipsos MORI, however, found that 47% of the country believed the claim. The day after the referendum Nigel Farage, who co-founded UKIP and led it until that November, disavowed the figure and said that he was not closely associated with Vote Leave. May has also declined to confirm Vote Leave's NHS promises since taking office.
The 2016 referendum's result severely impacted markets worldwide, though in some cases the effects were short-lived. The British pound crashed by 11.1% against the dollar – its biggest-ever one-day fall – before paring its losses to 8.1%. It has since fallen farther, and at the end of May it was down 12.8% from its June 23 close to $1.2905.
The euro also fell against the dollar on the referendum's result, dropping 4.2%. It recovered before close, but continued to slide in response to Brexit as well as other challenges: Italy's rejection by referendum of constitutional reforms, fears that the euroskeptic Marine Le Pen could win the French election and continuing anxiety over the Greek bailouts.
Equities also fell as a result of the vote, but in contrast to the pound and euro, the damage reversed itself fairly quickly. London's FTSE 100 fell 8.7% and closed down 3.1% on June 24. Germany's DAX fell 10.1% and closed down 6.8%. The S&P 500 fell 3.8% and closed down 3.6%. Shares in British, German, Irish, Italian and Greek banks took double-digit hits. American banks also swooned, though less intensely. As of the end of May, however, the FTSE, DAX and S&P are all up by more than 14%. American banks have more than recovered due to optimism about a Trump-era cull of financial regulation.
Until an exit deal is finalized or the deadline for negotiations set by Article 50 expires, Britain remains in the EU, both benefiting from its trade links and subject to its laws and regulations. Even so, the decision to leave the EU has already had an effect on Britain's economy due to the weaker pound. Shortly after the referendum, the currency's decline was seen as a blessing as British manufacturers' wares became more attractive to foreign buyers. The Markit/CIPS UK manufacturing purchasing managers index (PMI) rose by a record 5 points to 53.3 in August 2016 as firms enjoyed the "win-win" of EU membership and a pound that had priced in the end of that membership.
Such a situation is by definition unsustainable, however, and the Markit/CIPS survey contained an implicit warning: nearly 44% of manufacturers reported higher purchasing costs, as the weak pound drove up import prices. Nearly a year later, the higher price of imports has been passed onto consumers; CPI inflation was 2.9% in the 12 months to May 2017, a four-year high that well exceeds the Bank of England's 2% target and outstrips regular wage growth of 2.1% (as of March 2017).
A July report by the House of Lords cited evidence that British businesses would have to raise wages to attract native-born workers following Brexit, which is "likely to lead to higher prices for consumers."
Over half of British businesses (57%) are developing contingency plans related to Brexit, according to a survey conducted in July by the Institute of Directors. Only 11% have begun implementing these plans, but some businesses must plan far in advance and will not be able to wait until after December 2017 (at the earliest) to gain clarity about the shape of a future deal between the UK and the EU. Banks have already begun to announce plans to shift some operations to Dublin, Frankfurt and Paris. The aviation industry is voicing concern: "If there is no agreement between the UK and EU by March 2019, other sectors fall back on World Trade Organisation rules but we have no legal framework under which to fly," Airlines for America CEO Nick Calio said on July 23, adding that a new agreement or transitional deal will be needed by April 2018.
International trade is expected to fall due to Brexit, even if Britain negotiates a raft of free trade deals. Monique Ebell, associate research director at the National Institute of Economic and Social Research, forecasts a -22% reduction in total British goods and services trade if EU membership is replaced by a free trade agreement. Other free trade agreements could probably not take up the slack: Ebell sees a pact with the BRIICS (Brazil, Russia, India, Indonesia, China and South Africa) boosting total trade by 2.2%; a pact with the U.S., Canada, Australia and New Zealand would do slightly better, at 2.6%.
