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UK Election 2017: Implications for Brexit and International Trade

With Theresa May returned as Prime Minister, but without a working majority in the UK Parliament, what are the likely repercussions of the election result on the Brexit negotiations and on Britain's stance towards international trade?

Photo: How will Brexit negotiations fare given the walking-wounded status of the British Prime Minister? (Shutterstock.com)
How will Brexit negotiations fare given the walking-wounded status of the British Prime Minister?
Photo: How will Brexit negotiations fare given the walking-wounded status of the British Prime Minister? (Shutterstock.com)
How will Brexit negotiations fare given the walking-wounded status of the British Prime Minister?

With Theresa May re-elected as the UK Prime Minister, but having lost her overall majority in Parliament, she is now dependent on the support of a small number of MPs from an aligned political party in Northern Ireland – the Democratic Unionist Party (DUP) – in order to form a government. With the dust still settling from the election and her administration seriously lacking in numbers, credibility and authority, she now has to contend with the most pressing issue facing the UK – negotiating Britain's exit from the European Union (Brexit).

The big question for May is how much, after maintaining that an increased parliamentary majority would strengthen her hand in the talks, her actual lack of a majority will undermine her negotiating stance. In theory, at least, it might not actually make all that much difference.

Speaking before the election, Guy Verhofstadt, the European Parliament's Chief Brexit Co-ordinator, had already dismissed the notion that the size of May's domestic support would have anything to do with how the negotiations played out, saying: "The theory is nonsensical. For those sitting around the table in Brussels, it is an irrelevance."

In practice, however, the other EU countries now know exactly how precarious May's position is. With many commentators in the UK suggesting that she may not last the year as Prime Minister, she is unlikely to be in a position either to force concessions from the EU negotiators or impose unpopular terms on her own electorate.

Before the election, she had made her position with regard to Brexit very clear. Back then, it was her intent that the UK should withdraw from the European Single Market and the EU's Customs Union, while the jurisdiction of the European Court of Justice (ECJ) over issues relating to the UK would also be curtailed. Most importantly – and most publicly – she was also committed to ending the rights of EU citizens to live and work in the UK. Taken together, these were seen as the basic elements that comprised the "hard Brexit" stance.

Now, though, there is considerable doubt as to whether this stance remains tenable. Speaking in the wake of the surprise election result, Sam Coates, the Deputy Political Editor of The Times, a right-wing heavyweight UK newspaper, suggested many Conservative MPs are now openly questioning the party's commitment to a "hard" Brexit. Expanding on this, he said: "Mrs May must now decide how to handle the demands from a number of cabinet ministers to soften her line on Brexit. They want a looser migration system than the one she had planned, as well as a rethink on leaving the Customs Union and a more flexible approach to the ECJ."

It is thought that the initial talks will focus on three key issues – the rights of EU citizens living in the UK and UK citizens living in Europe; the status of the border between the Republic of Ireland and the UK (the open status of which is one of the foundations of the Northern Ireland peace agreement); and the settlement of the UK's existing financial obligations to the EU (the Brexit "divorce bill" as it has become known).

The first of these is unlikely to cause much concern to May. It is virtually certain that both sides will quickly guarantee, in principle at least, the rights of EU and UK citizens abroad. Discussions with regard to the other two issues, though, are likely to be an early indicator of the direction future negotiations are likely to take. The tricky conundrum of the Irish border is now complicated by May's reliance on the DUP, which is committed – for practical and economic reasons – to keeping the border open.

According to Catharine Barnard, Professor of EU Law at Cambridge University, this makes leaving the EU customs union virtually impossible. Explaining her thinking, she said: "If the UK leaves the customs union, the Northern Ireland border with the south would have to become a hard border. In short, there would have to be customs checks on all goods coming from the south into Northern Ireland.

Photo: Theresa May: Has her negotiating hand been weakened by a poor electoral result? (Shutterstock.com/chrisdorney)
Theresa May: Has her negotiating hand been weakened by a poor electoral result?
Photo: Theresa May: Has her negotiating hand been weakened by a poor electoral result? (Shutterstock.com/chrisdorney)
Theresa May: Has her negotiating hand been weakened by a poor electoral result?

