On 17th January, the Prime Minister outlined 12 principles for Brexit:
- Provide certainty about the process of leaving the EU
- Control of our own laws
- Strengthen the Union between the four nations of the United Kingdom
- Maintain the Common Travel Area with Ireland
- Brexit must mean control of the number of people who come to Britain from Europe
- Rights for EU nationals in Britain and British nationals in the EU
- Protect workers' rights
- Free trade with European markets through a free trade agreement
- New trade agreements with other countries
- The best place for science and innovation
- Co-operation in the fight against crime and terrorism
- A smooth, orderly Brexit
The Prime Minister made some specific pledges over the future of UK-EU trade.
- The UK will not seek membership of the Single Market. Instead, the Government will seek “the greatest possible access to it through a new, comprehensive, bold and ambitious Free Trade Agreement”.
- The UK will pursue new trade deals with other countries and so will not be members of the Customs Union, but will seek “a customs agreement with the EU”.
- The Government’s aim is to reach an agreement about the UK-EU future partnership “by the time the two-year Article Fifty process has concluded”, most likely in March 2019.
- The Government has committed to “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”, which is a welcome commitment to avoiding a cliff-edge.
- However, the Prime Minister held out the option of the UK leaving without a deal and reverting to WTO rules, saying “no deal for Britain is better than a bad deal for Britain.”
Open Britain’s reaction to the speech
- It is positive that the Prime Minister has committed to a vote in Parliament on the final deal, as Open Britain and others have been calling for. This means that there is no blank cheque for a hard, destructive Brexit. Given that so much of the Leave campaign’s rhetoric was about restoring parliamentary sovereignty, it would have been outrageous if a vote had not been granted.
- However, abandoning Single Market membership, especially at this stage, was a real mistake. To give up the best possible economic option for Britain before negotiations with our European partners have even started is bad diplomacy and bad economics
- All the possible trading alternatives are inferior to what we have now – membership of the Single Market and the Customs Union. The Prime Minister said she wanted to remove “as many barriers to trade as possible”, but leaving the Single Market and Customs Union can only increase barriers to trade between the UK and EU.
- What was particularly worrying was the hardness of the Prime Minister’s rhetoric towards our European partners. Especially the threat to simply walk away from the table with no deal at all rather than accept a “bad deal” – as this would mean reverting on to World Trade Organisation rules, meaning very high tariff and non-tariff barriers to trade with Europe. While hopefully this is just posturing for domestic consumption, walking away from our biggest trading partner without a deal would be precisely the “calamitous act of self-harm” the Prime Minister has warned against.
- Clearly, the Prime Minister is intending to put immigration control at the heart of her approach to Brexit. What is foolish is to not even explore the possibility that greater control might not be incompatible with Single Market membership. The opportunity was there to attempt to have a Europe-wide debate on free movement, as senior figures such as the Dutch Deputy Prime Minister have called for. However, the Prime Minister did not take that opportunity, and unilaterally gave up our best chance of minimising the economic damage Brexit may cause.
- In sum, those in favour of a hard, destructive Brexit got the most out of the speech, namely withdrawal from the Single Market and, to all intents and purposes, the Customs Union, and an approach to Brexit that puts reducing immigration at its heart. Even Ukip could not find anything to attack. They must now explain how they can deliver what they promised, namely trade with the EU free of tariffs and bureaucratic impediments outside the Single Market and Customs Union.
European and business reaction to the speech was mixed
- Most European leaders welcome the new clarity from Theresa May, after months of being unsure about Britain’s negotiating position.
- From the EU institutions, European Council President Donald Tusk welcomed the fact that the UK Government had “understood and accepted” the EU’s position on the Single Market, and said he appreciated her support for European integration, while European Commission President Jean-Claude Juncker said the EU was “not in a hostile mood” towards the UK. However, European Parliament chief negotiator Guy Verhofstadt warned that the UK would not be able to “cherry pick” parts of EU membership.
- From the member states, Italian Prime Minister Paolo Gentolini likewise welcomed the “clear impression” given by Theresa May. However, the negotiating resolve from European capitals has not weakened. Angela Merkel warned against cherry picking. An adviser to Francois Hollande said the UK would not be allowed a better trading relationship outside the EU than it enjoyed within it; and Swedish Prime Minister Stefan Lofven said London’s vision of the timetable for Brexit was “optimistic.”
