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17 January 2017

Dr Peter Holmes (Reader in Economics and member of the UK Trade Policy Observatory at the University of Sussex), reacts to Prime Minister Theresa May’s speech on negotiating objectives for exiting the EU.

The speech essentially confirms what we knew already, that sticking to the government’s red lines on the European Court of Justice and free movement would make joining the European Economic Area impossible and so we must leave the single market.

The Prime Minister’s position on the Customs Union was somewhat confused: “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.” In reality, staying in the Customs Union in any way is impossible.  It confirmed that the government wants a comprehensive Free Trade Agreement with the EU. But she seems reconciled to the possibility of trading with the EU on World Trade Organisation-only Most-Favoured Nation terms if the EU is unwilling to negotiate an FTA within the two-year article 50 deadline.

We cannot predict the economic consequences of this with any certainty but it is hard to see how FTAs with third parties could compensate for the worsened access to the EU. This confirms that government is putting the political goal of sovereignty above economic considerations.

The eventual deal will depend above all on what the EU-27 are willing to offer, which is likely to be at best a fairly shallow Canada-style FTA and at worst, and looking increasingly likely, MFN terms. The key question is whether this can be achieved before 2019 and if not whether a transition arrangement can be negotiated to avoid a “messy Brexit” on day one.

Disclaimer:

The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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