"The single market is a very deep and comprehensive trade agreement aimed at reducing non-tariff barriers," Ebell wrote in January, "while most non-EU [free trade agreements] seem to be quite ineffective at reducing the non-tariff barriers that are important for services trade."
June 2017 General Election
On April 18 May called for a snap election to be held on June 8, despite previous promises not to hold one until 2020. Polling at the time suggested May would expand on her on her slim Parliamentary majority of 330 seats (there are 650 seats in the Commons). Labour gained rapidly in the polls, however, aided by an embarrassing Tory flip-flop on a proposal for estates to fund end-of-life care.
The Conservatives lost their majority, winning 318 seats to Labour's 262. The Scottish National Party won 35, with other parties taking 35. The resulting hung Parliament has cast doubts on May's mandate to negotiate Brexit and led the leaders of Labour and the Liberal Democrats to call on May to resign.
Speaking in front of the Prime Minister's residence at 10 Downing Street, May batted away calls for her to leave her post, saying, "It is clear that only the Conservative and Unionist Party" – the Tories' official name – "has the legitimacy and ability to provide that certainty by commanding a majority in the House of Commons." The Conservatives struck a deal with the Democratic Unionist Party of Northern Ireland, which won 10 seats, to form a coalition. The party is little known outside of Northern Ireland, judging by a wave of curious Google searches that caused the DUP's site to crash.
Implications for Brexit
May presented the election as a chance for the Conservatives to solidify their mandate and strengthen their negotiating position with Brussels. Having lost their majority, that position appears weaker. It remains uncertain whether the new government will be able to stick to the Brexit goals it laid out in its manifesto: cutting annual net immigration to the tens of thousands – from 248,000 in 2016 – and pursuing a "hard Brexit," that is, leaving the EU's single market and customs union. The Tories want to retain the option of walking away from negotiations, arguing that "no deal" is better than a bad one. They also proposed a "Great Repeal Bill" which, despite the name, would write all applicable EU law into British law while ending the EU's ability to effect British law through the European Communities Act. The bill, renamed the EU (Withdrawal) Bill, passed the House of Commons on September 12 by a comfortable margin.
Labour, which according to Corbyn "won this election," criticized the Conservatives' immigration targets and argued that "'no deal' is not a viable option." The party opposed the Great Repeal Bill, promising instead to pass "an EU Rights and Protections Bill that will ensure there is no detrimental change to workers' rights, equality law, consumer rights or environmental protections as a result of Brexit." The bill, which allows the government to tweak parts of the law so that they make sense for Britain outside of the EU, is seen by many Labour MPs as a Tory power grab and a vehicle to roll back workers' rights.
In the wake of the election, many expected the government's Brexit position to soften. Some interested parties saw an opening: the day after the election, the Freight Transportation Association said the government should consider staying in the EU's customs union, given the "lack of a clear mandate from British voters." At first there was little hint that May's team had backed off its commitment to a hard Brexit, but an August 15 position paper indicated that the UK would seek a close customs relationship with the EU (see below).
The End of Britain? Scotland's Independence Referendum
Politicians in Scotland have pushed for a second independence referendum in the wake of the Brexit vote, but the results of the June 8 election have cast a pall over their efforts. The Scottish National Party (SNP) lost 21 seats in the Westminster Parliament, and on June 27 Scottish First Minister Nicola Sturgeon said her government at Holyrood would "reset" its timetable on independence to focus on delivering a "soft Brexit."
Not one Scottish local area voted to leave the EU, according to the UK's Electoral Commission, though Moray came close at 49.9%. The country as a whole rejected the referendum by 62.0% to 38.0%. Because Scotland only contains 8.4% of the UK's population, however, its vote to Remain – along with that of Northern Ireland, which accounts for just 2.9% of the UK's population – was vastly outweighed by support for Brexit in England and Wales.
