Brexit is Finally “Done” — as Britain Heads into the Great Unknown

By: TradeSmith Research Team

4 weeks ago | News

For three-and-a-half years — ever since the historic referendum vote on June 23, 2016 — Britain has been in a state of emotional turmoil over Brexit.

The painful saga of whether to accept Brexit, what kind of Brexit it would be, and what kind of deal would be negotiated seemed to drag on interminably, like a dental procedure that never ends.

But now, finally, Brexit is here. On Jan. 31 at midnight Brussels time — which, amusingly, is 11 p.m. London time — Britain will be out of the European Union.

The campaign slogan of Boris Johnson, the U.K. Prime Minister, was “Get Brexit Done.” And so it was.

But for the United Kingdom, the perilous journey has barely gotten started. The U.K. is sailing into uncharted waters with a hostile trading partner, a ticking clock, and a serious break-up threat from within.

For the rest of 2020, the U.K. will be in a “twilight period” with the European Union.

This means that, for the next 11 months, Britain will still have freedom of movement and free exchange of goods with the European Union, and still abide by the EU’s rules — but the British government will have no say in EU affairs.

As of Feb. 1, British politicians will be literal outsiders in Brussels, right down to having their access privileges and building badges revoked. As for any legislation imposed by the EU, Britain will have no say — and will never have a say in EU legislation ever again, unless they rejoin.

The 11-month twilight period — from Feb. 1 to the end of 2020 — is meant to give the U.K. time to work out a deal. The new terms of trade between the U.K. and the EU are not set.

This means the potential for a “No Deal Brexit” still exists — the nightmare scenario where the U.K. crashes out of the EU with no trade deal at all.

In deal negotiations over the course of 2020, the EU will hold the cards. This mostly comes down to size: The European Union, even with the U.K. gone, has 450 million people and 18% of global GDP. By population and economic heft, the EU is seven to eight times bigger than the U.K.

The European Union has incentive to drive a very hard bargain with the U.K. for at least three reasons.

First, because it can (due to having the upper hand). Second, to encourage large multinationals to favor the EU over Britain, e.g. car makers and money center banks moving their operations to the continent. And third, to set a harsh example for any other EU country pondering its own “Brexit.”

It is somewhat ironic that, in the aftermath of Brexit, British citizens and businesses will have far less sovereignty than before. They will still be subjected to EU rules but will no longer have a say in those rules — an arrangement that could continue indefinitely, depending on what type of trade deal is struck.

Freedom of movement, and the ability to do business in both directions, will also be greatly reduced (if not taken away entirely). 

But EU negotiation headaches — and the ticking clock that is 2020 — are only the beginning of the U.K.’s challenges. Scotland could be another big problem.

On Jan. 29, Scottish parliament voted 64-54 to hold another Scottish independence referendum.

The vote was largely symbolic; Scotland technically needs permission from the U.K. government to hold such an event. But this is the beginning of an ugly political fight.

Boris Johnson argues Scotland has no right to a new referendum, because the last one held in 2014 was supposed to be “once in a generation.” The pro-referendum Scots argue Brexit itself is a violation of Scottish sovereignty, and not something they ever signed up for.

Another key difference for Scotland is that, in 2014, Scotland was voting on whether to head into the wild blue yonder — to have Scotland break off from the United Kingdom as its own independent country.

That was a dangerous proposition, and Scottish voters almost went for it anyway (the split was roughly 55-45). If there is a new referendum vote, Scotland would be voting not to go solo, but to rejoin the European Union, getting back the rights and privileges it is losing with Brexit.

That is a much easier call — so much so that Scotland also voted on Wednesday to keep the EU flag aloft outside of Scottish parliament. 

As if all that weren’t enough, one of the implied benefits of Brexit was the opportunity for Britain to put together a magnificent trade deal with the United States. For a while, this looked like a real possibility, as the U.K. conservative party and the Trump White House seemed to get along great.

But not anymore, it seems. Boris Johnson has greatly irritated the Trump White House — and possibly pushed it to anger or even fury — by allowing Huawei telecommunications equipment into the U.K. to help build Britain’s 5G network.

The United States views Huawei equipment as a national security threat — a kind of trojan horse for China to spy on vital communications systems. As such, the U.S. urged its closest allies, like Britain, to reject Huawei equipment on the grounds of mutual security.

For whatever reason, the British government has decided to side with China on the Huawei issue. It may be that China offered sweeter deal terms, or more intimidating threats.

Either way, the U.K. is entering the Brexit twilight period at a bad moment with its closest ally, the United States — even as the EU cracks its knuckles in anticipation of bruising trade negotiations, and pro-independence Scots prepare for a knock-down, drag-out fight.

The mind-numbing wait for Brexit may be over — but the danger and uncertainties have only just begun.

TradeSmith Research Team

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