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Britain’s Obstacles to Brexit

TOPSHOT – People walk over Westminster Bridge wrapped in Union flags, towards the Queen Elizabeth Tower (Big Ben) and The Houses of Parliament in central London on June 26, 2016. (Getty)

Time, Money, Trade and Migration

by Yasmine El-Geressi

Brexit talks are moving forward against a backdrop of a weakened Prime Minister, a minority government and a divided nation. Theresa May will need to let the House of Commons vote on the final deal, but before she gets there she must face four key obstacles during the combative negotiations.

CLOCK IS TICKING

Time is running out for Theresa May to reach a Brexit deal in the agreed two year timeframe. With formal talks beginning less than a month ago, the scale of the task awaiting her is now becoming clearer. Valuable time was wasted in the year since the last summer’s referendum and the tight timetable became shorter by May’s failed election gamble making an already complicated process even more chaotic. The UK formally announced its intention to leave the EU in March by triggering article 50 and since then the UK has yet to agree on a single issue of the 7000 reportedly drawn up by the UK civil servants in Brussels. These will include lengthy discussions on a massive range of topics, including farming, fishing, human rights, air travel and pet passports.

May has said she wants a comprehensive free trade deal with the EU but according to the ratings agency Fitch “the UK will not be in full control of the negotiating agenda, and specifically the order in which issues will be addressed”. It adds that the time period is too short for such a deal to be negotiated and agreed and that a transition deal is seen as possible.

The legal impact of Brexit on the UK-based financial services sector is also of great concern globally. According to a report commissioned by the lobby group TheCityUK, the Brexit negotiation period will not be enough time for financial firms to reorganize themselves. Legal firm Freshfields suggested that a “longer and phased implementation period” would be beneficial to both the UK and EU.

EU officials are also skeptical of reaching a deal in the agreed timeframe. Chief Brexit negotiator Guy Verhofstadt told The Mail on Sunday that “time is running out” for the UK to offset the economic consequences of leaving the EU without a deal. Opposition parties share similar concerns. Labour’s foreign affairs spokeswoman Emily Thornberry said in a parliamentary debate that “as a country, we have got 20 months to go until Brexit; we absolutely have got to get a grip.”

However, leader of the Commons Andrea Leadsom insisted that she is “extremely optimistic” and told BBC’s Sunday Politics: “When you have politicians right across the EU and in the United Kingdom who share the desire for a successful outcome with low tariffs, zero non-tariff barriers, free trade between ourselves, cooperation on security and so on, it should be perfectly possible to meet the time frame.” She also confirmed that the next parliamentary session would be two years instead of one to allow MPs more time to dissect “substantial amounts of legislation” caused by Brexit.

COST OF BREXIT

No one knows for certain what exactly the charges will be as they are a subject of the Brexit talks but they are likely to include future budget payments to less wealthy countries, pensions for all EU staff, future liabilities for loans to struggling member states, such as Portugal, Ireland and Hungary, spending on infrastructure and structural funds agreed on but still to be financed, the cost of programs to improve democracy and the rule of law in nations including Turkey, and the cost of relocating EU agencies, such as the European Banking Authority, from London.

Before the referendum, many pro-Brexit campaigners and supporters cited the cost of EU membership as a strong reason for leaving making it one of the top three priorities for the Brexit negotiations. But a paper for the Centre for European Reform notes that the “Brexit bill” is “a far cry from the £350m-a-week bounty promised by Brexit campaigners during the referendum campaign”.

Britain’s exit from the EU will leave a hole in the union’s budget of approximately €10 billion euros which could mean that contributions from member states will increase and there will need to be spending cuts. However, EU officials say that the bill is not a punishment or revenge but a matter of fairness and an important precedent to other EU members, showing that leaving the bloc is costly.

The issue of the UK’s financial obligations is one of three areas Britain and the EU must make progress on before trade negotiations can begin. However, British Foreign Minister Boris Johnson recently made things more complicated by hinting that this is an area where the government are prepared to stand their ground and that the UK is not willing to agree to the costs set out by Brussells.

“I think that the sums that I have seen that they propose to demand from this country seem to me to be extortionate and I think ‘to go whistle’ is an entirely appropriate expression,” Johnson told parliament.

EU negotiator Michel Barnier hit back at Johnsons remarks, reminding the UK that the Brexit “clock is ticking.” He also explained that the financial settlement as “settling of accounts” and that honoring these costs was a matter of “trust.”

‘GLOBAL BRITAIN’

The type of trade deal Britain agrees with the European Union following Brexit is one of the top negotiation priorities. Studies by the National Institute for Economic and Social Research suggest leaving the single market could lead to a long-term reduction in total UK trade with Europe of between 22% and 30%. Kamal Ahmed, BBC economics editor, wrote “That stark fall in trade – and therefore in the creation of growth and wealth in the economy – reflects the fact the single market is a comprehensive trade agreement aimed at reducing tariff barriers within the EU (the UK’s largest export market).” This could be avoided if the UK manages to secure a deal similar to the one already in existence but the EU has made it clear that this is a deal they do not support.