Scotland joined England and Wales to form Great Britain in 1707, and the relationship has been tumultuous at times. The SNP, which was founded in the 1930s, had just six of 650 seats in Westminster in 2010. The following year, however, it formed a majority government in the devolved Scottish Parliament at Holyrood, partly owing to its the promise to hold a referendum on Scottish independence.
That referendum, held in 2014, saw the pro-independence side lose with 44.7% of the vote; turnout was 84.6%. Far from putting the independence issue to rest, though, the vote fired up support for the nationalists. The SNP won 56 of 59 Scottish seats at Westminster the following year, overtaking the Lib Dems to become the third-largest party in the UK overall. Britain's electoral map suddenly showed a glaring divide between England and Wales – dominated by Tory blue with the occasional patch of Labour red – and all-yellow Scotland.
When Britain voted to leave the EU, Scotland fulminated. A combination of rising nationalism and strong support for Europe led almost immediately to calls for a new independence referendum. When the Supreme Court ruled on November 3 that devolved national assemblies such as Scotland's parliament cannot veto Brexit, the demands grew louder. On March 13 Sturgeon called for a second referendum, to be held in the autumn of 2018 or spring of 2019. Holyrood backed her by a vote of 69 to 59 on March 28, the day before May's government triggered Article 50.
Sturgeon's preferred timing is significant, since the two-year countdown initiated by Article 50 will end in the spring of 2019, when the politics surrounding Brexit could be particularly volatile. The snap election on June 8 threw a wrench into the SNP's independence push, and the issue is off the table for now.
What Would Independence Look Like?
Even independence, however, might not allow Scotland to avoid "being dragged out of the EU against its will," as the SNP's website describes Brexit. According to the Press Association's Arj Singh, EU Commission spokesman Margaritis Schinas responded to Sturgeon's mid-March announcement by saying that Scotland would have to apply to join the EU, rather than remaining a member. Scotland's bid would face the threat of a veto from Spain, which wants to avoid sending pro-independence messages to the restive autonomous region of Catalonia.
Scotland's economic situation also raises questions about its hypothetical future as an independent country. The crash in the oil price has dealt a blow to government finances. In May 2014 it forecast 2015-2016 tax receipts from North Sea drilling of £3.4 billion to £9 billion, but collected £60 million, less than 1.0% of the forecasts' midpoint. In reality these figures are hypothetical, since Scotland's finances are not fully devolved, but the estimates are based on the country's geographical share of North Sea drilling, so they illustrate what it might expect as an independent nation.
The debate over what currency an independent Scotland would use has been revived. Former SNP leader Alex Salmond, who was Scotland's first minister until November 2014, told the Financial Times on March 17 that the country could abandon the pound and introduce its own currency, allowing it to float freely or pegging it to sterling. He ruled out joining the euro, but others contend that it would be required for Scotland to join the EU. Another possibility would be to use the pound, which would mean forfeiting control over monetary policy.
Upsides for Some
On the other hand, a weak currency that floats on global markets can be a boon to UK producers who export goods. Industries that rely heavily on exports could actually see some benefit. In 2015, the top 10 exports from the UK were (in USD):
- Machines, engines, pumps: US$63.9 billion (13.9% of total exports)
- Gems, precious metals: $53 billion (11.5%)
- Vehicles: $50.7 billion (11%)
- Pharmaceuticals: $36 billion (7.8%)
- Oil: $33.2 billion (7.2%)
- Electronic equipment: $29 billion (6.3%)
- Aircraft, spacecraft: $18.9 billion (4.1%)
- Medical, technical equipment: $18.4 billion (4%)
- Organic chemicals: $14 billion (3%)
- Plastics: $11.8 billion (2.6%)
Some sectors are prepared to benefit from an exit. Multinationals listed on the FTSE 100 are likely to see earnings rise as a result of a soft pound. A weak currency may also benefit tourism, energy and the service industry.