- Businesses welcomed the clarity, although some were worried by the pledge to leave the Single Market. Toyota said it would be working out “how our company can survive” Brexit. Swiss bank UBS said it “would have to move bankers” away from London; “the only question is how many.” And HSBC confirmed plans to move 1,000 London roles to Paris, accounting for a fifth of the revenues from its global markets division.
- European media reaction was less than positive. Germany’s Die Welt ran with the headline “Little Britain”, with the subheading “Theresa May leads Great Britain into isolation.” France’s Liberation compared May to Trump, saying she was being “aggressive” towards the EU. Spain’s ABC headlined on “May threatens the EU with commercial war.” This contrasted with the largely glowing coverage of the speech in the UK press.
What would a Canada-style Free Trade Agreement mean in practice?
There are some specific consequences of ruling out single market membership and aiming for a Free Trade Agreement. The EU-Canada deal is the most advanced EU FTA, and yet even if this were to be replicated there would still be negative outcomes for the EU.
- Years of uncertainty. The EU-Canada Agreement took seven years to negotiate from scoping and has only just been ratified. While it is true that a UK-EU Agreement would likely be easier to agree, it remains hugely complex and would be unlikely to be completed within two years. Pascal Lammy, former Director General of the WTO, said a new UK-EU FTA could take 5-7 years.
- Quotas and tariffs. For Canada, quotas remain in place for key agricultural exports. For the UK this could mean, for example, a 12 per cent tariff on a large share of the UK’s beef exports to the EU. It is hugely unlikely that the UK will negotiate zero tariffs on all goods.
- Less access to the free trade Single Market. Canada has only partial access to the EU Single Market, including for financial services, audio visual services and air transport. There is no EU FTA which gives the same access to EU markets in services as being in the single market.
- More red-tape for businesses. Canadian manufacturers, such as car-makers, must comply with Rules of Origin, requiring that a proportion of the product is made in Canada in order to qualify for preferential tariffs in trade with the EU. Leaving the Customs Union will mean the UK will face this additional bureaucratic cost.
- Giving up a say over the rules. Firms that export to the EU have to comply with EU product standards and technical requirements. For Canada, the EU has recognised Canadian assessments in only a minority of product categories. This leaves many Canadian products, such as medical equipment, dependent on approval by EU authorities before they can be sold in the Single Market. If the UK were to trade with the EU on similar terms, this would place many of our companies at a disadvantage.
- Trade deals. While the UK would be able to negotiate new bilateral trade deals, we will lose access to EU trade agreements with over 50 countries and no access to future EU deals. Existing deals will have to be renegotiated, but with inevitably weaker terms since our access to the EU market will be reduced.
What would the World Trade Organisation option mean in practice?
If the UK leaves the Single Market and defaults on to the World Trade Organisation with no preferential arrangement at all, the UK would make no budget contributions and would not accept free movement of people, but this is the worst of all worlds:
- Eye-watering tariffs. UK trade would be subject to new tariffs, which would mean increased costs for businesses and consumers. The House of Commons Library states that tariffs would apply to 90% of UK-EU goods trade by value, including rates of 10% on cars.
- Unilateral tariff reduction a risk. WTO Most Favoured Nation rules mean that without a separate UK-EU agreement, the EU would not give the UK preferable tariff rates. Without such an agreement, if the UK were to unilaterally drop tariffs on EU trade we would have to drop tariffs for all countries with no guarantee of reciprocal action. This would cause serious difficulties for British businesses and even leading Leave-supporting economists have said this would ‘mostly eliminate manufacturing’.
- Restricted service access. The ‘WTO option’ would mean access to the Single Market in services and the presumed right of commercial establishment would be lost, as would the financial services “passport”, which allows providers established in one Member State to provide their services in all.
- Giving up a say over the rules. As with an FTA, the UK would have to accept EU rules but have no say over them. There will also be new barriers to trade such as burdensome customs procedures, discriminatory tax rules and practices, duplicate technical regulations, standards and conformity assessment procedures.
