by Marc Chandler
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Q. The UK voted in s referendum to leave the EU in June 2016. It will happen at the end of March 2019. What is the status of the negotiations?
A: It had been hoped that the two sides would be close enough to allow a special summit to be called next month to finalize an agreement. This seems a bit premature, but an agreement still seems likely shortly. There are two stumbling blocks. The first is the Irish border. The EU insists on no hard border between Northern Ireland and the Republic of Ireland. The UK government insist on no hard border between the UK and Northern Ireland. At a high level, the EU insists permanent backstop, while the UK wants a set time limit. The second issue is what the EU calls the UK’s “cherry picking.” The UK wants to choose which parts of the EU it wants to participate in and which it doesn’t. Privileges come with responsibilities. The UK wants to stay in the single market for goods, but not services or immigration.
Q: What is involved?
A: Essentially, the UK and the EU are negotiating a separation, which is often compared with a divorce, but feels more like an amputation. The connections are to be severed, preferably in an orderly fashion. There will be a 21-month grace period beginning at the at the end of March 2019 when nothing will change. This transition period concludes at the end of 2021. The new relationship will be only agreed in the broadest of strokes before March 2019.
Q. What if there is no agreement reached by then?
A: Many paint a Brexit with no agreement as an unmitigated disaster. It is seen as sterling negative. The trade relationship would revert back to the rules of the World Trade Organization. While the EC has pursued a tough negotiating position, it is in everyone’s interest to minimize the risks of disruptions even if they have to prepare for them. Sterling has been trading as if many expect a deal to be struck even if the path to itis tortuous.
Q: What are the other possible scenarios?
A: May, much to the chagrin the hardline in her party, offered the “Chequers Plan,” which is a customs arrangement in which the UK would collect the tariffs on the EU’s behalf. It would remain in the single market for goods and would maintain regulatory alignment. The EC cannot accept a non-member collecting its taxes and the bald violation of the four-freedom principles. Instead, it offers a “Canada-like arrangement.” The UK would leave the single market and the customs union. A new free-trade agreement would be negotiated. This still does not resolve the Irish border issue.
Q: What’s next?
A: May gives the main dinner speech to Wednesday night to conclude the summit. Talks will likely resume shortly. The problem is that the terms that will allow the UK to strike an agreement with the EC may be difficult to win the approval of May’s cabinet, and in Parliament, May will have to court Labour votes to make up for some Conservatives that cannot support the government. Since shortly after the first referendum, there has been much talk of a second. It seems unlikely under the current government, but should it fall, all bets are off. PredictIt, event site, has May favored to be Prime Minister at the end of the year 85-15.
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