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British Prime Minister Reveals Brexit Negotiating Objectives, Suggesting a “Hard” Brexit; Impact on Trade Unavoidable, but Uncertainty Remains

On 17 January 2017, the UK Prime Minister, Theresa May, revealed her government’s negotiating objectives for Brexit, setting out her vision of a United Kingdom outside the European Union. During her speech at Lancaster House, May put forth the twelve priorities that will guide her during the Brexit negotiations with the EU. Hong Kong traders should be aware of the key messages that May conveyed, which are reported below.

In language indicating a "hard” Brexit, May ended months of speculation by confirming that the UK is preparing to leave the EU single market. May indicated that the UK, post-Brexit, is not willing to accept the EU’s four freedoms (these include the free movement of goods and of people), nor jurisdiction of the European Court of Justice, nor the obligation to contribute to the EU budget. As a result, the UK is not interested in a partial or associate membership of the EU, or any other model that leaves it “half-in, half-out”.

Rather, May stated that the UK will seek the greatest possible access to the EU market through a new, comprehensive and fully reciprocal free trade agreement between an independent UK and the EU, which should give UK companies the maximum freedom to do business with the EU and vice-versa.

While May was clear about leaving the single market, she was less precise about her vision of the UK’s membership of the EU customs union. May stated that she favours a customs agreement with the EU, but does not want the limitations imposed by the existing customs union. How this would be achieved has yet to be decided. A completely new customs agreement could be negotiated, the UK could become a new or associate member to the customs union, or the UK could remain a signatory to certain elements in respect thereof.

Post-Brexit, May explicitly mentioned she wants to achieve tariff-free trade with the EU, while being able to negotiate – without barriers – the UK’s own comprehensive trade agreements with non-EU countries. It appears that the UK is already holding informal trade discussions with at least 12 such countries, despite being prevented from striking such deals while still a member of the EU.

On immigration, May said that EU nationals, especially highly skilled workers, will still be welcome in the UK. Nevertheless, she stated that Brexit must lead to a better control of the migration flows to the UK from Europe. In addition, May declared that she wants to guarantee the rights of EU citizens who are already living in the UK and the rights of UK nationals living in other EU Member States.

Reversing her previous position, May explicitly promised that members of both houses of the UK Parliament – the House of Commons and the House of Lords – will get a vote on the final Brexit deal struck between the UK and the EU.

In reaction to Theresa May’s speech, it has been suggested that the UK might have overestimated its negotiating leverage. Indeed, while about 45% of UK exports go to the EU, only 8% of exports coming from EU countries head to the UK.

EU Brexit negotiator (and former Belgian Prime Minister) Guy Verhofstadt stated that “it creates an illusion that you can go out of the single market and the customs union and you can cherry pick and still have a number of advantages”. According to Verhofstadt, if the UK wants the advantages of a single market and a customs union, it must also assume the obligations related thereto. Similar statements were made by European Council President Donald Tusk, France’s Foreign Minister Jean-Marc Ayrault and German Chancellor Angela Merkel. Verhofstadt added that the European Parliament will now scrutinise and analyse the proposals that have been put forward.

Concerns about a hard Brexit were also expressed by the UK industry. If the UK leaves the EU without obtaining tariff-free trade with the EU, the UK industry will be faced with high tariffs when exporting to Europe. This would particularly affect UK carmakers and sheep farmers. The Irish Department of Finance also stated that Irish exports to the UK will fall by as much as one-third because of Brexit, which will cost around 40,000 jobs over the next decade.

At this moment in time, in absence of the withdrawal agreement between the UK and the EU, the trade implications of Brexit on Hong Kong and mainland China are hard to predict. On the one hand, post-Brexit, the UK will have to renegotiate its WTO terms of membership, including the maximum tariff levels that the UK can impose on imports from other WTO members. Depending on whether such tariff levels are higher or lower than the EU’s common customs tariff, this will, respectively, be detrimental or advantageous to traders from Hong Kong and mainland China.

However, there is little doubt that should the UK leave the single market altogether (which, after all, is the core aspect of a “hard” Brexit), Hong Kong and Chinese goods imported into the UK will not benefit from any free movement principles for circulation in EU Member States. Similarly, should they be imported into an EU country they would continue to enjoy free movement in any other Member State but could face duties when brought into the UK.

On the other hand, Brexit would allow the UK to negotiate separate free trade agreements with non-EU countries, including Hong Kong and mainland China. Brexit might also slow down the negotiation process of the EU–China free trade agreement, as it is the UK which is currently pushing for the deal from the EU side.

Hong Kong traders should be aware of the fact that the UK’s exit process will only be initiated once the UK formally invokes Article 50 of the Treaty on European Union (TEU). Immediately after Article 50 is invoked, a two-year period of negotiations will start on the terms of the UK’s withdrawal from the EU. Once the UK has left the EU, a separate agreement governing the post-Brexit relationship will need to be concluded between the UK and the EU.

While the UK government previously argued that it could trigger Article 50 TEU without its national Parliament’s consent, using its “prerogative powers”, the UK’s High Court judges disagreed. The UK government appealed the High Court ruling, and the UK Supreme Court ruled that May must seek an act of Parliament to trigger Article 50.

As the government, as expected, has lost the case, this may delay the UK’s exit process, as a bill will have to be passed through Parliament before it is possible to start the two-year negotiating period. Regardless of the result of the Supreme Court case, however, May has announced that she is “extremely confident” of invoking Article 50 by the end of March 2017.

Content provided by Picture: HKTDC Research
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