The BBC has a bombshell report that has not yet gotten the attention it warrants.
As we have stated, there was a big timing issue with a Brexit even based on a superficial look at the mechanics. As President of the European Council Donald Tusk made clear, the UK would be able to complete the steps necessary to leave the EU in two years. That matters because once the UK invokes Article 50, a two year clock starts running. If the departing country has not negotiated its exodus with the rest of the EU, it is out by default. While the two years can be extended, it would take a unanimous vote of all 27 remaining members. Give the lack of good will towards the UK, and the desire of the remaining members to use their negotiating leverage, it would be extremely dangerous for Britain to assume it could get additional time.
Mind you, the process of unwinding the current relationship between the UK and the EU is a tall order. Then the UK also has to enter into new arrangements not just with the EU but other trade partners, since most of those relationships were not bi-lateral but through the EU. Hence Obama’s threat, that the UK would go to the back of the line in negotiating a new relationship if it left the EU, was a serious matter.
Experts estimated the bare minimum amount of time for negotiating and consummating new trade deals was five years, and that that would be very unlikely to be achieved in practice. Moreover, trade negotiations can fail, which means there is a a possibility of it taking much longer.
So the UK was already faced with a gap of at least three years, and more likely longer than that, between when it left the EU and had a new trade regime in place, particularly with its most important trading partners on the Continent.
But the BBC interview with the EU’s most senior trade official reveals it’s even worse than that. The negotiations of the UK’s departure from the EU and new EU trade arrangements cannot take place in parallel. They must be sequential. No new deal talks with the EU until the exit is completed.
And the EU Trade Commissioner, Cecilia Malmstrom, also said the closest analogue was the negotiations with Canada (and recall that Canada is held out as one of the models for a post-Brexit relationship), took seven years to negotiate and will take an additional one or two years to ratify.
From the BBC (emphasis ours):
The European Union’s top trade official says the UK cannot begin negotiating terms for doing business with the bloc until after it has left.
“First you exit then you negotiate,” Cecilia Malmstrom told BBC Newsnight.
After Brexit, the UK would become a “third country” in EU terms, she said – meaning trade would be carried out based on World Trade Organisation rules until a new deal was complete…
WTO rules restrict the circumstances in which countries discriminate in favour of each other in trade. Otherwise, they must apply to each other the tariffs they apply against the rest of the world….
There is concern in the City that having to do business for years under WTO rules could be disastrous for the UK’s service industries.
Asked whether sticking to such a process wouldn’t harm the economies of all EU members, Ms Malmstrom replied: “Yes, but the vote was very clear.”…
Under EU law, the bloc cannot negotiate a separate trade deal with one of its own members, hence the commissioner’s insistence that the UK must first leave.
It is also against EU law for a member to negotiate its own trade deals with outsiders, which means the UK cannot start doing this until after it has left the EU.
Taken at face value, these rules mean the UK cannot conduct its own trade talks for up to two years – a fearsome challenge to any prime minister trying to deliver Brexit…
But even a Norway-style single market access deal, they caution, could take years to negotiate, leaving the UK trading on WTO terms in the meantime.
Even worse, the article mistakenly depicts WTO rules as an automatic default. That is not the case. The Director-General of the WTO has separately stated that the UK would also need to negotiate new arrangements with the WTO, and the process would be fraught. And recall the issue we boldfaced above: as long as it is a member of the EU, the UK cannot negotiate other trade pacts. So it can’t begin negotiating with the WTO during its Article 50 departure process. From a Financial Times article in Mayk (emphasis ours):
Britain joined the WTO under the auspices of the EU and its terms of membership have been shaped by two decades of negotiations led by Brussels. If Britain voted to leave the EU it would not be allowed to simply “cut and paste” those terms, Mr Azevêdo said.
Britain would have to strike a deal on everything from the thousands of tariff lines covering its entire trade portfolio to quotas on agricultural exports, subsidies to British farmers and the access to other markets that banks and other UK services companies now enjoy.
“Pretty much all of the UK’s trade [with the world] would somehow have to be negotiated,” he said.
The WTO had never gone through such discussions with an existing member, he said, and even the procedures for doing so remained unclear. But the likely complexity of such talks, Mr [Roberto] Azevêdo [Director-General of the World Trade Organization] said, made them akin to the tortuous “accession” negotiations countries go through to join the WTO. Even a small economy such as Liberia, which last year became the WTO’s 162nd member, took years to agree the terms of membership.
The implications are ugly. Again from the pink paper:
An exit from the EU, for example, would cause the UK to lose the preferential access to other markets covered by 36 trade agreements with 58 countries negotiated by the EU. As a result, to remain compliant with WTO rules the UK would have to impose higher “most favoured nation” tariffs on imports from those 58 countries, while they would have to levy their own surcharges on British exports, Mr Azevêdo said.
A WTO analysis had calculated the cost of the additional tariffs on goods imports to British consumers at £9bn, while British merchandise exports would be subject to a further £5.5bn in tariffs at their destination.
“The consumer in the UK will have to pay those duties. The UK is not in a position to decide ‘I’m not charging duties here’. That is impossible. That is illegal,” Mr Azevêdo said.
