After correctly taking her time and postponing triggering Article 50 until the government's negotiating position is settled (still expected in early 2017 despite pressures from some to wait until September after French and German elections), PM May is beginning to make some decisions and decide what form Brexit will likely take.
Mrs May has correctly ruled out another general election. She could have capitalised on her party's huge poll lead over a warring and inward looking Labour party. But people have had enough of elections and it would only add to uncertainty in the unlikely event of a Labour election. But above all there is no rationale or precedent for a new leader to go to the country. We elect a party to government in this country not a PM. Similarly, a full vote on Brexit for parliament has been ruled out quite correctly as the people have already spoken, although it will be given "a say" on the process. Furthermore, a second referendum has also been ruled out, since if the terms of exit were defeated, this at best would increase the uncertainty, but most likely leave the country in limbo.
And above all, Mrs May has made clear that the government would pursue some form of hard Brexit. And that there would be no attempts to "stay in the EU by the backdoor". A hard Brexit will be much easier to negotiate from both a political and probably a technical perspective too. As the people voted for major control of borders and to take back their sovereignty, retaining membership of the single market will very likely be a non-starter. Thus the so-called Norway option is ruled out (although there may be a role in the interim period for this option).
Furthermore, it will be a bespoke one says Mrs May. So talk of an "off the shelf" option like the Swiss or Canada one has been rejected. Even so one might expect that the deal pursued would be close to a Canada plus deal. Under this option we would secure a free trade agreement with the EU in whatever sectors are covered by the agreement. Ideally this would cover services as well as manufacturing and agriculture. The key issue here however, is that the EU may not be willing to extend any agreement to services and above all financial services (despite the obvious benefit for consumers throughout the EU) given the UK has a large surplus and comparative advantage with the EU, so it would harm EU producers.
If the EU refused to extend to services, there is still plenty to be optimistic about in that we can revert to trading with the EU according to World Trade Organisation rules. Though we would be subject to the EU''s Common External Tariff (and to non-tariff barriers), we would cut out all the uncertainty of negotiations with the EU as well as maintain full control of borders and maintain sovereignty as promised to the electorate. But from an economic perspective we would be in a position to negotiate free trade deals with countries throughout the world much more quickly. For example, the infamous Transatlantic Trade and Investment Partnership (TTIP) free trade deal between US and EU is very unlikely to be concluded successfully ( which I hope to explain why in a future blog). The UK is much better placed to succeed in talks with the US and more speedily, contrary to the intervention of President Obama in the run up to the referendum. We could also negotiate trade deals with other countries, most notably Australia, NZ, Canada and Singapore with their shared values, but also other bigger countries like China and India again more easily.
Under hard Brexit we would be free to boost the supply side of the economy further, by lowering taxes, and reducing EU related regulations - boosting product and labour market flexibility. Our international competitiveness and growth prospects would be raised. In recent days the EU has shown it's interventionist, collectivist, centralising, protectionist and high tax tendencies through its failure of the TTIP and it's war on tax competition and Ireland. The UK is right to go it alone, particularly as it also plans to deepen European integration at the expense of non-euro zone countries. But the UK must also make sure that UK growth benefits everyone. This means getting rid of tax loopholes, perhaps as a complete overhaul and simplification of the tax system, clamping down on certain corporate behaviour, but also social justice.
