Gearing up for the ‘divorce’

Prime Minister of the United Kingdom, Mrs Theresa May has finally laid out her plans for ‘Brexit’. The key aspects of the plan include the Britain leaving the European Union’s single market and giving the British Parliament, a final vote on the deal. The Britain would also not be a full member of the Customs Union but instead, it would negotiate some kind of a tariff-free trade deal. It would also continue to cooperate with EU on the areas like crime and anti-terrorism. PM Theresa May also threatened that if the EU failed to offer a good deal, then Britain would move towards becoming a low-tax regime to attract investments. Once it is out of the EU, Britain would no longer abide by the immigration rules of the European Union or be subject to the jurisdiction of the European Court of Justice.

Challenging the basic tenets of EU –
The primary basis of the European Union is free movement of goods and services, capital and labour. She has closed the labour option altogether by saying that there would be controls on the movement of people. PM Theresa May has ruled out a partial or half-in and half-out relationship with the European Union. If she would have acted otherwise, it would have been a violation of the mandate of the ‘Brexit’ referendum. The Government has confirmed that the Parliament is not in possession of any authority to overrule the mandate of the referendum. 

Xenophobic nature of the ‘Brexit’ mandate –
Flood of cheap labour from the Eastern Europe was a boon for British economy because the profits of the businesses in Britain shot up due to low wages. But the xenophobia surrounding the immigration policies of the European Union forced the people to pull out the Britain from the EU. It was a vote where ‘populism’ won over ‘cold statistics’. Hence, the mandate of the ‘Yes’ vote was factually incorrect by arguing that the immigrants have not contributed to the economy. PM Theresa May is making a virtue out of necessity or making best out of the bad job i.e. crisis management. Unfortunately, the mandate is so lopsided that PM May is left with no choice.

Negotiating the trade deal –
PM Theresa May calls for a new, comprehensive, bold and ambitious trade agreement with the EU. She should realise that the Britain already had one with the EU, against which the people voted to leave altogether. How can one get a more comprehensive free trade agreement once it comes out of a ‘comprehensive’ agreement altogether? Actually, the ‘hard Brexit’ was the result of ‘someone to blame’ for the harsh economic recession in the country. Britain wants to keep the immigrants out, which is the real reason for the ‘Brexit’ but is it going to compensate their economic loss during the time of economic recession? Many businesses (especially from India and China) have moved into the Britain to get a foothold in the EU. Britain is a very small market for any business venture. In the last one year, the current account deficit of the Britain has dropped by about 5.2% to 5.6% of the GDP, which is quite phenomenal. The cause of the same is because of the declined income from abroad. Britain is largely a service exporter to the EU. Service exports are concerned with the location of the parent company. In the event of immigration controls, the service economy is bound to suffer (Infosys- H1B visa analogy).

Manoeuvring debt obligation as a tool?
Britain owes diverse debts to the EU. One of them is as high as £50 billion. In case PM Theresa May is expecting to negotiate a better deal with the EU by using the debt clearance tool, it would be an unwise decision. The trade negotiators of the EU will be hard-line on the issue of the bills and those bills will have to be settled. Other major issues like the pension payments for the British employees in Brussels will have to settle as they would be losing their job soon and the future of the two big EU institutions in the Britain (The European Medicines Agency and the European Banking Authority). Moreover, it is possible that the Britain would have to pay the common external tariff from 2019 as it is possible that the trade agreement with the EU would not be concluded by then, especially if we see the history of trade agreements that the EU has negotiated in the past (Canadian-EU trade agreement took 8 years to conclude and the Gulf Cooperation Council-EU trade agreement is in limbo from the last 14 years).

Association with EUCU –
British PM has ruled out the full membership of the European Union Customs Union i.e. EU+ several other countries. It enables the free movement of goods along the members of the Customs Union in a single base-level tariff system. It was a wise thing to do for the Britain because abandoning the EU to become a part of EUCU did not make any sense. PM May has confirmed that the Britain will remain an associate member of the EUCU or it will retain some elements of the Customs Union.

Future of trade negotiations –
Britain now faces the normal ‘Most Favoured Nation’ tariffs with the EU which is alright for them because most of the tariffs of EU are down to pretty low levels. But the cause of concern is the facilitation of services trade with the EU because it involves multiple complexities involving local legislations and special permits for the movement of labour. Hence, the most crucial sector in which the Britain needs to negotiate is the services sector. This is where the blockages would be introduced by the Brussels. The major cause of worry for the Britain is that the financial services business would relocate to Frankfurt from London to access the large market of the Europe. Brussels has underlined the fact that British interests lie in the services sector and not in the goods.

Immigration conundrum –
PM May uses the term ‘control’ over immigration. It might mean that the Britain would introduce ‘work permit’ system for certain ‘desirable’ immigrants which are needed for the economy in terms of skilled labour. PM May also clarified that her government wants to secure the rights of the EU citizens working in the Britain and the British citizens working in the EU. It should be noted that around 1.2 million citizens of the EU work in the Britain and more than 3 million Britons work in the EU. But it is highly unlikely that the ‘Swiss model’ of working permits would be adopted because the Switzerland did not share any animosity with the EU in the past.

Jurisdictional issues –
A point of worry is that trade deals that are being negotiated would come under nobody’s jurisdiction, certainly not under the European Court of Justice’s jurisdiction. Hence, it would invite a clause of arbitration like it is covered in any normal trade agreement. Moreover, the trade arbitration rules could also be negotiated under the protocols of World Trade Organisation but there is no international protocol over services trade so they would have to negotiate bilaterally for this segment. WTO enables regional trade agreements but not makes them mandatory. Therefore, in case a trade deal is not worked out, the Britain could leave the EU under the WTO rules.

Strategy to secure a decent trade deal –
PM May has also warned the EU that if it tries to impose a punitive deal on Britain, she might convert Britain into an offshore tax haven and EU would lose access to crucial supply chains. It is a political strategy to please her British constituency that she is following the mandate and it is also a threat to the EU to accommodate the Britain in giving the best possible alternatives to them. It is quite laughable considering that these are empty threats and the heavyweights in the EU like Germany and France might not be impressed by such hollow threats because London might be an important financial centre but there is already talks about relocating financial services centre to various locations in the Europe to access a larger market than Britain. She must realise that the business is not going to be swayed away by patriotism or populism. It is concerned with profit maximisation. Therefore, using the financial clout of London as a bargaining chip might not work out for Britain in negotiating the trade deals with the EU. Neither most countries become prosperous because of them being a tax haven, nor the businesses simply get attracted by the candies offered by a tax haven. Moreover, there are guidelines by the OECD in this context which are to be followed by the members of the grouping.

Retaining the EU Labour laws –
PM May also said that she wants to retain some labour laws of the EU, such as 48-hour week, 20 days of paid leave and 14 days of maternity leave. It might be aimed at pleasing the British working class that overwhelmingly voted to leave the EU. These laws are coming into the picture because once you invoke Article 50 of the Lisbon Treaty, all the issues come on the table automatically for negotiation. Therefore, the laws which are to be abandoned and the laws which are to be retained would all be discussed post-March 2017 when the Article 50 would be invoked by the Britain.

If there is one thing certain, amidst the uncertainty surrounding the Brexit procedure post-March 2017 timeline of invoking the Article 50 of the Lisbon Treaty, it is that the negotiations would take far more than the stipulated two-year timeline in the Lisbon Treaty. Why is it certain? Their past record of such negotiations offers many insights into this certainty.