We still have no real idea of what kind of Brexit Britain is heading towards, writes Iain Begg. What we do know is that we will probably not – despite the claims of Brexiteers – get exactly the deal we want from the EU. The UK’s departure will leave a huge hole in the EU’s budget. Then comes the question of whether and how the government will replace EU subsidies to farms, universities, researchers and local authorities.
More than 100 days on from the referendum, there is still no clear sense of what the UK wants its future relationship with the EU to be, despite Theresa May’s announcement at the start of the Conservative Party conference that she will trigger Article 50 within six months. Nor does her intention to put forward a ‘Great Repeal Bill’ reveal which EU laws will be kept or discarded. In what are bound to be tough, complicated and lengthy negotiations, no-one would expect the British government to reveal its hand too soon, but both the British public and the many counterparties across the EU are becoming increasingly impatient with the government’s dilatory approach.
The reasons for the slow progress are easy to explain. First, the Cameron government insisted it would not set out a plan B, so that when the new government took over, the three ‘Brexiteer’ ministers most directly involved had to start virtually from scratch. Second, people knew what they were voting against in the referendum, whether staying in the EU or leaving the EU, but in a simple binary choice they could not say what they were voting for. The subsequent polling, as explained by Lord Ashcroft, may tell us that voters regard curbing the inflow of EU migrants and, perhaps even more emphatically, no longer paying into the EU budget as core elements of Brexit, but does not help in resolving the inevitable trade-offs.
A third reason is that it is far from obvious what is in the UK’s overall interest, let alone those of specific groups. Business leaders are alarmed about the prospect of being outside the single market, and want Brexit to be as close as possible to membership, but other voices (notably the Secretary of State for International Trade, Liam Fox) argue for a ‘pivot’ away from Europe. Farmers worry about their subsidies from the EU, while universities want to preserve their research funding from the EU and the flow of students, whatever the new regime for migrants becomes. So far the debate in the UK has been mainly around the post-Brexit model for access to the EU market: remaining fully in the single market; a free trade arrangement akin to the one Canada is close to concluding with the EU; or subject only to standard World Trade Organisation (WTO) rules.
Britain cannot simply dictate its terms
In the emerging, if rather unhelpful, lexicon of Brexit, full access to the single market is deemed to be ‘soft’, while the WTO outcome is considered ‘hard’. It has also been framed as, essentially, a British choice, with protagonists arguing about whether the benefits of their favoured option outweigh the costs. It has become a curious sort of phoney war in which the crucial question of what is likely to be acceptable to the rest of the EU has been too readily neglected. Will ‘they’, in other words, be receptive to what the UK, when it finally makes up its mind, wants from the negotiations? Are there issues other than those already prominently on the table, such as the rights of people from other EU countries to continue to live and work in the UK, likely to be potential deal-breakers?
In several policy areas, it will unavoidably be messy. For example, the other side to the endlessly repeated (if cynically mendacious) claim during the referendum campaign that leaving the EU would release £350 million per week to spend on the NHS is that the EU will lose these funds. The UK’s gross contribution to the EU (after deducting the famous rebate) is almost exactly the same as the aggregate of the gross contributions of all twelve countries which joined the EU in 2004 and 2007. Plainly, they will not be asked to double their contributions if the UK stops paying, but they will find other net contributors, such as the Germans and the Dutch, reluctant to make up the difference. The resulting acrimonious disputes will be blamed on the Brits.
A further budgetary dilemma is that some EU programmes are multi-annual, with expenditure allowed to continue well beyond the end of the current budgetary planning period, 2014-20. Big regional development programmes, including in the UK, and the highly prized grants awarded by the European Research Council, which UK academics have been disproportionately successful in securing, could still be active well into the 2020s. The UK could, therefore face a continuing bill long after its probable exit from the Union.
Compensating the losers
The process of disengagement from the EU will, in addition, pose challenges domestically about what happens to current recipients of EU funding. Farmers, researchers and local authorities receiving grants under EU Cohesion Policy have been told informally that they will still be funded up to 2020, but there will be ructions if the support then ends. The UK could seek to remain part of some EU programmes, such as the research one, with the implication that it would be expected to continue to contribute to the budget, despite popular objections. For Norway, Switzerland, Iceland and even tiny Liechtenstein, privileged access to the EU market comes with a price tag, as they contribute to the EU budget. In Norway’s case, the amount is substantial at €870 million per annum from 2014-2020, only €100 million less than Hungary, an EU country with double the population.
Because Brexit will lead to new winners and losers from whatever new trade arrangements are put in place, there may well be new demands for economic development support. This will oblige the government to come up with some sort of national framework for regional and/or industrial policy, two domains largely shaped at present by the EU approach. In this, as in many other policy areas, there has been no real public debate about what the UK should do next. It could largely emulate the EU way of supporting farming or lagging regions such as Cornwall and the Isles of Scilly or West Wales and the Valleys, or it could go in radically different directions.
Brexit may well mean Brexit, as our leaders are fond of telling us, but there is much more to it than waving goodbye. There are good tactical reasons not to trigger article 50 immediately, but if a more coherent way forward is not forthcoming soon, the process risks becoming a shambles.
This post represents the views of the author and not those of the Brexit blog, nor the LSE. It was first published at The UK in a Changing Europe.
Iain Begg is a senior fellow of The UK in a Changing Europe and a Professorial Research Fellow at the European Institute, London School of Economics and Political Science.
