The UK Prime Minister Theresa May has today set out her strategy for Brexit in a speech held at Lancaster House, London. In her speech, she covered both UK’s relationship with the rest of the world, and the UK’s relationship with the EU.
May set out that she wants a “truly Global Britain” which will be outward-looking, and which will not seek to hold on to bits of EU membership but will remain the “best friend” of the remaining EU Member States (“EU-27“). In line with our previous thinking, May suggested a form of free trade agreement (“FTA“) with the EU-27, confirmed that the UK would not remain part of the Single Market, and indicated that the UK would not remain part of the Customs Union with the EU-27 due to the limits that this would place on the UK’s ability to trade independently with the rest of the world.
12 Negotiating Priorities
May used her speech to set out 12 negotiating priorities, driven by four key principles: (A) certainty and clarity; (B) a stronger Britain; (C) a fairer Britain; and (D) a truly Global Britain. May also emphasised that a phased approach to Brexit would be important, notably for businesses. The 12 negotiating priorities are as follows:
(A) Certainty and clarity:
1. Provide certainty about the process of leaving the EU
(B) A stronger Britain
2. Control of our own laws
3. Strengthen the Union between the four nations of the United Kingdom
4. Maintain the Common Travel Area with Ireland
(C) A fairer Britain:
5. Brexit must mean control of the number of people who come to Britain from Europe
6. Rights for EU nationals in Britain and British nationals in the EU
7. Protect workers’ rights
(D) A truly Global Britain:
8. Free trade with the EU through a comprehensive free trade agreement
9. New trade agreements with other countries
10. The best place for science and innovation
11. Co-operation in the fight against crime and terrorism
A phased approach:
12. A smooth, orderly Brexit
May said that the 12 negotiating priorities amount to one goal: a new, positive and constructive partnership between Britain and the EU-27. We analyse the key trade priorities and objectives below.
Trade with the Rest of the World: a Global Britain
With regard to trade with the rest of the world, the overriding tone of the speech was that May is aiming for what she termed a “Global Britain”. May backed up her plan for a Global Britain by noting that the British people “voted to leave the EU and to embrace the world“. She highlighted that leaving the EU provides the UK with an opportunity to build a stronger economy and a fairer society, by embracing a genuine economic and social reform.
May said that she wants Britain to be “a country that reaches beyond the borders of Europe to the wider world […] a country that gets out into the world to build relationships with old friends and new allies alike“. May also confirmed that the UK wants to study in, travel to, and trade with countries outside the EU. She made it clear that the UK wants to continue to attract global talent, and to assert its position as a great global trading nation.
May indicated an ambitious approach to global trade, and cited several countries that have either approached the UK or with whom the UK has already begun preparatory talks about future enhanced trading relationships. These countries included: China; Brazil; the Gulf States; Australia; New Zealand; India; and the US. In particular, May noted that President Elect Trump has said that Britain is not “at the back of the queue” for a trade deal with the US, but front of the line.
May also stressed the importance of the UK being free to strike its own FTAs with third countries, and that the UK needs to increase its trade with the fastest growing markets. She noted that this was precisely why she created the Department of International Trade, led by Liam Fox.
Trade with the EU-27
- Single Market
With regard to the post-Brexit trading relationship with the EU-27, the key message emphasised by May is that Britain is leaving the EU and that she is not seeking to “hold on to bits of membership” or to have a “half-in, half-out” relationship with the EU-27. As discussed in our previous Blog posts (see here and here), May emphasised that the UK will not seek to stay in the EU Single Market. May noted that Single Market membership entails four key freedoms (i.e., the free movement of goods, people, services, and capital). She also explained that the UK could not accept all four freedoms since they are not in line with the UK’s aims, such as controlling immigration as part of a “fairer Britain”, and by default this meant that the UK could not remain part of the Single Market.
May said that the UK will instead look to enter into a different sort of trading agreement with the EU-27. She stated that “we do not seek membership of the Single Market. Instead we seek the greatest possible access to it through a new, comprehensive, bold and ambitious FTA“.
For our discussion on the impact of leaving the Single Market, and the differences between an FTA and the Single Market, see our previous Blog post here.
