Barnett and Company

Brexit Has Happened: Now What?

Buried in the news cycle swirl of impeachment and the coronavirus scare, something truly historic occurred last week that went nearly unnoticed in the US. After 47 years of association, Great Britain officially departed the European Union on January 31. The full impact of this momentous action has yet to be realized, but it is certain to alter the global political and trade landscape.

“Brexit”, a portmanteau of “Britain” and “exit”, is the shorthand term for the decision taken in a 2016 referendum throughout Great Britain on whether to stay in the broader European Union or to depart and go its own way, divorced from the economic and political confederation of 27 other countries in Europe. By a slim majority of 52% to 48%, the proponents of leaving the Union prevailed, setting up a contentious three-year deliberation on just how to accomplish such a disruptive action. With the election of Prime Minister Boris Johnson, a plan was finally adopted and a deal hammered out with the EU to grease the skids for Brexit this year. The devil, as they say, is in the details.

The agreed framework establishes an 11-month transition period to allow for wrangling over myriad details ranging from tariffs and border security to mutual defense and political cooperation. In the interim, until December 31 of 2020, nothing changes. This interregnum is intended to provide time for the UK to conduct negotiations with the EU and with its other trading partners in anticipation of the final exit. And there is much to discuss.

The European Union treaty, the successor of the 70s-era European Economic Community, essentially eliminated trade barriers among the various EU countries. Britain will now have to establish new trade agreements with the Union and individually with all of the EU’s trading partners (including the US). Barring a definitive agreement by year-end, Britain will revert to the default rules under the World Trade Organization, which includes various tariffs and barriers not currently encountered. This would have a distinctly negative impact on UK economic growth if allowed to occur.

Another important aspect of the EU treaty is free travel and commerce across borders of member EU nations. The UK must now negotiate new immigration and border control protocols with the Union to maintain the robust traffic between the UK and the rest of Europe.

The decision to leave was not without significant controversy. Those who voted “leave” were expressing frustration with the aggravation of EU over-regulation and the perceived loss of national sovereignty regarding issues of immigration. But overwhelming majorities in Scotland and Northern Ireland voted against Brexit, setting up the potential for heightened internal political conflict within the UK.

The situation in Ireland is especially complex. Northern Ireland, as part of the UK, will leave the EU, but the independent Republic of Ireland in the south will remain a member. This presents a particular conundrum, since the formerly open border between the two would now be closed. Part of the agreement with the EU includes moving the “customs” border to the Irish Sea, so that Northern Ireland remains part of the EU with regard to transshipment of goods but part of the UK with respect to all else. This bizarre arrangement also suggests the possibility that imports from England to British Northern Ireland would now cross the EU border and would therefore require a separate treaty. You can’t make this stuff up.

It is clearly in the interest of all parties to quickly negotiate separate trade and security treaties with Great Britain in the wake of Brexit. But without doubt the process will be messy.

Christopher A. Hopkins, CFA

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