What Happens to Trade Deals Post-Brexit? In 2 Years or Even Later?

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This is part two of a two-part series on recent trade developments in the U.K.’s pending divorce with the European Union, read part one here if you missed it.

British Prime Minister Theresa May appears more wedded to a policy of not extending Brexit past the two-year deadline that was dictated by the outcome of the referendum. Possibly due to her years in office as Home Secretary, May seems desperate to reclaim control of the U.K.’s borders and to reject the jurisdiction of European courts, regardless of the economic consequences of taking such a hard-line position.

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Committed Brexit supporters have championed the establishment of free trade agreements with countries outside the European Union, almost as an extension of their rejection of Europe. But the reality is geography will dictate that the E.U. is likely to remain the U.K.’s biggest export market after Brexit whatever Brexiters’ global ambitions may be.

Who Loses More Post-Brexit?

According to a Financial Times article last November, U.K. exports to fellow E.U. countries accounted for 48% of total exports and, in the 18 months before that, the figure ranged from 38% to 51%. The U.S., by comparison, was just 22% and few beyond the hardliners give any credence to the benefits of a President Donald Trump-inspired U.S.-U.K. Free Trade deal, knowing that in Britain’s desperation for an alternative to Europe such a deal would likely be very one-sided in favor of the U.S.

Nor is it clear how willing the E.U. will be to negotiate a free trade agreement with the U.K. post-Brexit. Although economically it would be in the E.U.’s interest, politically any deal that even appeared to leave the U.K. better off outside the single market that it was inside it is inconceivable. Simply because it would be an open invitation to struggling economies like Italy to support populist parties that would follow Britain out the exit door. Politics always trumps economics in Europe and it will be political expediency that guides negotiators’ hands in the long drawn out years of negotiations that lie ahead between the E.U. and the U.K.

Reading between the lines, by 2020 the U.K. will likely be outside of the European Union and coming to the end of a transitional agreement that will leave it with some degree of compromise on all fronts. It is very likely that the U.K. will reject the jurisdiction of the European Court but it may well develop equivalence on issues like product compliance, company law, trade and financial regulations.

What Will Immigration, Trade Look Like?

The U.K. will certainly reclaim control of its borders but if industry and business have their say it’s likely the U.K. will implement some form of immigration quota system that allows net immigration of skilled workers to continue. In return for some form of reduced tariff trade agreement, the U.K. may continue to make some financial commitment to Europe but at a reduced level from currently.

That would certainly be a compromise worth making particularly if continued participation in the customs union meant the U.K. could avoid bureaucratic border regulations even if a trade agreement incurred tariffs set between zero and those that would prevail under a worst-case World Trade Organization structure.

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Would the U.K. flourish under such a regime? It would certainly survive whether it would be better or worse that if it had not left the E.U. may only be judged during the next decade when growth and prosperity can be compared to those remaining within the E.U. 27… assuming the European Union survives that long for a direct comparison to be made.

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