May also emphasised that the UK will not seek to adopt a trading model already enjoyed by other countries, confirming our view that that the UK may seek to negotiate a hybrid FTA with the EU-27 once it has exited the EU (see our previous webinar dated 6 July 2016, available here). May said “We seek a new and equal partnership – between an independent self-governing, global Britain, and our friends and allies in the EU […] We do not seek to adopt a model already enjoyed by other countries.” She noted that elements of the current trading situation with the EU could be incorporated into the new FTA, such as in the areas of cars and lorries, or the freedom to provide financial services across borders. This would eliminate the need to “start from scratch” in these areas.
We note that a comprehensive, bold and ambitious FTA solution with the EU-27 could be good for business, and could indeed allow the UK to pursue a more global, independent trade policy. However, companies need to be prepared for the potential costs and bureaucracy associated with the UK leaving the Customs Union. One of the key hurdles with an FTA, as opposed to a Customs Union or Single Market arrangement, is that only goods that ‘originate’ in either the UK or the EU-27 will benefit from lower or no tariffs. Understanding and evidencing this can be complex and time-consuming for businesses.
Furthermore, given our UK economy is primarily services-based, the UK Government is likely to want the FTA to address services much more effectively than the EU’s FTAs have done to-date.
- Customs Union
The notion of Britain “taking back control” and negotiating its own, independent trade agreements with the rest of the world had prompted our speculation that the UK will leave the EU Customs Union, as well as the Single Market. This is because, as a party to the Customs Union, the UK would be restricted from negotiating its own independent trade policy, and would instead be effectively bound to negotiate external trade policies as a bloc with the EU-27.
On the Customs Union, May acknowledged that “full Customs Union membership prevents us from negotiating our own comprehensive trade deals“. She also stated that she wanted Britain to be able to negotiate its own trade agreements, but also to enjoy tariff-free trade with the EU that is as frictionless as possible.
May’s solution to this issue was to remain open minded and flexible in the thinking; she said “whether that means we must reach a completely new customs agreement, become an associate member of the Customs Union in some way, or remain a signatory to some elements of it, I hold no preconceived position“. This aligns with our previous thinking that a hybrid “FTA + Customs Agreement” may be the best solution for the UK’s future trading relationship with the EU-27, allowing it to simultaneously attain the objectives behind the Leave vote and maintain tariff-free trade with its EU neighbours. We also note that, within this hybrid, a myriad of possible options exists.
May confirmed that the “acquis” (i.e. the entire body of EU law), will be incorporated into UK law in order to give maximum certainty. She noted that the same rules will apply on the day after Brexit as they did before, and that it will be for the British Parliament to decide on any changes to that law after full scrutiny and proper Parliamentary debate.
Whilst we note that this is aimed at providing maximum certainty, and is certainly helpful in that respect, we need to be attuned to fact that in certain areas this may not work out as intended, and that amendments will be required to existing EU law to ensure that they work in and for the UK (for example, the recently implemented Union Customs Code).
Timing and Transitional Arrangements
Today’s speech comes with fewer than 11 weeks remaining before May’s end of March deadline for triggering Article 50, kick-starting Britain’s exit from the EU.
With regard to timing of negotiations with the EU-27, May stated that she wants the UK and EU-27 to have “reached an agreement about our future partnership by the time the two-year Article 50 process has concluded.” Based on past practice, to negotiate and agree such a deep and comprehensive FTA within two years is, in our view, an ambitious timeline.
Referring to suggestions of a transitional period or phased approach, May stated that “from [the time the two-year Article 50 process has concluded] onward, we believe a phased process of implementation, in which both Britain and the EU institutions and Member States prepare for the new arrangements that will exist between us will be in our mutual self-interest.” May was clear that the objective was to avoid a disruptive “cliff-edge” and to allow businesses time to plan and prepare for the new arrangements to be phased in.
May also confirmed that the Government will put the final deal that is agreed between the UK and the EU to a vote in both Houses of Parliament before it comes into force. In the Questions and Answer section following the speech, May was asked what would happen in the event that the House of Commons and the House of Lords rejected the final deal. May noted that MPs have voted for the Government to “get on with Brexit” and remarked that she was sure that Parliament will want to respect the views of the people.
The full text of the speech can be found here.
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