"Then you're into quite difficult territory. There are 300 crossing points between the north and south, all which would have to be policed. This would cost a huge amount of money and resurrect the issues of 20 or 30 years ago, inevitably raising tensions between north and south. As a result, there must now be a possibility the UK will stay in the customs union even if it leave the single market."

The size of the Brexit divorce bill is also likely to be a major sticking point. The public stances of the two sides are, at present, poles apart. Michel Barnier, the EU's Chief Negotiator, has cited a figure of about €100 billion (US$112 billion) as the amount the UK may have to pay. For its part, the UK government has denied the sum should be anywhere close to that. It is, however, widely felt that finding a compromise here could be key to future trade concessions.

George Parker, the Political Editor of the Financial Times, the UK's leading financial newspaper, sees the British government's relative reticence on this issue as telling. Speaking before the election, he said: "Clues can be gleaned from the British government's Brexit White Paper [the set of proposals drawn up by the government with regard to exiting the EU], which is specific in some areas, but virtually silent in others – noticeably on Britain's future payments to the EU budget. While Mrs May has ruled out making vast payments, many Euro-sceptic MPs in her own party have privately indicated that they would be prepared to pay something for market access."

Such a compromise would not go down well among the more right-wing sections of the UK media. It is also debatable as to whether May's weakened position would allow her to ride out any protracted political storm related to the issue.

Assuming such a compromise could be reached, however, what might she hope to get back in return when the talks turn to trade and transitional arrangements? Furthermore, what will she be able to sell to the voters in Britain and to the more rebellious elements within her own party?

Essentially, the UK's priorities are threefold – maintaining as much freedom of access to the European market as possible for UK goods and services; protecting the rights of the UK's financial sector to operate freely throughout the EU (the so-called "passporting rights"), and ending the right of EU citizens to live and work in the UK.

Such aims are, however, far from mutually compatible. The best deal with regard to access, for example, would be to remain in the single market. The EU, however, insists that can only happen if freedom of movement is guaranteed. There will clearly have to be trade-offs.

Given the general antipathy to immigration in many parts of the UK, greater flexibility on freedom of movement is unlikely to be one of these trade-offs. Addressing this particular eventuality, Parker said: "Although a generous immigration regime would help achieve a compromise deal, it would be completely against May's instincts to trade border controls for economic gain."

Nor is there likely to be a trade-off on market access, given that this would be in no one's interest. Addressing this point, Fredrik Erixson, Director of the European Centre for International Political Economy, a Brussels-based think-tank, said: "A free-trade deal with Britain is certainly in the interests of Spain and Italy, which both run a trade surplus with Britain. For Germany, it's a no-brainer. Cars, chemicals and machinery – all of which are strong export sectors for Germany – are all at risk if Britain replicates any tariffs the EU imposes.

"Similarly, French farmers and winemakers don't want to see British duties imposed on Camembert and Beaujolais, while the French government has strong interests in the British nuclear and transport sectors. For the Dutch, keeping tariffs at zero is also important for their hopes of remaining a hub for Britain's maritime trade."

The logical extension of all of this would be for the UK to remain in the EU's customs union but outside the single market, a similar arrangement to that enjoyed by Turkey. This would protect the UK's existing trading arrangements with the EU, while allowing it to restrict freedom of movement. The main trade-off for the UK, though, would be having to accept the jurisdiction of the ECJ in some matters, while also having strict limits placed on its ability to forge new trade deals outside the EU.

The EU, however, is almost certain to exact a price from the UK for agreeing to such an arrangement. Any deal the EU negotiates with the UK must, after all, protect its integrity and discourage other members from following the UK's example. The pressure point here is likely to be financial passporting.

France and Germany have long looked to curb the City of London's dominance in the European financial-services market. In terms of a precedent, it is perhaps worth noting that the financial services sector is excluded from Turkey's customs union arrangement with the EU.

How would that play out in the UK? Losing passporting rights would, of course, be a huge blow to London, with potentially crippling consequences for the UK economy as a whole. The British public's sympathy with the domestic financial sector, however, is still at an all-time low following the financial crisis of 2008. If any deal, then, were to be sold as protecting trade, while being tough on both immigration and fat-cat bankers, it might well prove acceptable to the electorate.

