May Chooses 'Hard Brexit'

by Nicholas Nalbantian

On Tuesday, January 17, Theresa May, the Prime Minister of the United Kingdom (UK), articulated the UK’s goals for the coming Brexit negotiations. While the political reaction has been well covered, be it from Davos or the tabloids, the speech altered how many envisioned the UK’s future relationship with the remaining twenty-seven members of the European Union.

When the Brexit vote results were announced on June 24 of 2016, there was a proliferation of articles on which “model” the UK would follow. These models were referred to as the “Norway Model” or the “Swiss Model,” and writers were trying to divine a future UK’s relationship with the EU-27 through analogy. These articles would always end with an investigation of the “Hard Brexit” option. A “Hard Brexit” would be a situation where the UK leaves completely both the EU as a political union and as a common market. With her speech on Tuesday, Theresa May has indicated the UK’s choice of Hard Brexit.

This speech repudiated the “Norway Model.” The “Norway Model,” a relationship also enjoyed by Iceland and Lichtenstein, would have meant continued UK membership in the European Economic Area (EEA). EEA membership would have entailed the continued flow of goods, services, and labor between the UK and the EU. In return, the UK would be obliged to continue to adopt a large number of EU directives, but the UK would no longer have a formal say in how these directives are shaped. Instead of remaining a member of the “fax union,” the UK will now presumably also activate Article 127 of the EEA Agreement (the only means of withdrawing from the EEA) giving twelve months notice to the member states.

The second oft-cited model is dubbed the “Swiss Model.” Switzerland is a member of the European Free Trade Association (EFTA) but not a member of the EEA. Therefore, much of its access to the EU common market is dictated by a series of bilateral treaties developed since the 1960s. These 120 bilateral treaties cover many aspects of the EU common market but—crucially for London—not services. In addition, Swiss manufacturers suffer the same drawback of the “Norway Model” countries where EU directives need to be applied in order to receive access, but no formal say is given in the drafting of these directives.

Theresa May’s speech did not foreclose such a relationship, but the EU response makes it seem less likely. With Guy Verhofstadt’s decision to make a deal with Antonio Tajani’s center-right European People’s Party (EPP), which won Tajani the presidency of the European Parliament, the EPP now controls all three leadership roles in the EU with Jean-Claude Juncker as President of the European Commission and Donald Tusk as President of the European Council. Thus, presumably their party mantra of “no cherry-picking” makes a “Swiss Model” unlikely for the UK.

The final cited model is the “Turkish Model.” Such a model would mean retaining the EU’s common external tariff and import conditions imposed under the EU’s many trade agreements. The big advantage would be that exports could pass freely into the EU without being subject to customs controls. This model has been explicitly repudiated by Theresa May as she stated that the UK will not seek to replicate any existing customs deals with the EU. Especially given the government’s desire to “rediscover” the UK’s global trading past, complete with negotiations set with Australia this week, the limits an EU customs deal places on a country’s ability to make free trade deals would be abhorrent.

Ultimately, the result will be the “Hard Brexit.” As of today, it is difficult to tell whether or not Brexit will damage the British or EU economies. While current indications seem to downplay the worst fears of the campaign, as with any attempt to envision the future, opinion is divided. The least that can be said is that this is good news for “British fizz” wine growers.