Theresa May will find it hard to forge a trade deal for Brexit Britain—but there may be a way forward

In some ways, May's struggle mirrors that of previous Prime Ministers. But the world has moved on since Macmillan's dealings with Europe in 1958

July 20, 2017
How will Theresa May get a "yes" on trade? Photo: PA
How will Theresa May get a "yes" on trade? Photo: PA

When Theresa May asked Parliament to trigger Article 50, she launched Britain into an unknown economic future. However, the strategic dilemma confronting May in her attempt to negotiate a comprehensive free trade agreement with an accompanying customs accord for post-Brexit Britain is, in part, familiar to that previous prime ministers faced.

In 1958, Harold Macmillan insisted that if the European Economic Community (EEC) states did not agree a free trade deal, he would withdraw British troops from western Europe. However, in the wake of the French president, Charles de Gaulle, terminating the trade talks, and the US pushing Britain to pursue EEC membership, Macmillan’s judgement turned defeatist.

By the mid-1980s, Margaret Thatcher believed Britain could change the nature of the European Community (EC) as a trading entity. The French push for monetary union, however, soon dashed her hopes.

After Black Wednesday in 1992, the euro-zone crisis exposed the divisions between the British and euro-zone economies and the question of whether Britain could enjoy the trade privileges of the Single European Market (SEM) at a politically tolerable price re-emerged. David Cameron was forced to confront the conflict between his government’s commitment to a sharp reduction in immigration, and the fact that the SEM tied free trade to constitutional-guaranteed migration rights through EU citizenship via free movement. Cameron was left to decide whether his government could absorb the domestic political price of ongoing membership if he could not secure reform of the SEM. The referendum result suggests that—as he did want Britain to retain its existing trade relationship—he should not have tried to find the answer.

Confronted with the imperative for Brexit created by that referendum, May has returned to Macmillan’s objective of securing a free trade agreement for Britain as an independent nation-state outside the continental union. In a number of ways, present circumstances are more propitious than those in 1958. Geo-politically, the stance of the US towards European integration is not what it was. Far from insisting, as President Eisenhower had done, that Britain would sooner or later have to surrender and join the EEC for security reasons, President Trump and his economic advisors appear to view the EU ambivalently at best, and Britain’s departure from the EU in relatively positive terms. For Trump, the EU is a means by which Germany advances its power, not—as it was for the first post-war American presidents—a means for checking any advancement of Germany.

A different economic world

Economically, the world is also fundamentally different: awash with debt, trade imbalances and competitive devaluations. In this world, an EU burdened with a debt-ridden currency union—in which the monetary manoeuvrings by the European Central Bank (ECB) required to sustain that union leave the euro structurally undervalued and increase the German trade surplus— is a source of instability. No-one occupying the White House can allow the dollar alone to take the ongoing strain of a weak euro. So long as maintaining the German trade surplus remains a raison d’état of German economic policy, Britain’s bargaining advantage in this increasingly conflictual exchange rate environment is precisely its long-standing economic weakness; namely, its large current account deficit.

It is also far from clear where any load-bearing source of EU unity can now lie. The euro-zone can only be patched up with more dysfunctionality until the next of any number of possible crises hit. Here, the fact that Britain has the world’s premier financial centre, and that most euro-zone borrowing takes place in London, matters. The ECB has to facilitate borrowing for the periphery states at rates far below what the risk of default would entail in market terms. If the EU states refuse to reach a substantial agreement on financial services, they will be increasing the costs of accessing the volume and liquidity of London’s capital markets, when small margins are acutely material to the euro-zone’s immediate future.

In terms of the sustainability of the euro-zone, it is one matter for the EEC to say that there must be a price to pay for Brexit, and another for the EU states collectively to be willing to extract it. If they have little faith that the euro-zone can be saved (and there are good reasons why they might), then they have little reason to think that various euro-zone member states could take the economic hit that would result from refusing to reach a trade agreement.

The EU has also grown accustomed to Britain’s substantial budget contributions. If the EU does not agree to a trade deal on terms any British government could accept, it then risks both eschewing some ongoing payments conceded to secure a trade deal, as well as the possibility that Britain walks away without meeting any of the money presently promised to the EU budget for 2019 and 2020, since there is no available legal or treaty mechanism by which previous financial vows can be enforced. Indeed, in principle, the British government could also demand the return of £9 billion of capital from the European Investment Bank (EIB), the claim to which is probably legally binding.

These realities do not necessarily mean that May can succeed, especially given the seemingly endless opportunities for those within the EU and Britain who don’t want a viable deal to engage in grandstanding confrontational rhetoric.

A possible future?

A scenario in which May did achieve a reasonably comprehensive agreement on goods and equivalences in financial services, and left Britain free to pursue other free trade agreements, would extricate Britain from the overriding trade disadvantage of EU membership, which lies in services.

Without the complications of the euro-zone and the budget, this issue would certainly create a strong incentive for the EU to insist on retention of the customs union as one price of a trade agreement. Here, if the EU states were to collectively decide that they can absorb the economic harm of ending the existing trading relations without even a transition agreement, they can run down the clock until March 2019, and make Britain pay.

Meanwhile, British politics is fraught. Although the election showed that Brexit certainly does not open up a renewed path to Scottish independence, there remains a strong anti-Brexit bloc at Westminster.

Most problematically, there is the matter of the Irish border, since the question of what kind of border will exist post-Brexit between Northern Ireland and Ireland is the exact same issue of what border there will between Britain and the EU. May’s position at Westminster in relation to her own party is also, of course, far from secure after her general election gambit failed.

The path that May wishes to walk will test— to possible destruction— Britain’s negotiating power about the terms on which it trades with its neighbours, free from any presumption that the country’s democratic domestic politics can be subsumed in a continental political union. Undoubtedly, she could lose badly; Britain could leave the EU without even an interim agreement, causing severe economic disruption. But there is a chance she will succeed where Macmillan failed and buy time with an interim agreement that would allow a comprehensive agreement after March 2019.

This is an extract from Helen Thompson’s essay, which is available in full in the latest edition of IPPR Progressive Review