Brexit Triggered…And Why Britain Should Succeed In The Negotiations

This is the week that Article 50 of the Lisbon Treaty was triggered, and the two years of negotiation between the UK and the EU commenced. Following this period, the UK formally leaves the EU. It is the first time a member state is leaving the EU, so the procedures are untested and the outcome uncertain. But it is not the first Brexit, as historian David Starkey has pointed out. Henry VIII gave similar notice to Rome and through several Acts of Parliament between 1532-34, removed papal powers and tithes, and achieved his Brexit. The chief Remainers, his Chancellor Sir Thomas Moore and Cardinal John Fisher, were executed in 1535.

Today’s Remainers can expect kinder treatment. But Britain has never been entirely happy giving away the legal supremacy from Parliament won by Good King Hal. When Britain joined the Common Market in January 1973, it was a trade bloc that made some strategic sense. The fashion was to belong to trading blocs, in the belief that the General Agreement on Tariffs and Trade (GATT), the forerunner to the World Trade Organisation, was not strong enough protection from trade barriers.

This article cuts through the white noise surrounding Brexit to consider Britain’s negotiating position with respect to trade only, which is the paramount economic issue. It attempts to isolate the key negotiating points that matter with respect to trade, and for clarity ignores other important issues, such as immigration and residency rights.

Leaving was always going to be tricky. Given the EU’s appalling track record of agreeing free trade agreements, there is a real concern that nothing can be negotiated with the EU within this time-scale. As an opening salvo, the EU establishment tried to threaten the UK with economic hell and damnation. The UK Government has sensibly refused to be provoked, keeping its powder dry. Events have moved in the UK’s favour since the referendum anyway, with the UK’s economy confounding the sceptics.

The feeling the British public was lied to by the Remainers has increased support for Brexit. Instead of the economy nose-diving as Messrs Osborne and Carney predicted, it has continued to progress strongly. Foreign multinationals have stopped threatening to withdraw investment, and have begun to increase it instead. UK-based manufacturers and service providers are now getting on with adapting to the new reality. Today’s Sir Thomas Moore, ex-Chancellor George Osborne, lost his office. Perhaps Cardinal Fisher’s equivalent in Mammon is Mark Carney, who has survived, but has lost credibility.

The British public is therefore prepared for Brexit, even though the Scottish government is still screaming foul. But Edinburgh is isolated, and the last thing it should want is the referendum for which Nicola Sturgeon clamours. Her problem is she is at “peak nationalism” and agitating accordingly. And the more she agitates, the more the English majority are likely to associate the Remainers with the Luddite past, not the progressive future. So, the British public has adjusted well, and is prepared to accept the worst-case deal. World Trade Organisation rules have not stopped Britain expanding her trade elsewhere. Theresa May has managed public expectations faultlessly, but will need to continue to do so.

Both politically and economically, Britain is now ready for the divorce. In the forthcoming negotiations, she holds a far stronger hand when it comes to the opportunities of free trade. The world has changed tremendously since Britain joined the Common Market back in 1973. Not only is the Commonwealth keen to trade freely with the UK again, but so are the new economic power-houses, such as China, Japan, South Korea and the whole of South East Asia. Donald Trump is fully supportive of Brexit, unlike his predecessor, and has promised a quick trade deal. So, given the US is significantly larger in GDP terms than the EU without Britain, she can, in theory, replace EU free trade with a trade alliance with the US.

Brussels Is Already Shifting

It appears to be becoming clear to Brussels that the UK will benefit from being out of the EU, even if she works to WTO rules. Brussels is temperamentally unsuited to being challenged in this way, but seems to be slowly adjusting to the new reality. Officials have subtly moved from declaring that Britain must be punished for leaving the EU club to discourage others. The realisation is that the gate on Animal Farm has been left open, and Napoleon sees some of the other animals, not imbued with idealism, drifting towards it. Change is needed, but there’s no consensus what that change should be.

Britain’s trade with the mainland EU is growing at a slower pace than her trade with the rest of the world, so she is becoming a springboard for global business once again, even before Brexit was triggered. Therefore, the Eurocrats’ worst nightmare is increasingly likely: an independent Britain will not only escape the rigidities of the EU, but will become more economically and politically powerful relative to the EU as a result. Then there are the divided interests within the EU itself, with Germany and France the ultimate masters of Brussels. When push comes to shove, Brussels must bend to their will.

This is important, because Germany and France listen to their big corporations, who have adapted to the reality of Brexit. Yesterday, Angela Merkel tried to set the negotiating agenda, but she is simply electioneering. Renault Nissan has been confident enough to commit further investment in its Sunderland car plant, widely recognised as the most efficient in Europe. Peugeot/Citron has agreed to buy Vauxhall from General Motors. BMW makes the popular Mini in the UK, and owns Rolls Royce. VW owns Bentley, and sells Audi and Porsche along with its own popular brand. Italy’s Fiat sells Fiat, Alfa Romeo, Maserati and Ferrari.

Britain is the most important single market for these European manufacturers, and this is only one sector. Supply chains are intertwined between the EU, UK and elsewhere. The key point is globalisation drives manufacturing and technology, not economic secularisation any more. The idea that the EU can impose the terms of trade with Britain on its corporations, without badly damaging itself, is as commercially illiterate as the Trump administration threatening to put up trade barriers against Apple’s iPhones assembled in China.

