Lancaster House is a beautiful and eloquent structure, but today it lay host to a stormy and volatile topic. After weeks of criticism for her indecisive behaviour, Theresa May stepped out to deliver clarity on her Brexit plans. Political speeches are normally filled with ambiguity and general commitments, but today, we finally witnessed some direction, and it is welcomed. TCC deciphers the Prime Minister’s speech and what it means going forward, how Europe could react, and whether President-elect Trump could have an influence on how things turn out.

 

Single Market

Amidst all the uncertainty since June 23rd 2016, the UK economy faced further hardships this morning as the Office for National Statistics (ONS) declared that UK inflation had risen to 1.6% based on figures from December. The effects of Brexit seemed finally to be taking their toll on consumer prices. The weekend saw the pound fall further amidst expectations that May would declare the UK to be delivering a “hard” Brexit. Each time such headlines crop up, concerns for the damage that could be caused by fractured trading relationships between the EU and UK unsettles investors and tempts them to invest their money somewhere more stable.

The UK, will indeed, no longer be a member of the single market. Faced with the trade-off of reducing migration numbers and retaining market access, this is an unsurprising, but bold, move. Over the past 6 months a whole host of businesses have pressured May to remain within the single market, as it enables them to operate in any of the EU members under one regulatory system. However, May has finally put her foot down, arguing that we cannot subscribe to elements of the EU that leave us “half in and half out”. Leaving the Union, but remaining a member of the single market, would mean that there could be no new controls over immigration levels (being forced to accept the free movement of people), but also that the UK would have to accept EU laws, without having a say in their substance. Such a situation would actually see us maintaining majority aspects of membership to the EU, and in effect, would not be Brexit at all – and I mean we all know Brexit means Brexit. As a corollary of leaving the single market, Britain will no longer pay annual sums to the European budget. Can’t wait to spend that £350 million a week on the NHS, hey Mr Farage?

What has been less clear is whether Britain will remain a member of the customs union; this allows goods to move freely without customs checks. Boris Johnson, the foreign secretary, has been one of the Cabinet members pressing May to make a “clean Brexit” and wants to rule out chances of remaining in the customs union. Phillip Hammond, the Chancellor, wants this to remain an option for the interim. Hammond looks to be in favour as although May today ruled out a “full customs union membership” on the basis that this would prevent trade deal negotiations, some access may be required to allow “tariff-free trade with Europe and allow cross-border trade to be as frictionless as possible”. In order to clear this up a little, it might be good to explain the differences:

Single Market: we use the EU single market as the most prevalent example and it is the most ambitious type of trade co-operation. The aim is not only at removing tariffs for trade, but includes four free movements. This attempt to create a level playing field, harmonising regulations as well as tariffs, does not happen in a free trade area.

Free Trade Area: this is an area where there are no tariffs, taxes or quotas on the goods / services from one country entering into another. However, the imported goods would also have to comply with the law of the country they are being sold in – BBC News provides the example: you could have an FTA with the US, but still a ban on the import of GM foods. Whereas in the single market, the regulations are harmonised between member states. EU law stipulates the requirements of their member states, therefore France, for example, would already be complying with the laws of Germany, seeing as they both follow the same law established by the EU

Customs Union: the key difference here is that the countries that club together agree to apply the same tariffs to goods from outside the union. (So one could see how it is difficult to negotiate trade deals with countries outside the EU whilst being in the customs union). Once goods have cleared customs in one country, they can be shipped to others in the union without further tariffs being imposed. The EU is a customs union. Norway, for example, is part of the EU’s single market, but is not part of the customs union. So therefore it sets its own tariffs on goods imported from outside the single market.

 

Immigration

Moving to immigration, one of the cornerstone arguments cited by Brexiteers in the referendum debates. May stated that the number of people coming into Britain would be controlled. Although not setting out the explicit detail as to how this would occur, suggestions are mounting that she could be in favour of a cap on numbers that would vary depending on economic need. This would perhaps imply that she favours some form of work permit system.

Which industries will lose out most from the free movement of people? This week, in a comprehensive article, The Economist reported that hotels and restaurants depend heavily on migrants; accounting for nearly 50% of staff. Furthermore, industries such a lorry driving contain around 10% of EU migrant members. The immigration issue even trickles down into agriculture, with the proportion of EU workers increasing in the summer to pick fruits and vegetables. For these industries, unfettered access to workers from the Union was more important than remaining in the EU.

As a result, many employers are already being forced to adapt their business models in anticipation of the changes. Potential measures are encouraging recruitment straight out of school, widen the participation in the labour market and the investment in labour-saving technology. A last resort could be for firms to pack up and leave to a member state with a good supply of labour. May’s tough decision is inevitably not without its consequences.

 

What Does This Mean For Future Trade With Europe?

The Prime Minister stated, “the government will seek the greatest possible access to the single market in the form of a new, comprehensive and bold free trade agreement”.

May, however, took a hard-line approach and warned the remaining EU members that she was willing to walk away from Brexit talks should they draw up a bad deal to punish Britain for leaving. She warned Europe that it would be self-harm to hand Britain a bad deal – suggesting that Britain could slash tax rates for corporations to make the country an attractive option for European businesses. This prompted Ed “Yes I’m tough enough” Miliband to tweet comments that letting big corporations off millions of pounds of tax was not part of the deal. This is a situation Britain does not favour, as such a move would mean relying on the World Trade Organisation (WTO) rules for its trade with other EU nations, meaning the imposition of tariffs – this is what unsettles businesses. However, if push comes to shove, May states it is an option she is willing to pursue – or at least this is what she claims….

Surprisingly, May came out and revealed this early on that MPs and peers will be handed a chance to vote down the government’s deal with the EU (whatever content that may end up including) before it is put into force.

 

What Factors Could Affect The EU’s Decision-Making?

Referencing back to May’s comments on immigration, which suggested that incoming numbers could vary based on the country’s economic needs, the PM gave no indication as to whether EU nationals would get preferential access to UK labour markets over nationals from other countries in order to fulfil they needs when they surfaced. If they did, this might sway Europe to be more lenient on trade deals into the single market.

And now, enter our trans-Atlantic friends from across the pond. Donald Trump, in a wide-ranging interview with The Times, gave a pledge to secure a quick trade deal with Britain after Brexit. Whitehall departments have been asked to come up with three priorities for future talks with America to help the provisional discussions, likely to begin after May visits the US in the spring. Some MPs are pushing for a quick and limited deal that would be agreed straight after Britain leaves the EU, on areas such as the car industry. This would be followed with a second round of negotiations that looks at a more comprehensive agreement. However, senior government figures stated that they were against Britain rushing into a poor trade deal with the US. They stated that the UK “needs really good trade negotiators” and should start speaking with other countries first (eg: India, Japan).

Nonetheless, what this could do is subdue any EU attempts to create that bad deal for the UK. With Mr Trump’s vocal comments, it offers evidence that big countries out there are willing and waiting to strike a deal with the UK. If the EU marginalises Britain, we will go elsewhere and there will be opportunities to do so. Although this was always obvious, the combination of both May’s declarations today, and Trump’s yesterday, provides physical evidence of this possibility rather than just theoretical speculation. Accordingly, the union may be more inclined to hammer out and fair and comprehensive deal.

Could Mr Trump therefore be a saviour in these negotiations? Either waiting in the wings to pick up Britain if EU negotiations fail, or in the alternative, his presence forcing the EU to hold their resentment at Brexit and contribute fair trade agreements. Who’d have thought Trump might be the answer, and not the orchestrator, of demise.

By Dre Efthymiou