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The UK is in the final lap of the Brexit process, though its final stages could be tortuous. The EU was never under any obligation to serve up on a plate precisely the sort of deal the UK wanted. It seems this realization is now dawning on the UK government. The precise steps towards Brexit are below:-
The much maligned Chequers plan envisaged:-
Michel Barnier gave Brexit Secretary Dominic Raab a detailed report on the reasons for rejecting the “common rulebook” the main thrust of the “Chequers plan” which allows free movement of goods between the UK and EU.
The main problem is it allows the UK to follow only common product standards and ignore the single market’s broader social and environmental protection rules and obligations. This would create a two track system where the EU27 are following different rules and the UK gaining a competitive advantage. This would undermine the single market by allowing a non-member state to obtain the same benefits of single market access without following its rules the “cherry picking” accusation frequently heard in Brussels and not without just cause.
The problem for the EU is how to accommodate the UK as a non-member State. The UK ostensibly wants and needs single market access but does not want to pay for it. The UK approach is essentially to request single market access for free, but that is a benefit that EU members are paying for.
Both Norway and Switzerland are non EU members but are allowed single market access because they accept EU laws and specifically the four freedoms. The UK does not want freedom of movement, nor any acceptance of EU laws.
Since the rejection of the Chequers plan at Salzburg, a surprised and affronted PM demanded the EU explain its rejection and provide a counter proposal. But the EU has explained its reasons already it is not obliged to go any further.
The rejection of the UK approach has not yet caused the PM to divert from Chequers in the hope the EU Commission changes its mind. It must then secure support in Parliament. But if Michel Barnier stands firm, the UK will have to come up with a “Plan B”.
Also pressing for Plan “B” is the hard Brexit contingent; they see Chequers as tying the UK to the EU rule book. They have sold the country on the notion of free trade deals post Brexit. The 2010 UKIP manifesto promised a “Commonwealth Free Trade Area”. This conveniently ignored significant lessons of history. The UK tried to set up a free trade system with the newly created Commonwealth countries in the 1950s and 1960s. A significant effort was made with Canada, but no agreement was ever reached. In the end the Commonwealth became concerned primarily with cultural, sporting events, Royal visits. Where is the evidence that any Commonwealth countries are now actively in pursuit of a free trade deal with the UK?
The notion of a UK/ Commonwealth (54 countries/ 9% of UK exports) free trade zone and its sister variant “Empire 2.0” a free trade zone between the UK and Africa/ India and other assorted emerging market countries appears a colonial fantasy that is not just drivel, but assumes other countries bowing and scraping to trade with the UK. Do countries want to do bilateral deals with the UK? A century ago yes. But it is a late Victorian perspective. It ignores the trade requirements and developments in the Commonwealth since WW2.
The problem is free trade access to India (1.3bn people) is a good idea from a UK perspective, but what does the UK offer in return? The UK market (65m people) is too small on its own, to be attractive relative to other countries and trading zones. The Commonwealth has moved on and trades with their neighbours and China. The workshops and factories of Africa and India are buying Chinese inventories and spare parts. Australia and New Zealand are locked into China and SE Asia. And Canada? over 70% of trade goes to the USA.
The hard Brexiter rejection of the “EU rulebook” brings the obvious question, of where exactly is the “UK rulebook”? Who will arbitrate UK trade disputes? What export credit will the UK government make available to finance and underwrite the increased trade with riskier countries? The UK will need to enhance its trade infrastructure which has been reliant on Brussels for years.
The UK focus has to be the EU27 and securing access to the EU single market. The problem is since 1973 the EU has compromised with the UK, allowing UK rebates, UK cherry picking on a vast scale, Schengen, opt-outs everywhere. Now it is the UK’s turn to compromise. But the UK does not want to compromise. The PM has repeatedly said “no deal is better than a bad deal”.
The forthcoming EU summit is vital for setting out the terms of the “UK-EU” divorce the “withdrawal agreement” – a political declaration on the future relationship between the UK and EU. We suspect a rather vague statement.
The reality is if no agreement is reached this month, then it will have to happen by the end of 2018. The UK might be left with a deal resembling the bare bones of EU/ Canada, the Comprehensive Economic and Trade Agreement (CETA).
It is in our opinion central to the PM’s survival that she delivers a free trade deal and an orderly Brexit on the 29th March – this deal must preserve UK key access to EU markets – including EU Open Skies etc. Crashing out would bring a leadership contest and possibly another General Election.
We suspect we are in the final lap of the Brexit episode. This has been an unfortunate episode that brought to the surface the realities of a divided country. It shallowed out the centrist consensus, helping a lurch to both the extreme right and left. Whilst another vote is unlikely and in my view counterproductive, the UK will have to flex its terms soon to avoid crashing out of the EU which would bring very significant asset volatility including another bout of sterling weakness.
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