The only other option available to the UK would be removing all barriers for all WTO members, effectively turning its economy into a duty-free one like Singapore and lifting the protections politically sensitive domestic industries enjoy under the EU. “That is possible. But that is also very unlikely,” he said.
Azevêdo issued similar warnings in the Guardian in June. He stressed he had not been asked by anyone in the Remain campaign to weigh in, but he felt compelled to speak up to correct misinformation. He also stressed that the UK had no seasoned trade negotiatiors and recruiting the team would also take time. From the article:
Azevêdo said this would be an all-or-nothing approach: “If you are a duty-free country, you can’t be selectively duty-free. If you want to go duty-free, you have to go duty-free across the board. There can be no tariffs on anything, including agriculture and steel.”…
Noting that only Macau and Hong Kong adopted a complete duty-free approach, Azevêdo said: “I recognise reality for what it is. I think it is very unlikely it (a duty-free world) is going to come to pass.”..
“It is very difficult to predict. Russia’s accession to the WTO took 20 years. Other negotiations happened faster. It will be a very high risk bet to hope that negotiations would be quickly completed and that negotiations would be uneventful,” he said.
Presumably, the reason for rejecting the Hong Kong option is that Britain has more in the way of domestic companies that need the shield of WTO rules than potential exporters that would gain. Recall how keen China was to become a member of the WTO. In addition, the UK will likely lose more on its financial services “exports” to Europe if it cannot negotiate deals that give advantaged access to its customers to European exporters (ie, the Singapore “no barriers” option throws away a critically important bargaining chip).
The Leave campaigners had no idea what they were advocating. If the Government has any comprehension of what a Brexit really entails, they are certain to work to find a way to ignore the referendum results while minimizing the political fallout.
In some ways, the fix the UK is in is analogous to the big impediment we discussed at length to Greece leaving the Eurozone. Setting up a new currency has very long lead times. It took eight years of planning and three years of execution for the launch of the euro to go smoothly. The big obstacle is not the introduction of physical currency, which would take the better part of a year. It is all of the IT systems work, the overwhelming majority of which is not under Greece’s control but that of many other parties, such as the very fragmented members of the electronic point of sale industry. As we’ve had to stress, much of the code in bank payment systems is in Cobol or even older formats, where every line of possibly relevant code has to be inspected manually and substitutions made manually, and coders of different sub-systems in banks often used different designations of key data items.
Here, the analogy to the millions of lines of clunky code is the density and complexity of the trade agreements, and the labor-intensiveness of striking new deals. And as Azevêdo warned in the Financial Times:
“It is extremely difficult and complex to negotiate these trade agreements. And slow as well,” he said. “Even if you are in a position to negotiate quickly with all these other members it doesn’t mean that they will be in a position to negotiate with you because they have their own priorities.
No wonder Johnson was defenestrated and Brexit true believer Gove perhaps duped into being the hatchet man, which if you believe the reports in the Torygraph, has severely damaged his odds of becoming Prime Minister. The Conservatives’ coup has moved two of the most determined Leave advocates out of the running. This big change in who is a serious PM candidate does not prove that the Tories are groping for a way to back out of Brexit, but it is a necessary condition.
So if the current prognostications are correct, and Theresa May is indeed “coronated” as Prime Minister (which rings hollow to US ears, given how well similar plans worked for Hillary Clinton), it looks to be a classic example of a woman being handed the reins because no sensible man would want the job.
Even if the new Prime Minister and her allies recognize that a Brexit is virtually unworkable in practice, it’s not clear how they extricate themselves at an acceptable political cost. 58% of their voters backed Remain. The party risks a backlash not just from them but also from Remain voters who made up their minds right before going to the polls, meaning they were not strongly committed, and take offense at the will of the public being ignored. Going through any process to relitigate the issue (a second referendum, having a Labour stooge in a pocket district demand Parliamentary approval) would tear the country apart and risks reconfirming the Leave decision.
One option would be inertia: do nothing and hope voter support cools. But the EU, IMF and other parties are not willing to let the matter pend. European Commission president Jean-Claude Juncker said a new PM who backed Leave should invoke Article 50 the day he assumes office; one who supported Remain should do so within his first two weeks in office.
Juncker was not speaking on behalf of the EU, but his words reflect the keen desire of European officials for the UK to stop faffing about. Given the strenuous EU insistence that the UK act soon, a new PM could give some excuses regarding the need for further delay. But the danger with that is the credible-seeming pretexts, like needing to sort out what the UK’s preferred post-Brexit relationship would be, and the need to recruit, qualify, and hire trade negotiators, are all consistent with Brexit being on track. That works against the domestic imperative, of softening up Leave voters for ignoring the referendum results.
And remember, as Clive warned, the EU is unlikely to sit pat if its officials perceive the new government to be stringing them along about a Brexit. They no doubt have bureaucratic tortures of various sorts they can inflict (strict enforcement of inconvenient rules that are normally not enforced is a stating point) and one can expect them to start applying them in an escalating manner.
Perhaps May can manage Leave expectations down before she becomes PM. But since she and the other short-listed candidate need to win the approval of the 150,000 grass roots members, I doubt she can go very far in that direction.
The upside is that the Tories have served up a dog’s breakfast and they will have to eat their own cooking. So expect lots of schadenfreude in the coming months. It couldn’t happen to a nicer bunch.