The LSE blog is hopeless pessimistic. The UK does hold all the cards because its walk-away position (trading under WTO rules) is better for the U.K. than anything else in offer. The EU seem to think they the negotiations will be similar to those in February with David Cameron and revolve around them giving as little as possible on free movement in return for what they as advantages to themselves of U.K. Membership of the EU. All that is history. The UK will be not be negotiating about freedom of movement, its contribution to the EU budget or acceptance of EU law and the jurisdiction of the ECJ. All that is history. It will be negotiating between the walk-away position of WTO rules or a comprehensive free trade agreement that must include services because to offer free trade that only includes good & agriculture would be a one-sided deal of advantage to the EU only as they have a large surpluses in those areas with the UK. The deal is free trade in services in exchange for free trade in goods & agriculture or it is nothing at all and reverting to WTO rules.
How does reverting to WTO rules benefit the UK ?
Surely tariffs hurt both parties, but they hurt the UK comparatively more? Because a higher percentage of our trade is with the EU. And it could take years of negotiating even to become an independent WTO member.
Thousands of financial jobs will be lost without passporting and manufacturing here for an EU market will revert to domestic production only. Unless the government can somehow compensate, companies will face higher costs both for imported materials and for exported goods.
The EU external tariff on industrial goods is only 2-3% on average which is too low to distort trade. The only industrial goods with a tariff high-enough to distort trade is cars. Tariffs on agricultural produce are higher (~10%) but that sector only represents 1% of UK GDP. There are no tariffs on services which is 79% of U.K. GDP. There is not going to be ‘passporting’ for financial services outside the EUsingle market but it will be straightforward for U.K. Banks to work around that, some using EU subsidiaries others simply using “equivalence” which US banks use today to access the single market.
The UK contribution to the EU budget is today equivalent to a 7% tariff on our trade and that is going to disappear. Even if we pay ~3% tariffs on average in the future under WTO rules it will still be a lower cost trading regime than today.
I do not agree with you “higher % of trade argument” as tariffs are always applied as a % of the volume of trade and the UK is going to collect more in tariffs than the EU27 will because there is a higher volume of exports from the EU into the U.K. than in the other direction. The highest tariffs by product type are also (not coincidently) in areas where Germans and French specialise, e.g. Cars and agriculture so when those tariffs start to apply to U.K.-EU trade it will clearly impact their producers most as it will tend towards shutting them out of the UK market rather than (as now) protecting the U.K. Market for French and german producers. In contrast the areas where the UK excels are already tariff free.
It is not going to take years for the UK to become a WTO member; it already is one.
2-3% can be quite a bit, especially if there’s a high elasticity in demand. Services are much more dependent on common regulation than on tariffs. W/o a regulator looking after correct and harmonized implementation, UK will only become more and more isolated from the rest of the world.
The UK is not already a WTO member.
Add to Freebornjohns comments above the sad, bitter Ian Begg lays out his goomy, the UK is in such a bad position, adding to the flow of such articles the Remainer losers are flooding the mdeia with to prolong the project fear neolibcon dire warnings during the referendum.
The EU are in a terrible position. 27 countries will never agree a common deal with the Uk.
So lets set them straight.
We can walk away, making no contributions to their budget which will result in them arguing and fighting amongst themselves, making them pay WTO tarriffs on all goods exported here which will tip them into recession.
Asia is organising on a large scale and desperate for western cooperation. Asia is growing, markets are growing, opportunities abound. They’ll never do a deal with the EU. It’ll take forever to get a common agreement from the 27!! This presents the Uk with an enormous, unparallelled opportunity to trade across Asia, huge countries such as China, India and Russia and lots of smaller, exciting markets like Taiwan, Philipines, Thailand, Vietnam, Cambodia, and ex empire countires.
Why aren’t there articles in the mdeia extolling the exciting future prospects of turning away from moribund, protectionist, shrinking EU markets and getting out there in the land of opportunity?
The elections in Frnce and Germany offer another way for the UK to stir the pot. We can speak to leaders of parties hoping to win those elections and do away with Merkel, yes she’s in danger of losing, and Hollande, yes he will lose too.
New anti EU governments in these countries and others is a definite possibility. They agree with the UK stance on immigration, EU laws and loss of sovereignty. Lets talk to them and help their case instead of the useless, elitist status quo of Merkel, Hollande and their cronies.
Words like “loser,” “sad” and “bitter” cannot hide the fact that you have little idea what you’re talking about.
Walk away, and UK will face tariff barriers to pretty much the entire global market. You know why it’s not easy to negotiate quick deals afterwards? Because time is a bargaining chip in negotiations, and the one with the power to hold out is the one that is getting the better deal. This is why it takes so long to negotiate with the EU (and the US for that matter). China, US, Europe will be in the position to leave the UK hanging until it will simply accept what its are offered. If they are so eager to trade with UK, why are all leaders telling May she shouldn’t fool herself. They know better. It’s as simple as that.
As to the success of other exits: The Brexit vote led to a surge in pro-EU sentiment all over Europe. Besides, right-wing parties argue about extra-EU immigration and Euro. Single market and freedom of movement remain quite popular all across the continent.
Now stop fooling yourself.
Great to read that the pessimistic Remoaners of the LSE will not be used any longer by the U.K. Foreign office when seeking advice on the UK’s exit from the European Union. The UK cannot afford to have defeatist losers on its brexit team.
I am surprised, ‘We do not know what the Brexit means.’ Well from Mrs May speech the EU has concluded the UK will go for a Hard Brexit.
The EU is sad to loose the UK. It does not seem to value its single market. BUT so be it! The UK has chosen to go at it alone. Not much the EU can do about it.
In the exit deal the EU and the UK will answer the question about citizens living in each others country. Seems to me like a deal that can be arranged in 2 years, even for EU.
After that, well I think your pretty much on your own.
The EU will be busy with other stuff. Make sure you have your schedules in the WTO right, otherwise we can not trade with you under WTO rules…..