Investment Clock insights

Beyond "Brexit means Brexit"


Ian Kernohan

17 January 2017

The Prime Minister has set out her objectives ahead of triggering Article 50.  The main theme of the speech was “Global Britain” - the UK now wants to trade in a wider world.  
The key points were as follows:
1. Any final deal will be put to a vote in Parliament.  This may assuage some fears of a so-called Hard Brexit, as any agreement would have to be acceptable to Parliament. An option to reject any agreement and keep the UK in EU is not the government’s intention, so our base case still assumes the UK will leave the EU.
2. The supremacy of the European Court of Justice will end and the UK will seek control over immigration.  This implies the UK wishes to leave the Single European Market (SEM).  The UK is prepared to make some financial contribution for the best possible access to the SEM, but “the days of vast contributions” are over. 
3. Instead, the UK will seek a Free Trade Agreement (FTA) with the EU, with the aim of retaining as much free trade as possible in goods and services.  Any FTA may include elements of the SEM, such as passporting, and current arrangements in specific sectors (eg. autos). 
4. The UK does not want to be part of the external tariff wall in the European Customs Union, however since the government want trade to be as frictionless as possible, the UK will seek its own customs agreement with the EU. 
5. The government want to see an “implementation period” after 2019, to avoid any “cliff edge”.  This should allow business to adjust to the new reality eg. adapting to new immigration arrangements.  The PM rejected a “semi-permanent” transition, as well as any existing ‘models’, such as Norway-style European Economic Area membership as temporary arrangements. 
6. “No deal for the UK is better than a bad deal”.  Without a good FTA, the UK will still have the freedom to trade, since most of global trade takes place without formal FTAs.  If faced with an attempt to “punish” the UK as an example to others, the UK will walk away from a bad deal and seek to change its economic model if necessary. The EU needs access to London capital markets and many of its industries have strong links with the UK. The PM was quite blunt: “Do you want to make yourselves poorer, in order to punish the UK?”. 
7. During the negotiations, the government will provide certainty where they can, but there will be no running commentary.
We have now moved beyond “Brexit means Brexit” and have a greater sense of the government’s objectives, however there is still great uncertainty over the likely outcome, including the possibility of a disorderly outcome.  At this stage, our base case assumes a Free Trade Agreement between the UK and the EU, including some sector specific arrangements and a transition arrangement.  This may not happen entirely in parallel with the Article 50 Brexit process, as it will need the agreement of all EU states.  A tariff-free goods deal should be relatively easy to do, given the UK’s large goods trade deficit, however a deal on services, and in particular financial services, will be more difficult.

The Prime Minister has set out her objectives ahead of triggering Article 50.  The main theme of the speech was “Global Britain” - the UK now wants to trade in a wider world.  

The key points were as follows:

1. Any final deal will be put to a vote in Parliament.  This may assuage some fears of a so-called Hard Brexit, as any agreement would have to be acceptable to Parliament. An option to reject any agreement and keep the UK in EU is not the government’s intention, so our base case still assumes the UK will leave the EU.

2. The supremacy of the European Court of Justice will end and the UK will seek control over immigration.  This implies the UK wishes to leave the Single European Market (SEM).  The UK is prepared to make some financial contribution for the best possible access to the SEM, but “the days of vast contributions” are over. 

3. Instead, the UK will seek a Free Trade Agreement (FTA) with the EU, with the aim of retaining as much free trade as possible in goods and services.  Any FTA may include elements of the SEM, such as passporting, and current arrangements in specific sectors (eg. autos). 

4. The UK does not want to be part of the external tariff wall in the European Customs Union, however since the government want trade to be as frictionless as possible, the UK will seek its own customs agreement with the EU. 

5. The government want to see an “implementation period” after 2019, to avoid any “cliff edge”.  This should allow business to adjust to the new reality eg. adapting to new immigration arrangements.  The PM rejected a “semi-permanent” transition, as well as any existing ‘models’, such as Norway-style European Economic Area membership as temporary arrangements. 

6. “No deal for the UK is better than a bad deal”.  Without a good FTA, the UK will still have the freedom to trade, since most of global trade takes place without formal FTAs.  If faced with an attempt to “punish” the UK as an example to others, the UK will walk away from a bad deal and seek to change its economic model if necessary. The EU needs access to London capital markets and many of its industries have strong links with the UK. The PM was quite blunt: “Do you want to make yourselves poorer, in order to punish the UK?”. 

7. During the negotiations, the government will provide certainty where they can, but there will be no running commentary.

We have now moved beyond “Brexit means Brexit” and have a greater sense of the government’s objectives, however there is still great uncertainty over the likely destination, including the possibility of a disorderly outcome.  At this stage, our base case assumes a Free Trade Agreement between the UK and the EU, including some sector specific arrangements and a transition arrangement.  This may not happen entirely in parallel with the Article 50 Brexit process, as it will need the agreement of all EU states.  A tariff-free goods deal should be relatively easy to do, given the UK’s large goods trade deficit, however a deal on services, and in particular financial services, will be more difficult.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.