In May 2016, the State Bank of India (SBIN.NS), India's largest commercial bank, suggested that the Brexit will benefit India economically. While leaving the Eurozone will mean that the UK will no longer have unfettered access to Europe's single market, it will allow for more focus on trade with India. India will also have more room for maneuvering if the UK is no longer abiding by European trade rules and regulations.
UK-EU Trade After Brexit
May has advocated a "hard" Brexit, meaning that Britain would leave the EU's single market and customs union, then negotiate a trade deal to govern their future relationship. The Conservatives' poor showing in the June 2017 snap election called popular support for that approach into question, and many in the press speculated that the government could take a softer line. In her September speech in Florence, May reiterated her government's hard Brexit stance, saying "we will no longer be members of its [the EU's] single market or its customs union." On the other hand, she proposed a transition period "to adjust to the new arrangements in a smooth and orderly way" of around two years.
Have Your Customs Union and Eat It
In an August position paper the UK suggested it would remain in the EU's customs union during an interim period and afterward transition to one of two arrangements: a "highly streamlined customs arrangement" that leaves "as few additional requirements on EU trade as possible," or a "new customs partnership with the EU" that "removes the need for a UK-EU customs border." The latter arrangement, the paper suggests, could include mirroring EU import requirements from third countries.
Under either arrangement, the government insists, the UK would negotiate trade deals with third countries. Guy Verhofstadt, the European Parliament's Brexit coordinator, criticized what he saw as a the desire to have it both ways: "To be in & out of the Customs Union & 'invisible borders' is a fantasy. First need to secure citizens rights & a financial settlement," he tweeted. Nicola Sturgeon echoed the sentiment, bemoaning the government's "daft 'have cake and eat it' approach" and saying they "should commit to staying in single market and CU, period."
The position paper acknowledged that a borderless customs arrangment with the EU – one that allowed the UK to negotiate free trade agreements with third countries – is "unprecedented" and "challenging to implement." Not everyone has been as dismissive as Sturgeon and Verhofstadt, however.
Politico's UK political correspondent Charlie Cooper wrote that the second proposed arrangement, the "new customs partnership," has "a significant upside" in that it avoids a hard broder between Ireland and Northern Ireland. On the other hand, he worries that the paperwork involved could be "Kafkaesque": goods entering the country would be subject to different tariff regimes, depending on whether they were destined for EU or UK consumption. The former would be treated as though the UK border were still the EU border; the latter would be suject to whatever tariffs the UK had worked out with a given country.
The government is right that there is no example of this kind of relationship in Europe today. The four broad precedents that do exist are the EU's relationship with Norway, Switzerland, Canada and World Trade Organization members.
The Norway Model: Join the EEA
The first option would be for the UK to join Norway, Iceland and Lichtenstein in the European Economic Area (EEA), which provides access to the EU's single market for most goods and services (agriculture and fisheries are excluded). At the same time the EEA is outside the customs union, so Britain could enter into trade deals with non-EU countries. The arrangement is hardly a win-win, however: the UK would be bound by some EU laws, while losing its ability to influence those laws through its European Council and European Parliament voting rights. In September, May called this arrangement an unacceptable "loss of democratic control."
Earlier in the month, David Davis expressed interest in the Norway model in repsonse to a question he received at the U.S. Chamber of Commerce in Washington. "It's something we've thought about but it's not at the top of our list." He was referring specifically to the European Free Trade Association (EFTA), which like the EEA offers access to the single market, but not the customs union. EFTA was once a large organization, but most of its members have left to join the EU. Today it comprises Norway, Iceland, Lichtenstein and Switzerland; all but Switzerland are also members of the EEA.
The Switzerland Model: Bilateral Trade Agreements
Switzerland's relationship to the EU, which is governed by around 20 major bilateral pacts with the bloc, is broadly similar to the EEA arrangement. Along with these three, Switzerland is a member of the European Free Trade Association (EFTA). Switzerland helped set up the EEA, but its people rejected membership in a 1992 referendum.