On trade therefore, Brussels needs to undergo a learning curve, and reality must be encouraged in the Brexit negotiations. The other factor affecting cross-border trade, that no one can ignore, is the changing attitude to trade in America. As I argued in last week’s article, future US trade policy could be a major disrupter for global trade, unless President Trump and the Republicans come to their senses. But for now, it appears that President Trump is gunning for the German motor manufacturers, and an undervalued euro, while prepared to prioritise trade with an independent Britain. Therefore, the straws in the wind suggest that Britain is better placed to pursue trade agreements in America’s sphere of influence outside the EU, rather than in, if only because of the future direction of America’s own protectionist trade policies.

How are trade negotiations likely to proceed?

We know the principal trade-related issues beforehand, which can be summarised as follows:

• Getting the unanimous agreement of the other 27 member states on trade is difficult. Most member states are ruled by coalitions, and political interest leading to protectionism drives national and regional considerations.

• WTO rules, the worst case for Britain, are acceptable as an alternative to EU free trade. It will mean a tariff of 10% on motor cars, lesser tariffs on other products. The British Government has expressed a willingness to compensate British-based exporters to the EU with lower corporation taxes, if EU tariffs are raised against them or WTO rules apply.

• The UK has a trade deficit with the rest of the EU, so EU manufacturers have more to lose in the absence of a workable trade agreement.

• Global economic growth is being driven by China and her trade partners. In addition, resource-rich countries, such as Russia, those in Latin America and sub-Saharan Africa are all expanding on China’s coat-tails. With some exceptions, the future for growing trade opportunities is no longer with Europe.

• The Eurozone’s economy faces a financial crisis, only deferred by the ECB’s monetary policies but not resolved. It hangs like the sword of Damocles over proceedings.

• Political discontent within the EU membership is growing, and the EU risks disintegrating.

• The EU as a governing entity is profligate and faces a significant budget shortfall, exacerbated by Britain’s withdrawal.

• The EU’s chief Brexit negotiator, Michel Barnier, has claimed that Britain owes €63bn, which he says it must be paid before talking trade. The legal advice to a sub-committee in the House of Lords unequivocally states that no such liability exists.

In mid-January, Theresa May delivered a speech to the press at Lancaster House in London, setting out the Government’s position. With respect to trade she said the UK will leave the single market and the Government would seek the greatest possible access with a fully reciprocal free trade deal. She wanted to see a phased process of implementation of new arrangements outside the EU from 2019 (i.e. when the two-year notice period is up). Importantly, she said that no deal would be better than a bad deal.

It boils down to four major issues:

• Tariffs and other protectionist policies will be strongly opposed by European-based multinational corporations. Brussels will be isolated from the EU’s industrial giants if it attempts to perpetuate such policies;

• On trade, Britain has far less to lose than the other EU member states;

• Brussels wants the incentive for other member states to follow Britain’s lead minimised; and

• Brussels desperately needs money to balance its books.

The negotiations themselves are likely to take place behind closed doors. Britain must insist on controlling the agenda.

It would probably suit the UK not to hurry. While new trade agreements with the rest of the world cannot be signed before the two years is up, they will be negotiated ready for signing, weakening the EU’s negotiating position. Big business, seeing the progress Britain makes with the rest of the world would be given every encouragement to lobby hard in Brussels for a tariff-free agreement. Investment banks will make it clear that London remains the European international finance centre, and that no banker in his or her right mind is going to relocate European business, beyond what is strictly necessary, to Paris or Frankfurt. That said, it is highly unlikely that an agreement on trade will be signed within the two-year time scale.

This is where Brussels’ need for money comes in. Britain can agree a significantly smaller sum than the €63bn sought by Brussels, on the basis that there is no legal claim for any of it. After all, Parliament regains its sovereignty in 2019, and no challenge to it from the European Courts or even the UK’s own High Court will gain traction, if the EU thinks it can litigate.

So here’s the deal: Britain will pay a face-saving sum such as €10-20bn in full and final settlement only after the EU has agreed to a free trade deal. No deal, no money.

The closer we get to March 2019, the more Brussels and its disparate member states will understand this is an offer they can’t refuse. Moreover, so long as Britain can trade freely with the EU, there is probably less incentive for other states to leave the EU. There will be no reason for Ireland, for example, which does over 70% of its trade with the UK, to also consider leaving, or for that matter any other country preferring free trade with Britain and all her new trading partners.

This is not how the Eurocrats currently see it, but that is the reality. What’s Britain’s downside if the EU refuses to play ball? Britain walks away, the EU writes itself a suicide note, and Britain is free to trade with whoever it likes.

The British Government, while being very diplomatic about it, has approached the Brexit negotiations in this spirit, and there’s every indication this is going to be its general strategy. And don’t be surprised if Mrs May calls an early general election to consolidate her position later this year, which should give her a landslide.

It is also becoming clear that the EU has even greater external problems ahead of it than Brexit. Russia and Turkey are moving towards a strategic alliance on Europe’s eastern flank, and relations between America and the EU have deteriorated significantly, potentially shutting US markets to many EU-based manufacturers. It should agree to free trade with Britain, collect some money, and move on.

Alasdair Macleod

HEAD OF RESEARCH• GOLDMONEY

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