In this week’s economic update, we investigate six distinct possibilities surrounding Brexit that could materialise following the outcome of Tuesday’s Parliamentary vote. We also dig deeper into the role and history of the World Trade Organisation as a mediator of global trade discussions.
Brexit, what now?
After two years of negotiations, Theresa May’s hard-fought EU deal was overwhelmingly rejected by MPs on Tuesday night with 432 votes to 202, a historic majority against of 230. Jeremy Corbyn, leader of the Labour party, immediately called for a vote of no confidence in the Conservative government. Theresa May won this round of votes confirming the confidence of Parliament. The question now is: Where does this leave us?
Theresa May is set to present her ‘Plan B’ which will be proposed on the 21st of January then debated amongst MPs on the 29th.
Six main options look likely, but MPs can propose alternative plans through a series of amendments. Below we outline six possible outcomes but expect the unexpected!
1. No Deal
This is the default position. As it currently stands, if nothing else were to happen, we would get a no deal Brexit. This is because MPs voted in favour of triggering Article 50 committing the UK to leaving the EU on 29th March 2019. If this happens there will be no transition period and no real clarity. The UK as a non-member will be subject to EU tariffs and will fall back on World Trade Organisation rules in its dealings with the European Union. The Irish border issue will still need to be resolved hence there is a real need for a solution. However, control over movement of people, freedom to enter trade deals and control over UK laws will revert back to the UK Parliament, restoring sovereignty.
2. Second Vote for MPs
A further option is for those MPs who voted against the deal to change their position and, instead, side with it when another vote is called. Mrs May has declared that she will take part in ongoing discussions with senior politicians and party members on how best to deliver the Brexit plan. This process could involve making minor amendments and requesting further small changes to the deal from the EU. The Prime Minister may be asked to make promises on how negotiations on the future relationship will proceed following the UK’s departure. Regardless of direction, a paradigm shift in attitude will be required if a second vote on the deal is to be successful next time.
3. Major Renegotiation
Another possibility would be a complete overhaul of the current Brexit deal. For this to happen there would most likely have to be an extension to Article 50, agreed to by the twenty-seven countries of the European Union. However, this would delay the UK’s departure from the EU and prolong the uncertainty.
4. The government calls for a General Election
Theresa May could also decide to hold an early general election in the hope of gaining an outright majority and removing the current reliance on the DUP. However, this means the Conservative party could be ousted earlier than required under the Fixed Term Parliament act. It is not as easy now to call for an early election but not impossible, as we saw in 2017. With some political manoeuvring, and two thirds of MPs voting for one, a general election could take place. If this were the plan, the earliest an election could occur would be 25 working days later, necessitating a request to extend Article 50, again, extending uncertainty.
5. Another Referendum
The possibility of a second referendum is building. It is being held at bay by a weakened Prime Minister vehemently opposed to having one. Even if there was general support for a second vote, the exact details of the question to be put on the ballot paper would be contentious. A people’s vote could ask if we want to remain or accept May’s deal. However, if May’s deal gained most of the votes, the DUP could bring the government down because May’s deal includes the backstop without a termination date. One certainty, is that if a people’s vote were to take place an extension to Article 50 would be required. It is suggested that once the necessary legislation has been passed it would take roughly 22 weeks for a referendum to be completed, taking us way past the March 29 deadline.
6. Cancellation of Brexit
Finally, there exists the option to withdraw from the Brexit process altogether. Late in 2018, the European Court of Justice ruled that it would be legal for the UK to revoke Article 50 without agreement from the 27 other EU countries, thus cancelling the whole Brexit process. The 2016 referendum in the UK was not legally binding because of the sovereignty of Parliament. Therefore, the result of the referendum was advisory meaning the government is not required, by law, to follow through with the people’s vote and can in fact cancel the whole process. However, such a move would be hugely damaging to the democratic process and given May’s strong support for following the ‘will of the people’, cancelling Brexit looks unlikely to happen.
Tactically, the government’s whip hand is to threaten to leave with no deal. This puts pressure on the EU to come back with concessions. To do this they need to continue to stall for time. However, many MPs are aghast at this prospect arguing that to trade under WTO terms would be a disaster. The only certainty right now is uncertainty. Breaking the impasse looks to be an impossible task and with such strong feelings around no deal, an extension to Article 50 looks inevitable and we could be heading for a second referendum.
World Trade Organisation (WTO)
In recent months markets have been rattled by key global players, China and the US, battling over trade and protectionism. Overseeing all trade disputes, the World Trade Organisation (WTO) has a key role to play. However, it is clearly facing an uphill struggle when two major nations are intent on putting up barriers.
The WTO is made up of 164 nations accounting for 95% of all global trade. It is an intergovernmental organisation whose aims are to ensure trade is fair and transparent. In a competitive landscape, and under their rules-based framework, they strive to ensure trade does not favour one party over another.
The WTO came into being in 1995, the successor to the General Agreement on Tariffs and Trade (GATT) which was established in the wake of the Second World War. Despite many criticisms about the organisation’s effectiveness against nations ‘going rogue’ the WTO, and before that GATT, have helped prevent sudden, harmful policy shocks.
The main functions of the WTO are to:
• Host negotiations
• Remove obstacles to trade
• Resolve conflict
The key advantage conferred by membership of the WTO lies in the requirement for negotiation. Membership helps all countries, regardless of size, overcome trade barriers and resolve disputes. It is also a rule making body setting tariffs to ensure a level playing field.
The policy term for equalising terms of trade is ‘Most Favoured Nation’ (MFN) status. This term cropped up during the Brexit negotiations. MFN occurs when no member state is provided with more favourable terms than their fellow members, thus avoiding competitive advantages being offered outside of free trade agreements (the European Union operates a free trade area for its members).
If the UK leaves the EU with an agreement on trade, EU rules will transition into UK law. However, if the UK leaves without a deal, under MFN the EU will charge the same tariffs to the UK as it does to all other countries with which it does not have a trade deal. This means some goods tariffs will be lower, but others will be higher and one key difference will be that customs checks at the borders will increase. However, they should not be arbitrary nor significantly more onerous.
The critical aspect is the extent to which the UK could pursue a liberal trade agenda when free of the EU. ‘Project fear’, as it is termed, warns that new trade deals are a fantasy. Brexiteers say the opportunity is so great outside the bloc that the EU is determined to shackle the UK. Growth in trade outside of the EU is growing much faster than trade between the EU members and there are other trade blocks such as the Pacific trade bloc and our Commonwealth partners to which the UK can turn.