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Jan 10, 2017 | 01:20 GMT

7 mins read

A Trade-Off in the Brexit Negotiations

Prime Minister Theresa May announces the United Kingdom strategy for Brexit
(DAN KITWOOD/Getty Images)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

London is in a tricky position going into the Brexit negotiations. Since roughly 44 percent of its exports go to the European Union — the source of about 53 percent of its imports — the United Kingdom will likely try to maintain as much access to the bloc's markets as possible. But membership in the EU internal market entails accepting workers from countries in the European Union. This is a sticking point for British voters in the "leave" camp and for British Prime Minister Theresa May's government, which has promised to reduce immigration by withdrawing from the union. If the United Kingdom closes its borders to EU workers, however, the European Union is unlikely to grant it continued access to the internal market for fear that other countries would try to follow its example.

In a televised interview on Sunday, May offered some insight into her plans for navigating the difficult negotiations ahead. The prime minister clarified that her administration is not interested in trying to "keep bits" of the United Kingdom's EU membership and has prioritized recovering full control over its immigration policies in its negotiations with Brussels. Her statements suggest that London will renounce its membership in the EU internal market in favor of a trade agreement with the Continental bloc. Negotiating such a deal will not be easy, but it could pave the way for other member states thinking of leaving the bloc to keep their economic ties with the European Union regardless of membership status.

In the likely event that the United Kingdom decides to give up its membership in the EU internal market, it will have three options for maintaining its trade ties with the bloc. London could trade with the European Union under the rules of the World Trade Organization (WTO), but this would subject its exports to and imports from the bloc to WTO tariffs. Alternatively, London could sign a free trade agreement with Brussels to cover as many goods and services as possible. The United Kingdom could also arrange to keep its membership in the EU customs union, which involves a common external tariff for trade with the rest of the world. To minimize disruptions in trade with the Continental bloc, London will probably try for one of the latter two options.

Entering a free trade agreement with the European Union would restore the United Kingdom's sovereignty on trade and immigration. The signing parties would be able to include as many economic sectors as they want in the pact, from goods and services to public procurement and agriculture.

Entering a free trade agreement with the European Union would restore the United Kingdom's sovereignty on trade and immigration. The signing parties would be able to include as many economic sectors as they want in the pact, from goods and services to public procurement and agriculture. In addition, the United Kingdom would be able to draw up similar agreements with other trade partners such as India, the United States, Japan and Australia, each tailor-made to suit the participating countries' needs and interests. The solution is not without its drawbacks, however. Free trade agreements generally take a long time to negotiate, and considering the tumultuous political environment around the world, they will probably become even more difficult to sign and ratify in the future. Canada's free trade agreement with the European Union offers a cautionary tale of the pitfalls of such an arrangement: After almost a decade of negotiations, a regional parliament in Belgium nearly derailed the deal.

Given the possible complications, the customs union might be a better option for the United Kingdom. The EU customs union includes the bloc's 28 members as well as nonmember countries such as Andorra and San Marino. Membership does not require accepting EU migrants or contributing to the EU budget, nor does it subject countries to the European Court of Justice's authority. The customs union, moreover, does not apply rules of origin to exports from member states, saving exporters time and money. It would allow the United Kingdom to avoid introducing customs controls between Northern Ireland and the Republic of Ireland. It would also enable the United Kingdom to continue benefiting from the European Union's free trade agreements with nonmember countries, sparing London the hassle of negotiating them from scratch. (By the same token, though, the customs union route would prohibit the United Kingdom from pursuing its own free trade agreements outside the bloc.)

Turkey, one of the European Union's biggest trade partners in the customs union, could serve as a guide for the United Kingdom. Ankara entered the union two decades ago, though its current trade agreement — which covers only industrial goods — would not suit a services-based economy such as the United Kingdom's. In mid-December, the European Commission expressed interest in starting negotiations with Turkey to expand its customs agreement to include services, agriculture and public procurement. This is good news not only for Ankara but also for London, which could request a similar deal from Brussels. In fact, Turkey could prove a useful ally as the United Kingdom embarks on trade negotiations with the European Union — an ironic turn since "leave" campaigners used the prospect of Ankara's accession to the bloc to galvanize support for their cause. May will visit Turkey on Jan. 17 as part of her government's initiative to relaunch the United Kingdom's foreign policy after the Brexit vote. (British Foreign Affairs Minister Boris Johnson is currently pursuing the same mission in the United States, meeting with members of President-elect Donald Trump's incoming administration.)

At the same time, the United Kingdom's negotiations with the European Union will set a precedent of their own for member states interested in leaving the bloc. Countries such as the Netherlands and Germany will face a dilemma. On the one hand, they hope to reach a substantial trade deal with London to preserve their trade links with the United Kingdom. On the other, they know that an agreement that seems too beneficial for London could inspire Euroskeptic groups in their countries to demand the same. EU members must demonstrate to their electorates that leaving the bloc entails a certain amount of economic pain. Otherwise, the prospect of maintaining trade relations with Europe while avoiding the political and migratory obligations of membership could tempt voters to call for their countries' withdrawal.

Of course, the United Kingdom has a relative advantage in its talks to leave the bloc. Member countries that have held on to their own currency, as it has, are probably better poised to negotiate an orderly divorce from the European Union than are those in the eurozone. Should a eurozone member decide unilaterally to withdraw from the bloc, it would have to return to its national currency. Remaining member states, meanwhile, would likely have to introduce capital controls to prevent a run on their banks in the widespread anxiety that would sweep depositors. EU members outside the eurozone, such as Denmark or Sweden, would therefore have an easier time following the United Kingdom's Brexit example. The same could be said of countries such as Poland or Hungary, at least from a financial perspective, but their geopolitical interests will probably prevent them from unilaterally leaving the European Union.

The British prime minister is expected to provide more details about her Brexit plans in a public speech later in January, and official negotiations will begin by late March. Considering the complexity of the issues on the table, the negotiations will probably continue beyond the two-year period described in EU treaties, meaning that an extension, and perhaps a transitional agreement to buy London and Brussels more time, are likely. In the meantime, governments in and beyond the European Union will be watching closely to see how the negotiation unfolds because it will create a precedent that others may someday choose to follow.

A Trade-Off in the Brexit Negotiations
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