(Br)exit stage left?: The UK/EU divorce and trade implications for New Zealand

Brexit has a certain Humpty-Dumpty quality to it

The already-parlous state of the Brexit process has worsened this week, with a decision by PM May to delay the Parliamentary vote on the UK-EU Withdrawal Agreement in order to go back to the EU27 to seek a more palatable deal – an outcome which seems increasingly improbable – and an unsuccessful Tory leadership challenge. Where this leaves Brexit, and New Zealand’s export interests, is far from clear.

The UK is due to leave the EU in a little over three months’ time, with even earlier deadlines for getting the requisite legislative changes in place, but the path ahead – already murky – is now even more opaque than it was before.

Major Brexit developments this week

On Monday, the European Court of Justice delivered a judgment on the ‘Article 50’ process (the mechanism under which the UK formally leaves the EU next March), which confirmed that the UK can unilaterally withdraw its notification of departure from the EU. Previously it had been thought that the other EU member states would need to agree (with all of the tricky politics this would entail), so the Court’s ruling has been hailed as a victory by Remainers.

“…the path ahead – already murky – is now even more opaque than it was before…”

Separately, on Monday PM May postponed the scheduled vote in the House of Commons on the UK-EU Withdrawal Agreement. It had become clear that she would lose the vote by a “significant margin” (to use her own words), with opposition from hardline Brexiteer MPs and governing partner the Democratic Unionist Party, unhappy about the Agreement’s “backstop” element. The backstop would have acted as an insurance policy to prevent a hard border in Ireland, should the UK and EU fail to agree a new bilateral trade deal by the end of 2020, but would potentially have meant the UK remained subject to EU rules (and without a voice to influence them) indefinitely. The non-binding negotiated ‘Political Declaration’ on the future trade relationship, which accompanies the Withdrawal Agreement, had also attracted adverse reactions.

Dismal prospects for a more palatable deal

PM May immediately returned to European capitals to seek changes to the backstop, but it has been made clear to her that new negotiations are not an option. The Commission has signalled only a modest degree of flexibility on offer over how to facilitate UK ratification of the current deal.  Subsequently on Wednesday evening London time, PM May saw off a Tory leadership challenge. European leaders are reportedly preparing to welcome the result but also to rule out any significant concessions on the Brexit deal. She returns to Brussels for an EU Summit on Thursday.

Where to next?

The European Commission has indicated that it is stepping up planning for a “no-deal” outcome (that is, a scenario, in which the UK leaves the EU with no replacement bilateral arrangements in place).   Such an outcome is widely expected to do both short-term and longer-term damage to the UK economy and trade interests; the necessary infrastructure and systems for a UK operating outside of the Single Market and without any FTAs will not be in place by March, and at the very least, there will be severe disruption for a period – including potentially for New Zealand exports.

Uncertainty prevails. Possibilities include a second Commons vote in the coming weeks on a (perhaps slightly tweaked) Withdrawal Agreement; a second Brexit referendum; a Tory leadership contest and/or a General Election; or – most concerning of all – a no-deal outcome on 29 March.

Where does this leave the UK-NZ trade relationship?

What this means for trade with New Zealand and others, and for the future of an independent trade policy for ‘Global Britain’, is far from clear. It may be that Brexit is delayed or deferred for an as-yet-to-be-determined period, meaning that the status quo ante prevails for New Zealand exports; this would also mean, of course, that the UK is not in a position to negotiate potentially advantageous trade deals (see our recent report on a prospective UK-New Zealand FTA), and the current deeply unhelpful climate of uncertainty continues.

On the other hand, a no-deal outcome would free the UK’s hands to negotiate – and indeed would provide a compelling imperative to do so, for the UK at least – but whether others would want to engage, when so much remained unresolved with the EU, is another question entirely.

This post was prepared by Stephanie Honey, Associate Director of NZIBF.