Retail Insights

Election result makes hard Brexit more likely, not less

When the UK submitted its Article 50 letter it set in train a process to leave the EU which now has its own momentum. This means that unless the UK and EU explicitly agree otherwise, at the end of the two-year process the UK will be out of the EU and will have a trading relationship based on so-called "WTO rules". In trade terms, this is what hard Brexit means. This outcome requires no further decision or action on the part of either party, and is the default consequence of the UK's decision to leave. As Michel Barnier, the EU's chief Brexit negotiator, told the Commission "... in any event, the UK would become a third country on 29 March 2019." So, hard Brexit is the road that we are already on.

How would this hard Brexit manifest itself? Most obviously in the form of new tariffs on imports of British goods to the EU. Assuming that no agreement is reached, on 29 March 2019, British goods destined for the EU market will become subject to the EU's standard rates of customs duty. The same will be true for EU goods destined for the British market. The government has already said that it will set its standard duty rates at the same level as the EU does and so imports of European clothing and footwear, for example, would become subject to duty rates of 10-16 per cent and imports of many food and drink lines would be subject to duties far higher. In the case of some beef and dairy products the rates are as high as 80 per cent.

The question is not so much how the government can deliver a hard Brexit, but how can it avoid it. The two sides have to agree something specific, but the options, at least for the UK side are rather limited.

The most comprehensive solution would be for the UK to remain a part of the Single Market, probably through an arrangement very similar to Norway. However, both Labour and the Conservatives have effectively ruled this option out. The Conservatives have been very explicit on this. Labour has been less explicit, and its manifesto says it wants to "retain the benefits" of the Single Market. However, it goes on to say "freedom of movement will end when we leave the EU". This one simple sentence effectively rules out continued membership of the Single Market because as David Cameron discovered during his effort to negotiate with the EU prior to the referendum, the Single Market is a monolith and if the UK wishes to enjoy the benefits of its free trading provisions it has to apply its free movement provisions as well.


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