Theresa May’s game of Brexit chicken

"We dare you to impose trade and investment barriers"

October 03, 2016
Prime Minister Theresa May after giving a speech at the Conservative Partys 2016 Conference on Sunday, 2nd October ©Isabel Infantes/EMPICS Entertainment
Prime Minister Theresa May after giving a speech at the Conservative Partys 2016 Conference on Sunday, 2nd October ©Isabel Infantes/EMPICS Entertainment

Theresa May’s speech to the Conservative party conference yesterday was only slightly less gnomic than her previous statements about Brexit. She announced a “Great Repeal Act,” which, far from ripping up EU laws, will bring them into British statute upon the day of Brexit, so that some may be repealed later. She said that “we are not leaving the European Union only to give up control of immigration again,” echoing earlier statements that the British people “do not want free movement to continue as it has in the past,” and that a new immigration system should “ensure that the right to decide who comes to the country resides with the government.”

As many have pointed out, becoming a “independent and sovereign nation” again, ending free movement and the enforcement powers of the European Court of Justice together mean that the UK will leave the Single Market. But May did not abandon a “pick and choose” strategy—maintain close economic ties with the EU in goods, services and capital, while ending the free movement of labour. Quite the opposite: the purpose of her announcement was to signal to the EU that she would try to make the EU27 blink first, and agree to an extensive free trade deal.

Two passages which went largely unnoticed in the hall and post-speech analysis suggest that May will be playing a game of chicken with the EU, daring the EU27 to erect trade barriers against the UK in retaliation for a unilateral withdrawal from free movement and the jurisdiction of the European Court of Justice. The prime minister said that when the Great Repeal Act is in force, Parliament will be free, “subject to international agreements and treaties with other countries and the EU on matters such as trade,” to amend or repeal “any law it chooses.” But because EU laws will now be British laws, thereby continuing after the date of formal Brexit, British businesses and workers will have “maximum certainty,” since the “same rules and laws will apply to them after Brexit as they did before.” If no agreement is reached by the date of Brexit—which will be in March 2019, since May announced that she would push the Article 50 button in March 2017—then Parliament will unilaterally repeal unwanted EU laws in a gradual process, remaining open to imports of goods, services and capital while imposing immigration controls—thereby daring the EU to erect barriers in response. The BBC’s Kamal Ahmed reported that government sources said they were thinking about "grandfathering" the present trade arrangements with the EU and then seeing what the EU's response is.

This strategy is an attempt to take back control over the Brexit negotiations. The EU has the upper hand, for three reasons. First, Article 50 says that if there is no deal at the end of the two-year negotiating period, Britain is out, unless the EU27 agrees to extend the deadline. Second, the Article 50 process only covers a divorce settlement, not an agreement about future trade relations with the EU, which must be agreed separately—and which will almost certainly take longer to agree than the two-year period. Third, this creates a potential cliff-edge for UK exporters, since if there is no deal, the EU’s common external tariff will be imposed on British manufacturers, and UK-based banks will lose their passports, which enable them to do business across the EU. The British government is essentially telling the EU: we won’t impose trade and investment barriers if you won’t give us a deal that allows us to end the free movement of workers. We dare you to impose them.

Theresa May’s gambit is also designed to face down opposition in the House of Commons and the Lords. The majority of MPs and Lords were against Brexit, and some Remainers have been demanding that Parliament be given a vote on triggering Article 50. The prime minister refuses to offer one, but the Great Repeal Bill gives Parliament the opportunity to vote down a measure that is necessary to minimise legal uncertainty, ensuring that EU laws with direct effect in the UK continue to be in force after March 2019 and will only be repealed slowly. The government is likely to win, since any insurrection by Remainers can be portrayed as Parliament refusing to take back control from EU institutions, and so defying the referendum result.

But the EU27 are far less likely to blink. The economic fallout from higher trade barriers will be far more onerous for Britain: 7 per cent of EU member-states’ exports go to the UK, on average, while nearly half of UK exports go to the EU. This makes the UK vulnerable to any decision by the EU to disallow the right of British exporters and financial institutions to do business in the EU, or to impose tariffs upon British manufactures. And the EU27 has made clear that it would not be afraid to erect these barriers. They do not see the City of London as a European asset, but as a source of foreign direct investment and tax revenues that could be repatriated to the continent. While German politicians do not want a hard Brexit, they will seek to keep the EU27 together, by forcing Britain to accept that the four freedoms come as a package, thereby signalling to populists in other member-states that EU withdrawal is costly.