“The single market also seeks to reduce “non-tariff barriers”, the rules and regulations governing issues such as safety certification and licensing of goods and services provided across borders. For an economy such as Britain’s, driven by services such as retail and finance, non-tariff barriers are very important as well as very complicated.” Ahmed explained.

But could new trade deals soften the blow of leaving the single market? Research by New Open Europe suggests that there is enough untapped UK trade potential to offset the possible effects of Brexit on exports to the EU.

The report said: “The UK is already a great trading nation, which exports to well over 200 nations. Our research reveals that the UK’s EU membership cuts against the grain of our overall comparative advantage – which is services industries. All three of our top priority countries share strong historical ties – Canada and India remain in the Commonwealth, Israel looks fondly on the country which allowed it to be created. All share our legal system. And, while Canada speaks English, English is a lingua franca for India, and widely understood in Israel. The task of the Government is to seize the opportunity of Brexit to draw fully on our comparative advantages, the English language, the common law system, the status of the UK judiciary and legal system, the UK’s security, development and defence reach, our world-class universities, our innovation and science.”

Others are less optimistic. Professors at the London School of Economics, Steven Brakman, Harry Garretsen and Tristan Kohl argue that the economic opportunities that will arise from Britain leaving the largest trading bloc in the world are not enough to outweigh the negative impact of Brexit. “The UK has no trade-enhancing alternative to an agreement with the EU that essentially mimics its current situation as an EU member. A gravity model predicts that the negative impact of Brexit would be only marginally offset by a bilateral trade agreement with the US, and even in the case of trade agreements with all non-EU countries, the UK’s value-added exports would still fall by more than 6%.”

Despite the government’s attempt to cultivate a perception of a ‘Global Britain’, this gloomy evaluation is confirmed by most trade analyses of Brexit.

BRUSSELS, BELGIUM – OCTOBER 21: British Prime Minister Theresa May (L) shakes hands with President of the European Commission Jean-Claude Juncker (R) at the European Commission at the end of a two day summit at the Council of the European Union on October 21, 2016 in Brussels, Belgium. (Getty)

MIGRATION

Theresa May’s migration negations are off to a shaky start as her “fair and serious” offer to give EU citizens in the UK “settled status” after Brexit was described as being “far short of what citizens are entitled to”. European Parliament chief Brexit negotiator Guy Verhofstadt criticized the offer in an interview with Euronews. He said: “What they call a generous offer is not really generous when you compare with the rights that the British citizens will enjoy on the continent that [the] European Unition gives to any third country nationals.”

“The rights that the British Government is prepared to grant to the EU citizens are basically a sort of second-class citizenship that can be revoked at any point in time. It’s what they call ‘settled status’ which you can earn – and not easily – and once you have it, it can be revoked.” He added.

Cabinet Office minister Damian Green responded by explaining that the “basic rights” of EU citizens living in the UK would be “preserved” and recommended Mr Verhofstadt to “read our proposal”, which the government says would allow the three million EU citizens to remain on the same conditions as now.

The UK’s acceptance of the Single Market’s ‘Four Freedoms’ includes the free movement of EEA citizens. The UK aims to gain more freedom to impose restrictions on EEA immigration during Brexit talks. The recent Tory manifesto said that “leaving the European Union means […] that we will be able to control immigration from the European Union” and that the government will “reduce and control the number” of EU migrants to Britain.

The UK has several options ranging from permissions which are possible within existing regulations, to more restrictive permits which treat EEA citizens the same as migrants from any other country.  Mark Easton, BBC’s home editor says an immigration “cliff-edge” would be “problematic for social care, health, construction, hospitality and agriculture, sectors, that currently rely on significant numbers of EU migrant workers. It is suggested the UK might negotiate transitional arrangements lasting several years after Brexit.”

Voters’ worries about European immigration being “uncontrolled” fueled the Brexit vote and the Prime Minister has reiterated her aim of bringing net migration to below 100,000 a year. However earlier this year May suggested that the free movement of EU citizens into the UK could continue for a while after the UK officially leaves the European Union and that she “cannot guarantee” that migration levels would drop in post-Brexit Britain.

Businesses have expressed alarm over what the impact of new immigration policies will mean for them. According to new research from the CIPD, the professional body for HR and people development, and the National Institute of Economic and Social Research (NIESR), the end of free movement of people from the EU will damage UK businesses and public service delivery unless the government negotiates policies that take into consideration the need for both skilled and unskilled labour from the EU.

Peter Cheese, Chief Executive of the CIPD, commented: “Access to skilled and un-skilled labour is a huge concern for employers. If the Government does not provide a straightforward, flexible and affordable immigration system for EU nationals post Brexit, as set out in our recommendations, significant numbers of employers are likely to face real skill shortages which may hold back their growth and performance.”

As a result, 1 in 5 organizations say they are considering relocating all or part of their UK operations outside the UK (11%) or will focus future growth outside the UK (9%).

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