Perplexed by Brexit? Here Is a Guide

November 18, 2019 2:00 AM
Photo Credit: 
REUTERS/Phil Noble

After weeks of ridiculous stops and starts, Prime Minister Boris Johnson is finally presenting the British electorate with (more or less) the Brexit deal that he wanted. Yes, he was forced to renege on his “do or die” promise to leave the European Union by October 31. But a path toward the exit door is clear if the electorate returns Johnson and the Tories to office in December. If Johnson is defeated, it will likely spell another Brexit referendum.

No matter what happens, the economic specifics of Brexit will not “get done” any time soon. A Conservative victory would set another “cliff edge” in motion for the end of 2020, the expiration date of the status quo transition period. A Johnson victory would have to be followed up with a new treaty to govern the future trade and economic relations between Britain and the European Union. The treaty must be agreed to by mid-2020 to be ready for treaty ratification by the end of next year.

Lost in the debates over Brexit, at least for observers outside the battleground, is the fact that Johnson seeks to take Britain in a very different direction than current EU rules and regulatory standards, necessitating a hard slog in the negotiations for a new UK-EU treaty. As for trading goods and services, the terms will also have to be negotiated by Britain (excluding Northern Ireland) and the EU.

One deal that is settled is the UK financial liabilities to the rest of the EU. Here are five other policy areas to watch.

1. Goods Trade

Under Johnson’s deal, Britain will leave the EU customs union and the internal market of common standards for goods. A new comprehensive trade deal needs to be negotiated by mid-2020, unless there is an extension. If no deal is negotiated, British EU-bound exports and EU exports to Britain will be subjected to EU and UK tariffs on goods from elsewhere. These could range from nothing to prohibitively high levels blocking any trade.

But tariffs are not the main issue. UK regulatory certifications and industrial, safety, and environmental standards would be deemed invalid in the EU. This barrier will de facto sever cross-Channel manufacturing supply chains and likely make large parts of the UK-based manufacturing sector unprofitable, because of this sector’s reliance on intermediate goods originating in the EU27. Particular parts of perishable goods trade, such as fresh food products subject to EU sanitary and phytosanitary rules, will become impossible after Johnson’s Brexit.

2. Services Trade

A British departure from the EU internal market strips UK-based service providers of the vast majority of current EU occupational, professional, and standards certifications. As a result, it will become impossible for UK providers to export services from the UK to the rest of Europe. This change again forces UK investment firms and financial service providers, among other firms, to establish bases inside the EU in order to conduct business there.

Financial services traded from the City of London will benefit from a series of transitional arrangements, but in a relatively short time, most critical market and liquidity-providing euro-denominated institutions will have to relocate to the euro area. Accordingly, to offer services to EU-based customers, financial concerns based in the City of London will need to ask the EU to grant them “equivalent status,” an untested designation for large financial markets that can be revoked by Brussels at short notice.

3. Immigration

Johnson’s deal settles most residency issues in principle for UK and EU citizens living in both economies, though the process to achieve permanent residency in either location remains burdensome and arbitrary. Consequently, this issue may become a political problem ahead of the ratification of any new free trade agreement between the UK and the EU. The current free movement of labor inside the EU will end insofar as movement to the UK is concerned. The British government has not yet proposed a replacement in terms of new more restrictive immigration rules potentially imposed on EU citizens emigrating to or living temporarily in the UK. Because of the enflamed nature of this issue, a Conservative government is likely to impose tough new restrictions. The Labour Party, on the other hand, has recently committed itself to maintaining the current free movement of labor between the EU and the UK, perhaps facilitating a UK entry into the EU single market under a future post-Brexit Labour government.

4. Agriculture

UK farmers would naturally lose access to the EU Common Agricultural Policy (CAP) and associated annual subsidies of around €4 billion. They will have to turn to what will possibly be less generous national UK agricultural support policies. As noted, trade in agricultural products and livestock between the EU and the UK will become much more difficult because of different sanitary and health frameworks. A separate issue, even more volatile, is how the UK will address the terms of a future free trade agreement (FTA) with the United States, given President Donald Trump and the US Congress’s agenda of opening UK markets to US producers. Such access would likely require the UK to accept food regulations that are incompatible with those of the EU. Such a change would further diminish the prospects of EU-UK agricultural trade.

A trade agreement between the UK and the EU might eliminate or resolve some of these issues, but only after a long and hard negotiation stretching beyond the end of the transition in December 2020. A delay may not make a big difference in the services and agriculture sectors, as issues related to them are unlikely to be included in a relatively straightforward goods-oriented FTA. But UK businesses will face more red tape and bureaucracy when trading with the rest of Europe and also between Britain and Northern Ireland, which will remain in the EU customs union. All these negotiations could delay the departure for years.

5. Irish Border

Resolution of the tricky issue of an open border between Northern Ireland and the Irish Republic was the key to Johnson getting his Brexit deal to this stage. The British prime minister essentially did what he had sworn to never do and accepted the creation of a new de facto customs and regulatory border in the Irish Sea, separating Northern Ireland from the rest of the UK. Businesses trading between Northern Ireland and the rest of the UK will now have to fill out paperwork to track their shipments. Any difference between UK and EU customs levels would be reimbursed to a seller/buyer in Northern Ireland, based on the ultimate destination of the goods in question.

But the road ahead contains landmines, as the deal evidently greatly increases red tape in Northern Ireland and the rest of the UK, and virtually all Northern Irish businesses oppose it. Labour, the Liberal Democrats, the Scottish Nationalist Party, the Greens, and the Democratic Unionist Party are all against Johnson’s solution to the Northern Irish border problem. They regard the separation of Northern Ireland from the rest of the UK as unacceptable for different reasons, including the creation of trade barriers between parts of the United Kingdom, increased bureaucracy in Northern Ireland, and not least the fact that separating Northern Ireland from the rest of the UK allows Johnson to pursue a very, very hard Brexit for the rest of the UK.

A Second Referendum on Brexit?

Any outcome other than an outright Conservative majority in the election is likely to trigger a second referendum forcing the public to choose between an indeterminate variation of Brexit and remaining in the EU. If Labour, alone or with potential coalition partners, secures a parliamentary majority, such a vote seems certain. Another hung parliament without a clear majority for any governing coalition or Brexit position would likely also lead to another election.

The only way to overcome persistent parliamentary gridlock and secure a potential further extension of the Brexit deadline from the EU27 is to allow a second referendum to take place. Based on current polling, British voters in another election would narrowly choose to remain in the EU. The stakes in the upcoming election in December are therefore pretty straightforward—either Johnson wins outright, or Brexit gets cancelled.