Commentary – Theresa May clarifies what Brexit means – free trade agreement and a hard exit

January 20, 2017

After the June referendum in which a narrow majority of British voters favored leaving the European Union, Theresa May, campaigning for the Conservative Party leadership to replace David Cameron as prime minister, famously said “Brexit means Brexit.” For months, commentators and public officials alike debated what that phrase meant – and what kind of Brexit the UK would seek when it negotiated its withdrawal from the EU.

Now we know. In a long-awaited speech at Lancaster House on Tuesday before ministers and representatives of the EU, Prime Minister May made it clear the UK will not seek, as many had hoped, a “soft Brexit” – one in which it retains membership in the EU’s Single Market and Customs Union while regaining control of immigration from other EU member states and the ability to set its own laws and freeing itself from the jurisdiction of the European Court of Justice. It will, instead, seek a less ambiguous relationship with, and more complete break from, the EU – something that, notwithstanding her words about “our close friends and neighbors in Europe,” is a “hard Brexit.”

As she put it, “We are leaving the European Union…we seek a new and equal partnership – between an independent, self-governing, Global Britain and our friends and allies in the EU. Not partial membership of the European Union, associate membership of the European Union, or anything that leaves us half-in, half-out. We do not seek to adopt a model already enjoyed by other countries. We do not seek to hold on to bits of membership as we leave. No, the United Kingdom is leaving the European Union.”

And that, she made clear, means no attempt to retain membership in the EU’s Single Market: “What I am proposing,” she said, “cannot mean membership of the Single Market…Instead we seek the greatest possible access to it through a new, comprehensive, bold and ambitious Free Trade Agreement…That Agreement may take in elements of current Single Market arrangements in certain areas – on the export of cars and lorries for example, or the freedom to provide financial services across national borders….So an important part of the new strategic partnership we seek with the EU will be the pursuit of the greatest possible access to the Single Market, on a fully reciprocal basis, through a comprehensive Free Trade Agreement.”

Prime Minister May also noted that, while the UK does not want to retain full membership in the EU’s Customs Union, including its Common Commercial Policy and Common External Tariff, since that would prevent it from negotiating its own trade agreements, it nevertheless wants tariff-free trade with Europe and cross-border trade that is as frictionless as possible. As a result, she said, “I do want us to have a customs agreement with the EU. 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.”

While Prime Minister May disavowed the utility of any existing models of the relationship between a non-EU state and the EU, it was perhaps not entirely coincidental that she gave her speech on the first day of the annual World Economic Forum in Davos. Switzerland is the non-EU state with a trade arrangement with the EU that most closely resembles the sectorally-differentiated agreement described by the prime minister. That country negotiated an FTA with the European Communities in 1972 and two decades later participated in the creation of the European Economic Area (EEA), which provides non-EU states such as Norway, Iceland, and Liechtenstein with access to the Single Market in exchange for a contribution to the EU budget, acceptance of EU regulations, and acceptance of the EU’s “four freedoms” - the free movement of goods, services, capital, and people.

But after Swiss voters rejected membership in the EEA, the government negotiated a series of free trade agreements for specific goods and services with the EU. There are now roughly 120 such “bilaterals.” Importantly for the UK, Switzerland still has not completed, after ten years of negotiation, a treaty on financial services. If it does negotiate such a treaty, it will no doubt require, as the existing ones do, acceptance of the EU’s principal of free movement. And even if it signs a treaty on financial services that accepts free movement, it will not allow the country’s financial services firms the same access to the EU market via “passporting” that firms located within the EU enjoy.

Article 50 of the Treaty on European Union, which defines the procedure by which a member state may withdraw, stipulates that the EU treaties will cease to apply to the state as of the entry into force of the withdrawal agreement or, failing that, two years after notification of the intention to withdraw unless the other member states unanimously agree to extend the negotiation. It’s highly unlikely the UK will be able to negotiate a Free Trade Agreement, especially one that, as the prime minister suggested, might be differentiated, within two years.  As the recent negotiations between the EU and U.S. to create a Transatlantic Trade and Investment Partnership (TTIP) and between the EU and Canada on the recently-completed Comprehensive Economic and Trade Agreement (CETA) demonstrate, such negotiations take years. EU officials have estimated the negotiation of an FTA with the UK could take a half-dozen years.

In recent weeks and months, the UK government has come to realize that it will not be possible to negotiate a comprehensive FTA within two years. To prevent the disruptive “cliff-edge” scenario that would occur with the abrupt termination of the treaties without any withdrawal agreement two years after notification, Prime Minister May proposed a “phased process of implementation” during which the UK and the EU27 would prepare for the new post-Brexit relationship. It would not be, she said, “some form of unlimited transitional status, in which we find ourselves stuck forever in some kind of permanent political purgatory.” But it would provide the time needed to phase in the new arrangements, as each of the many issues – immigration controls, customs systems, financial services regulations, etc. – required. 

The speech was greeted with rapturous applause by those in the UK who support Brexit and share the prime minister’s vision of a “Global Britain.” And it no doubt presented, as elementary bargaining theory would advise, a tough initial position for the negotiation that will commence when the UK notifies the European Council of its intention to withdraw, presumably by the end of March – a toughness underscored by her statement that a “punitive deal” for the UK would be “an act of calamitous self-harm for the countries of Europe” and that “no deal for Britain is better than a bad deal for Britain.”

Nevertheless, while good theater, there is reason to doubt the UK will attain the objectives set forth by the prime minister in her speech. It’s highly unlikely the EU 27 will allow the UK to enjoy “elements of the current Single Market” for the export of cars and trucks and the provision of financial services through continued “passporting” of those services and tariff-free trade under a new or amended customs agreement without accepting the free movement of EU citizens into the UK. Indeed, Michel Barnier, the chief Brexit negotiator for the EU 27, and Guy Verhofstadt, the negotiator for the European Parliament, have already made it clear the UK will not be able to “cherry pick” the elements of the Single Market and Customs Union it wishes to retain while refusing to accept free movement of EU citizens, EU regulations, and the jurisdiction of the ECJ. And it’s not at all clear the EU 27 would accept the transitional implementation stage proposed by the prime minister; after all, playing its own brand of hardball, the EU 27 could simply say, “exit and then we’ll negotiate the FTA and the post-Brexit relationship.”

Moreover, although the point seems to have been forgotten in London, the outcome of the negotiation will depend not just on what the UK wants but on what the EU 27 will accept. And Article 50 gives the EU a very large advantage in that negotiation. For one thing, the ticking two-year clock means the EU can sit on its hands, let the clock run down, and watch as auto producers and others bring pressure to bear upon the UK government to modify its position, financial service providers make plans to relocate, and the government scrambles to avoid the dreaded “cliff-edge” scenario – a very abrupt, very hard and very costly “Brexit.”

In addition, Article 50 establishes a high hurdle for EU approval of any withdrawal agreement.  Approval requires a “qualified majority” of the council, defined as 72 per cent of the 27 continuing states comprising at least 65 per cent of the total population, as well as the consent of the European Parliament. And if that agreement is accompanied or followed by an FTA, the EU treaties require that, as Canada recently learned with CETA, the latter agreement requires approval and ratification by all of the member states.

Six months ago, Theresa May said, “Brexit means Brexit.” We now have a much better idea of what that catchy but circular and vacuous phrase means – at least for the UK. But whether the Brexit that emerges in 2019 is the same as the one she described at Lancaster House on Tuesday will depend not on the UK but on the EU.


David R. Cameron is a professor of political science and director of the Program in European Union Studies at the MacMillan Center.