Brexit Between Economic and Political Disputes

Given the protracted timeframe for the negotiation of the UK’s future long-term relationship with the EU, it makes sense for the two sides to agree to a stand-in agreement that will be in effect during a transition period while the UK and the EU hammer out a long-term deal that achieves the goals that both sides want. After reaching the details of this agreement, it is now the job of PM Theresa May to sell this deal to her parliament. However, this will prove tricky. Several so-called “Hard Brexiteer” members of the UK Cabinet have already quit the government in protest over the perceived compromises in the agreement. Some “rebel” Conservative Members of Parliament have even attempted to trigger a leadership contest voicing their discontent with PM May’s deal. While May’s position is strengthened by the failure of the triggering of a leadership contest, it underscores the thin line she must walk to please many different parties in this process.

1. What does the political approval process for the deal look like?

The provisional agreement that has been reached would provide for a transition period that allows the UK to remain in the EU customs union for the time being, among other provisions. Under this provisional agreement, the transition period is set to expire in December 2020, with the possibility for an extension if needed and agreed upon by both parties. More urgently, this provisional agreement needs to be agreed to by both the member states and the UK, and thus needs to pass the UK Parliament and the European Parliament before the deadline for Brexit as outlined in the bill to trigger the process. If a transition period agreement is not reached by then, the UK will face a “cliff-edge” or “hard” Brexit, with immediate exit from the agreement with no special provisions for the country. The UK would then need to negotiate new trade deals with the EU as a completely unrelated state would. This would likely spell disaster for the UK economy. The UK’s position in the
goods market once it enters the transition period will be similar to that of Norway. It will, however, lose its representation in the EU legislative and regulatory process.

As it stands, the passage of the provisional deal is fraught with opposition from several factions in the British Parliament, which could be perilous for the UK wishes to avoid a cliff-edge exit. On the one hand, hard Brexit proponents among the Conservative party view the provisional deal as the worst of both worlds, as it keeps the UK in the EU customs union but eliminates its representation in the regulatory and legislative bodies of the union. On the other hand, pro-EU Conservative MP’s are opposed to too loose an agreement with the EU. Thus, they are threatening to oppose the vote for the provisional deal bill as well. Furthermore, the Democratic Unionist Party (DUP), the junior partner in the coalition government with the Conservative party, is threatening to vote in opposition as they view the position of Northern Ireland (discussed below) to be different from the rest of the UK in the provisional deal. As it stands, there remains considerable uncertainty as to whether this deal will pass the UK Parliament where the expectation of greatest resistance for it will be on both sides.

2. What is in the deal that Theresa May is proposing to her country?

The EU seeks to guarantee four freedoms among its member states: goods, services, capital, and people. This means that the EU must allow the free movement of the pillars: free trade in goods and services, free movement of capital among member states with no restrictions on capital movement, and the free movement of people for work or other reasons. These freedoms boost investment and growth in the Eurozone but have also fueled anti-EU sentiment not only in the UK, but elsewhere in the Eurozone where opposition to the organisation has swelled in recent years.

The four freedoms have allowed the economies of the member states to become deeply intertwined and so any attempts to divide them again will likely be fraught with very detailed negotiations. With 48% of all the UK’s trade (whether exports or imports) coming from the EU, it becomes very quickly apparent that the country’s trade is heavily dependent on this trade partner. Furthermore, this figure fails to capture the effects of freedom of capital movement on the UK financial sector, which accounted for 6.5% of the country’s economy in 2017 and 3.2% of all jobs.

The deal further stipulates that the UK will have to pay the EU £39B to settle outstanding obligations that the UK had to the union as the EU funds itself through the contributions of current (and in this case soon-to-be-former) members.
Among the issues agreed on are those of borders between the Republic of Ireland and Northern Ireland (which is part of the UK). Due to the difficulty of establishing a border on the island of Ireland, the provisional agreement allows Northern Ireland to be well-integrated into the EU goods market, while the rest of the UK would not be. This incentivises both parties to reach a future agreement that would resolve the status of where the UK stands in the European goods market.

Similar issues to the Irish border issue apply to Gibraltar. Given that it is under British control, the UK claims that the territory is subject to the same principle of being part of the customs union. However, given that it is a British Overseas Territory, Spain counters that is technically not part of Great Britain and thus not covered by deals made by the country with the EU without Spain’s approval. This will prove a sticking point in any eventual deal as Spain would like to have the option to approve any trade deal involving Gibraltar, while the UK does not want to commit to allowing Spain to veto any deal involving the territory.

The above graph shows the UK’s trade with different parts of the world, including the countries of the European Free Trade Association (Switzerland, Norway, and Iceland). The UK’s trade with the EU and the EFTA countries makes up around half of both its imports and exports.

Source from: MERatings