Hard And Soft Brexit Explained


brexit explained

As we get closer to triggering Article 50, it’s even more important to understand what a ‘Hard’ or ‘Soft’ Brexit will mean for the UK. Here, we’re looking at the different trade agreement models and what the hardest Brexit could look like.

At stake is the UK’s ability to deregulate its industry, negotiate its own trade deals and set immigration controls when it leaves the EU.  The price for maintaining access to our single biggest trading partners markets includes tariffs, customs checks and following EU regulations and standards without any say in what they are.

What is Article 50?

The Treaty of Lisbon became law for the UK in December 2009. It was the most recent in a series of major treaties to shape the development of what we today call the European Union. The first was the Treaty of Rome in 1957 that established the European Economic Community. The UK joined the EEC with Denmark and Ireland in 1973.

The Treaty of Lisbon was intended to make the EU, “more democratic, more transparent and more efficient”. For the first time, since 1957, Lisbon set out a basic five-point plan for any country leaving the European Union called Article 50.

Once the UK formally notifies the EU that it is activating Article 50 to withdraw, “the member of the European Council or of the Council representing the withdrawing Member State shall not participate in the discussions of the European Council or Council or in decisions concerning it,” the rule says.

Negotiations should be completed within two years although many believe it will take much longer. For example, the trade agreement between the EU and Canada took eight years to agree and is 1,600 pages in length. Nobody knows for sure, it has never been done before.

The UK’s exit will be negotiated with the EU Commission. It must be agreed by the 27 remaining members of the EU and the EU Parliament. So, it could still be sometime before we actually leave.

Hard Brexit

Recent speeches by the Prime Minister and statements by the government’s ministerial Brexit team, Boris Johnson, David Davis and Liam Fox suggest taking control over immigration will take priority over access to the single market. This is known as a Hard Brexit.

Losing access to the single market will mean British exports to EU countries will be subject to customs checks and could attract tariff and non-tariff barriers.  Despite many goods already being tariff-free if the UK joins the World Trade organisation, HSBC economist, Doug Lippoldt, estimates that this could be comparable to a tariff of at least 10% on all UK exports to the EU.

Over half of UK imports come from the EU and thorough customs checks would be applied to them too. That will create an additional administrative burden, adding costs and time to deliveries for UK consumers.

Service exports are crucial to the UK, especially professional and financial services where we have a trade surplus. Unless a specific exception is negotiated, financial institutions in the City could lose access to European markets under the ‘passporting’ scheme. This currently allows a UK financial institution, licensed by the Financial Conduct Authority, to access markets in other European countries. If the passport remains, UK financial services would have to continue to adopt EU regulatory changes but would be unable to influence them.

The second biggest market for UK services is the USA. The Trump administration has made it clear they would like to agree a post-Brexit trade deal with the UK. A bilateral trade deal for services with the USA and China could be good news for the UK outside the EU.

We have looked at the implications that leaving the single market could have on British business in more detail in an article you can access by clicking here.

A Canada-style free trade agreement with the EU would be good for consumers and the agriculture industry and would be in the EU’s interests given the UK’s consumption of goods such as German cars and Italian sparkling wine.

Soft Brexit

A soft Brexit would mean the UK retaining some form of membership of the European Union single market in return for allowing a degree of freedom of movement. Most economic models suggest this would reduce the impact on the UK and EU economies.

Switzerland has 120 separate agreements with the EU which gives it bespoke access to the single market. It has no say in regulations and its single market access covers only a few services, but all goods. It also has its own bilateral trade agreement with China.

Switzerland rejected free movement of people with the EU in a 2014 referendum. The Swiss government is negotiating with the EU to maintain its access to the market but without success so far. The EU will restrict market access if Switzerland goes ahead with immigration controls.

Norway has access to the single market and can trade freely in services. It is not part of the customs union so there is a bureaucratic barrier to goods trade. Its tariffs for trade outside the EU are not set by the EU so Norway is at liberty to negotiate free trade deals. It is however, subject to the free movement of goods, services, capital and, the sticking point for the UK and Switzerland, people.

Turkey is inside the EU customs union, but not the single market. This allows tariff-free trade of goods across the EU and means Turkey must apply the same tariffs as the EU to non-EU trade. Turkey’s model would give the UK free movement for goods and services across the EU and allow us to apply controls on people. But as with Norway and Switzerland, the UK would have no say on regulations. This arrangement would exclude services and would restrict the UK’s ability to make its own trade deals.

The road ahead is unclear, so now is a good time to review your investments and retirement provisions to make sure you are suitably diversified for whatever the outcome. Get in touch today for a full financial review.

HSBC have produced this useful table that sets out different types of Brexit.

 

Brexit HSBC Table

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