The country allows free movement of people and is a member of the passport-free Schengen Area. It is subject to many single market rules, without having much say in making them. It is outside the customs union, allowing it to negotiate free trade agreements with third countries; usually, but not always, it has negotiated alongside the EEA countries. Switzerland has access to the single market for goods (with the exception of agriculture), but not services (with the exception of insurance). It pays a modest amount into the EU's budget.
Brexit supporters who want to "take back control" would be unlikely to embrace the concessions the Swiss have made on immigration, budget payments and single market rules. The EU would probably not want a relationship modeled on the Swiss example, either: Switzerland's membership in EFTA but not the EEA, Schengen but not the EU, is a messy product of the complex history of European integration and – what else – a referendum.
The Canada Model: A Free Trade Agreement
A third option is to negotiate a free trade agreement with the EU along the lines of the Comprehensive Economic and Trade Agreement (CETA), a pact the EU has finalized with Canada but not ratified. The most obvious problem with this approach is that the UK has only two years from the triggering of Article 50 to negotiate such a deal – that is, until the end of March 2019. The EU has refused to discuss a future trading relationship until December at the earliest.
To give a sense of how tight that timetable is, CETA negotiations began in 2009 and were concluded in 2014. Three years later, a small minority of the EU's 28 national parliaments have ratified the deal. Persuading the rest could take years. Even subnational legislatures can stand in the way of a deal: the Walloon regional parliament, which represents fewer than 4 million mainly French-speaking Belgians, single-handedly blocked CETA for a few days in 2016. In order to extend the two-year deadline for leaving the EU, Britain would need unanimous approval from the EU 27. Several British politicians, including Chancellor of the Exchequer Philip Hammond, have stressed the need for a transitional deal of a few years so that – among other reasons – Britain can negotiate EU and third country trade deals; the notion has met with resistance from hard-line Brexiteers, however.
In some ways, comparing Britain's situation to Canada's is misleading. Canada already enjoys free trade with the United States through NAFTA, meaning that a trade deal with the EU is not as crucial as it is for the UK. Canada's and Britain's economies are also very different: CETA does not include financial services, one of Britain's biggest exports to the EU.
Speaking in Florence in September, May said the UK and EU "can do much better" than a CETA-style trade agreement, since they're beginning from the "unprecedented position" of sharing a body of rules and regulations. She did not elaborate on what "much better" would look like, besides calling on both parties to be "creative as well as practical."
Monique Ebell of the National Institute of Economic and Social Research stresses that even with an agreement in place, non-tariff barriers are likely to be a significant drag Britain's trade with the EU: she expects total British foreign trade – not just flows to and from the EU – under an EU-UK trade pact. She reasons that free-trade deals do not generally handle services trade well. Services are a major component of Britain's international trade; the country enjoys a trade surplus in that segment, which is not the case for goods. Free trade deals also struggle to rein in non-tariff barriers. Admittedly Britain and the EU are starting from a unified regulatory scheme, but divergences will only multiply post-Brexit.
WTO: Go It Alone
You want out? You're out. If Britain and the EU cannot come to an agreement regarding a future relationship, they will revert to World Trade Organization (WTO) terms. Even this default would not be entirely straightforward, however. Since Britain is currently a WTO member through the EU, it will have to split tariff schedules with the bloc and divvy out liabilities arising from ongoing trade disputes. This work has already begun.
Trading with the EU on WTO terms is the "no-deal" scenario the Conservative government has presented as an acceptable fallback – though most observers see this as a negotiating tactic. British secretary of state for international trade Liam Fox said in July, "People talk about the WTO as if it would be the end of the world. But they forget that is how they currently trade with the United States, with China, with Japan, with India, with the Gulf, and our trading relationship is strong and healthy." Following her September speech, May told a reporter, "we continue to believe" that no deal is better than a bad deal.
