The Future of Brexit: How to Minimize Its Damage

While much of the excitement and attention surrounding the United Kingdom’s decision to exit the EU has died down, questions still remain about what is going to happen moving forward, and for those like myself who strongly oppose this so-called “Brexit,” if there is anything that can be done to avoid it.

The first thing to know about this developing situation is that the U.K. will undoubtedly leave the E.U. Many are still naively holding out hope that a new referendum can be held. This is exemplified in a petition that was created on the U.K. parliament website which called for a new referendum on EU membership. This petition has reached well over the 100,000 needed to be considered for debate by UK lawmakers. As I write this, the petition has received 4,148,925 signatures. Both David Cameron and Theresa May, respectively the former and current Prime minister, have made it clear that this referendum will be followed. Cameron said that the vote was a “once in a generation decision” and May stated, “Brexit means Brexit”.

While there may not be a way to avoid leaving the European Union, there are certainly ways to minimize the damage done. This depends entirely on what type of new economic relationship is negotiated between the U.K. and EU during the two years that both sides will have to come to a new agreement following the enactment of Article 50 of the Lisbon treaty.

There are a multitude of different economic arrangements that can be negotiated between the UK and EU, many of which are modeled after agreements previously made by other countries and the EU. Keeping in mind that any agreement will have to placate the Leave voters, the models that a post-Brexit United Kingdom and European Union are likely to pursue are the Switzerland model, the Norwegian model, the Canadian model, the Turkey model, and the basic world trade member model. I will briefly outline each of these economic agreements as well as their potential benefits and drawbacks.

The Switzerland model

This economic arrangement boils down the U.K. being a member of the European Free Trade Association, but not of the European Economic Area. This would require a multitude of bilateral agreements to gain access to EU markets and would not cover all aspects of trade. For example, Switzerland does not have complete access to the single market for its’ banking and parts of its service center. While still requiring some contribution of funds to the EU, it would be significantly less than the amount it would have to pay as a fully-fledged member of the EU or if following one of the latter models. By following the Switzerland model, it would also limit the amount of laws from the EU that the EU would have to comply with. This would protect sovereignty, a central point of the Leave campaign. However, one of the laws the United Kingdom would have to follow would be the freedom of movement law—that is, movement of goods, services, people, and capital—which might make it untenable for the Leave camp.

The Canadian model

This model, while not finalized between Canada and the EU as of yet, allows Canadian goods to be sold to the Single Market of the European Union without most trade tariffs. It would allow the UK to avoiding having to follow the majority of laws that other models such as the Switzerland one or being a member of the EU would require. Although goods coming from Canada—or hypothetically the U.K.—have to be proven that they originate from Canada and are not being resold from other countries. Goods coming from the exporting country must also be up to European standards, while at the same time Canada has no say on what those standards are.

The Norwegian model

This would set the U.K. as a member of the EEA, giving it full access to the single market. It also allows the U.K. to have autonomy on its foreign, security, home affairs, and justice policies, which has been a key argument of the Leave side. However, there would be a significant financial cost to being part of the EEA. According to a paper by the London School of Economics, “In 2011, Norway’s contribution to the EU budget was £106 per capita, only 17% lower than the U.K.’s net contribution of £128 per capita.” It also would once again remove the U.K.’s ability to have a say in new laws and regulations to be made, and would still force the U.K. to allow freedom of movement.

The Turkey model

This type of agreement would involve the U.K. being part of a customs union with the EU thereby allowing industrial goods to be exported tariff free. This would exclude agricultural goods or services, however. By being a part of the customs union, the U.K. would lose the ability to set tariffs for countries outside of the EU. Instead, the U.K. would apply tariffs set by the European Union which the U.K. would have no say in, likely harming their bargaining ability for future trade deals with other countries.  

The default world trade model

This is the scenario that will occur if the U.K. and the EU cannot reach an agreement after the two years. It would involve the U.K. having the rights of any other member of the World Trade Organization. This would mean restrictions and tariffs on goods, but would also free the U.K. to set its own tariffs and restrictions. The U.K. would also be able to create new trade deals with other countries while not having a fee for being part of the EU.