So a Turkey-style arrangement, coupled perhaps with a new UK work-permit system that would limit immigration from the EU, but favour EU citizens over migrants from elsewhere, and a "soft-touch" transitional arrangement to allow the UK enough time to disentangle itself as painlessly as possible from the single market, could form the basis of a likely compromise agreement.

The consequences of any such deal would be far-reaching. The City of London could well lose billions of pounds of business to other financial centres. While such business might migrate to Europe's other leading financial centres, notably Frankfurt and Paris, the US and Asia would also be in a position to benefit considerably. As an alternative, it is also possible that the UK might re-direct the focus of its financial activities away from Europe and towards the other financial markets, with Singapore and Hong Kong the likely beneficiaries.

As to where it would leave the UK economy, well any customs union deal with the EU would allow it to maintain most of its ties with its largest current trading partner. This, though, would be contrary to the hopes of the more hardcore Brexit supporters, many of whom have been championing the possibility of free-trade agreements (FTAs) with the faster-growing emerging economies and a number of the former imperial possessions, most notably India.

Photo: A possible PM in waiting: Labour Leader Jeremy Corbyn remains hopeful of replacing May. (Shutterstock.com/Ink Drop)
A possible PM in waiting: Labour Leader Jeremy Corbyn remains hopeful of replacing May.
Photo: A possible PM in waiting: Labour Leader Jeremy Corbyn remains hopeful of replacing May. (Shutterstock.com/Ink Drop)
A possible PM in waiting: Labour Leader Jeremy Corbyn remains hopeful of replacing May.

The truth is that, for practical reasons, these FTAs are unlikely to be negotiated any time soon, despite the apparent enthusiasm being shown on all sides. Drawing up new trade arrangements with Europe will involve multi-layered, multi-sectorial talks. These will not be completed quickly and are likely to occupy all of the UK's trade negotiation facilities for some time. Having not had to conduct its own trade deals for the past four decades, the country's number of skilled trade negotiators is understandably low.

So, for the foreseeable future at least, the UK is likely to stay a Euro-centric economy. It is also likely to become a somewhat poorer one. The unavoidable disruption in – and uncertainty over – trading arrangements in the short-term is already affecting business.

In specific terms, the threatened departure of such companies as HSBC, as they look to relocate within the EU's shrunken boundaries, will involve a loss of jobs and taxable income. At the same time, the economic damage caused by the end of financial passporting rights would be almost impossible to repair.

Any decline in the UK's prosperity – and, as a result, its demand for imports – will also negatively impact upon the global business community. This will particularly be the case in a number of regions, such as Hong Kong, which have entrenched historical and financial ties to Britain.

There is, of course, a darker scenario – the threat of no deal at all. Talks between the EU and the UK are unlikely to progress smoothly and May's weakened position makes that prospect loom ever larger. EU members will be less likely to make concessions to a UK Prime Minister who may not even be in office for much longer, while May is likely to feel less able to face down her critics in the UK.

A "no deal" scenario, though, would leave UK businesses at the mercy of World Trade Organisation (WTO) terms. In this scenario, John Springford, the Centre for European Reform's Director of Research, has gone on record as estimating that the increased tariffs and trade barriers this would entail would knock some £160 billion off the UK's GDP, with the obvious knock-on effects for the global economy.

Photo: The 2017 Election: A vote for uncertainty with regard to the UK’s economic future. (Shutterstock.com/chrisdorney)
The 2017 Election: A vote for uncertainty with regard to the UK's economic future.
Photo: The 2017 Election: A vote for uncertainty with regard to the UK’s economic future. (Shutterstock.com/chrisdorney)
The 2017 Election: A vote for uncertainty with regard to the UK's economic future.

The paradox here, however, is that although May's election debacle could make the negotiations more difficult, it could also have made the possibility of "no deal" a little more distant. Her stated position that she was prepared to return with no agreement if the compromises on offer were not to her liking appears to have been unpopular with UK voters, in part explaining her lack of success at the ballot box.

As a result many turned to the Labour Party, the more left-wing challenger to May's administration. This political grouping has already rejected the possibility of not reaching a deal with the EU and has hinted at the desirability of concessions in order to protect jobs. It may well be that the voters of the UK, having delivered the bruising blow of Brexit to the global business community on their previous outing to the polls, may just have done a little to make up for that this time around.

Robert Rea, Special Correspondent, London

Content provided by Picture: HKTDC Research
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