For certain industries, however, the EU's external tariff would hit hard: Britain exports 77% of the cars it manufactures, and 58% of these go to Europe. The EU levies 10% tariffs on imported cars. Overall, Monique Ebell estimates that reverting to WTO terms with the EU would reduce overall British goods and services trade – not just that with the EU – by 30%.
Deals With Third Countries
Nor will the UK only be giving up its trade arrangements with the EU: under any of the scenarios above, it will probably lose the trade agreements the bloc has struck 63 third countries, as well as progress in negotiating other deals. Replacing these and adding new ones is an uncertain prospect. In a September interview with Politico, Trade Secretary Liam Fox said his office – formed in July 2016 – has turned away some third countries looking to negotiate free trade deals because it lacks the capacity to negotiate.
Fox wants to roll the terms of existing EU trade deals over into new agreements, but some countries may be unwilling to give Britain (66 million people, $2.6 trillion GDP) the same terms as the EU (excluding Britain, around 440 million people, $13.9 trillion GDP).
Negotiations with third countries are technically not allowed while Britain remains an EU member, but even so informal talks have begun, particularly with the U.S.
Impact on the U.S.
Companies in the U.S. across a wide variety of sectors have made large investments in the UK over many years. American corporations have derived 9% of global foreign affiliate profit from the United Kingdom since 2000. In 2014 alone, U.S. companies invested a total of $588 billion into Britain. The U.S. also hires a lot of Brits. In fact, U.S. companies are one of the UK's largest job markets. Output of U.S. affiliates in the United Kingdom was $153 billion in 2013. The United Kingdom plays a vital role in corporate America's global infrastructure from assets under management, international sales and research and development (R&D) advancements. American companies have viewed Britain as a strategic gateway to other countries in the European Union. Brexit will jeopardize the affiliate earnings and stock prices of many companies strategically aligned with the United Kingdom, which may see them reconsider their operations with British and European Union members.
American companies and investors that have exposure to European banks and credit markets may be affected by credit risk. European banks may have to replace $123 billion in securities depending on how the exit unfolds. Furthermore, UK debt may not be included in European banks' emergency cash reserves, creating liquidity problems. European asset-backed securities have been in decline since 2007. This decline is likely to intensify now that Britain has chosen to leave.
Who Will Be Next to Leave the EU?
Political wrangling over Europe is not limited to Britain. Most EU members have strong euroskeptic movements that, while they have so far struggled to win power at the national level, heavily influence the tenor of national politics. In a few countries, there is a chance that such movements could secure referendums on EU membership.
In May 2016, global research firm IPSOS released a report showing that a majority of respondents in Italy and France believe their country should hold a referendum on EU membership.
Matteo Salvini, the head of Italy's Northern League, called for a referendum on EU membership hours after the vote, saying, "This vote was a slap in the face for all those who say that Europe is their own business and Italians don't have to meddle with that." The Northern League has an ally in the populist Five Star Movement (M5S), whose founder, former comedian Beppe Grillo, has called for a referendum on Italy's membership in the euro – though not the EU. The fragile Italian banking sector has driven a wedge between the EU and the Italian government, which has provided bail out funds in order to save mom-and-pop bondholders from being "bailed-in," as EU rules stipulate.
Marine Le Pen, the leader of France's euroskeptic National Front (FN), hailed the Brexit vote as win for nationalism and sovereignty across Europe: "Like a lot of French people, I'm very happy that the British people held on and made the right choice. What we thought was impossible yesterday has now become possible." She lost the French presidential election to Emmanuel Macron in May 2017, gaining just 33.9% of votes in the second round. (See also, What the French Election Means for Europe.)
A Year Later
In June 2017, more than a year after Ipsos' poll, the immediate pressure on the EU appears to have eased due to the electoral setbacks suffered by Le Pen and other euroskeptics. On the other hand, a report by Chatham House finds that 55% of the European public expects another country to leave the EU within the next decade; 28% of respondents are neutral on the question, while just 18% expect that no more countries will leave.