- Trade deals. While the UK would be able to negotiate new bilateral trade deals, we will lose access to EU trade agreements with over 50 countries and no access to future EU deals. Existing deals will have to be renegotiated, but almost certainly with even weaker terms than under an FTA since our access to the EU market will be reduced.
- Evidence. Studies have shown that defaulting on to the WTO would be most damaging outcome for the UK economy. The Treasury estimated that this would reduce GDP by 7.5% over 15 years and would reduce tax receipts by £45bn per year. The National Institute for Economic and Social Research has shown that under the WTO model real growth would be “projected to fall by 4.6 per cent to 6.3 per cent”.
What does leaving the Customs Union mean?
- Increased bureaucracy. Within the Custom Union’s uniform system of customs duties and procedures, goods can cross borders freely and without delay because each country has agreed to sign up to common rules over labelling, packaging and alike and therefore do not need to go through bureaucratic checks. By contrast, countries outside the Customs Union have to classify their goods and pay a customs duty and need to ensure their goods meet EU regulatory standards. This takes time, adds bureaucracy and increases costs.
This was highlighted by the Japanese Government, who said that “maintenance of the current tariff rates and customs clearance procedures” was their number one request of the UK Government.  They also said: “The imposition of customs duties anew could suppress the revenues of businesses, which in turn could affect the sales prices of their products and their international competitiveness… Changes in customs clearance procedures for exports to the UK and the application of complicated procedures due to the introduction of inconvenient rules of origin could delay and increase the costs of logistics operations, which would have a significant impact on business operations.”
Countries outside of the customs union exporting in to the EU have to comply with rules for establishing the country of origin of imported and exported goods. They will need to classify goods that are manufactured in more than one country. A 2013 report commissioned by BIS from the Centre for Economic Policy Research estimated that the cost to UK business of implementing Rules of Origin requirements on UK-EU trade would be approximately £3 billion per year. UK businesses will face these costs, even with a customs co-operation agreement.
- New trade deals. Countries within the Customs Union are members of the EU’s common trade policy and are therefore party to the EU’s FTAs with over 50 other countries. When the UK ceases to be an EU Member State, we will no longer be party to these FTAs, which will have to be renegotiated as bilateral agreements, as the Foreign Office has said.
The balance between these drawbacks of being a non-EU Member State within the Customs Union would need to be weighed against the hypothetical benefits of being outside and able to sign new FTAs in future. The Secretary of State for Exiting the EU has stated that he expects many new trade deals to have been concluded within two years before UK-EU negotiations were complete, but this is impossible to achieve. Some Leave campaigners have claimed that leaving the Customs Union will lead to new jobs, but these claims have been proven false.
 HM Treasury, ‘The long-term economic impact of EU membership and the alternatives’, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/517415/treasury_analysis_economic_impact_of_eu_membership_web.pdf
 NIESR, ‘The Long Term Impact of Leaving the EU’, http://www.niesr.ac.uk/sites/default/files/publications/National%20Institute%20Economic%20Review-2016-Ebell-121-38.pdf
 ‘Alternatives to membership: possible models for the United Kingdom outside the European Union’, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/504661/Alternatives_to_membership_possible_models_for_the_UK_outside_the_EU_Accessible.pdf
 “So within two years, before the negotiation with the EU is likely to be complete, and therefore before anything material has changed, we can negotiate a free trade area massively larger than the EU. Trade deals with the US and China alone will give us a trade area almost twice the size of the EU, and of course we will also be seeking deals with Hong Kong, Canada, Australia, India, Japan, the UAE, Indonesia – and many others”, Conservativehome, July 14 2016, http://www.conservativehome.com/platform/2016/07/david-davis-trade-deals-tax-cuts-and-taking-time-before-triggering-article-50-a-brexit-economic-strategy-for-britain.html
 Change Britain, January 3 2017, https://www.changebritain.org/trading-opportunities-outside-customs-union-create-400000-new-uk-jobs
 Open Britain, January 3 2017, http://www.open-britain.co.uk/wilson_fantasy_figures_underline_weakness_of_case_for_leaving_the_customs_union