Which is best?

In reality, none of these options are ideal. None of the aforementioned models provides solutions to what the Leave party felt were central issues such as sovereignty, financial costs, unrestricted immigration policies, and tough regulations on goods. Therefore, what the U.K. should negotiate for in the future depends entirely on what the Leave party demands and what it can concede.

For myself, however, the solution is clear: the Norwegian Model is most able to help the U.K. avoiding the brunt of the damage that Brexit will cause.

The Switzerland model does not include complete access to the single market for service or financial sectors. This is significant, as these sectors comprise nearly 80% of the United Kingdom’s economy. It has taken Switzerland and the EU years to create what we see today; with it’s over 120 bilateral agreements. Attempting to achieve the same deal in only two years would be a herculean task.

The Turkey model would be unrealistic because it removes the U.K.’s ability to make new trade deals with non-EU countries. One of the few arguable benefits of not being a part of the EU is that it gives a country the potential to gain better deals with other countries.

The Canadian model isn’t a terrible option for the U.K. to try to negotiate for, as it would mean the U.K. was not bound to many of the regulations that the Switzerland and Norwegian models would expose it to. The deal breaker is that the current Canadian model does not cover both the service sector or the financial sector fully while the Norwegian model allows open access to the EU’s single market.

Clearly, I have bias when it comes to this issue; I would have chosen to remain in the EU without hesitation. Unfortunately, many do not feel the same. The issues that they have for being a part of the EU will have to be dealt with. The largest problem I see the Leave party having with the Norwegian model is the free movement issue and the cost of being a member. I truly believe that the freedom of movement issue is little more than xenophobic sentiment that has no basis in reality—just as they have no basis in the United States—but perhaps that’s a discussion for a different article.

I will say this about immigration in the United Kingdom, however: according to a study conducted by University College London, European immigrants arriving since 2000 have added £20 billion to the economy and provided human capital and skills that would have cost an additional £6.4 billion in education. While the cost of the Norwegian model is certainly high, being a part of the EEA costs nearly as much as EU membership, but without having a say. I don’t think the U.K. can afford to take any other deal given how much of its economy is tied to the European Union; according to Full Fact, 44% of UK’s exports go to the EU. Because so much of the UK’s economy is based on the financial and service centers, only the Norwegian model ensures continuing access to both parts of the European Union’s economy.

The U.K. has some hard times ahead of it. Trying to balance the needs of the Leave party with what is actually beneficial for the economy will be difficult. On top of that, the EU might make leave negotiations as painful as possible in order to send a message. Many other right-wing nationalist groups also known as “Euro-skeptics” have used Brexit to call for similar votes in their respective countries. The European Union obviously wants to avoid any more countries leaving and might decide that the best way to achieve this is to show just how much a country will lose by doing so. Even if all the negotiations with the EU go well and aren’t hampered by bitterness or strategic sabotage, the U.K. will be left in a much weaker global position. Without the strength of the EU’s economy behind it, the U.K. will not hold the same bargaining power while negotiating future trade deals. It also faces an unhappy Scotland (due to voting to stay in the EU 62% to 38%), which may feel differently about is 2014 decision to remain in the U.K. given that it will loose the benefits of being part of the EU.

Despite these challenges, the U.K. can still use these two years of negotiating to achieve a deal that will best protect its economy. Therefore, it’s common sense to choose the Norwegian model; this model can best help minimize the drawbacks of leaving the EU while still affording some of the Leave sides’ demands. This may be asking a bit much, however. If the majority of the U.K. citizens were using common sense in the first place, the U.K. would not be in this position now.

TL;DR With the UK’s official exit from the EU looming the country will have to figure out how to best avoid the negative consequences of being cut off from their primary market, this can be achieved by mimicking the Norwegian model trade deal.

The views expressed in this article do not necessarily represent the views of other Arbitror contributors or Arbitror as a whole.

Photo: “Brexit tea” by Frankeileon, licensed under CC by 2.0