In this article, we’ll analyse why the UK is likely to struggle to secure a post-Brexit deal with the European Union.
Specifically, we’ll analyse the dynamics of the British government and its ability to negotiate with the remaining 27 EU members. Furthermore, we’ll forecast what it could mean for GBP.
After you’ve read it, you’ll know why a ‘No Deal’ Brexit is likely and how you can capitalise on this situation in your trading.
Here’s what the article covers:
- The Weakness Of Theresa May
- Negotiating With The EU
- Why ‘No Deal’ Isn’t Necessarily Bad
The Weakness Of Theresa May
The markets have been focused on Brexit recently. In early June 2018, the British government published a White Paper. This explained its vision for Brexit, two years after the UK electorate delivered the ‘Leave’ vote.
Essentially, the White Paper outlined a ‘Softer Brexit’ vision. For example, the British government wants to establish a new free trade deal with the EU.
This would be achieved by the UK and EU agreeing to a ‘Common Rulebook‘ for manufactured goods. The reason for this is simple – the British government wants to make it easy for British businesses to trade with EU partners.
It also wants to introduce a Facilitated Customs Arrangement. This would see the UK apply EU tariffs to imports being shipped to the EU. For domestic imports, the UK would apply its own tariffs. This arrangement would allow an open border to continue to exist between Ireland and Northern Ireland.
However, this ‘Softer Brexit’ vision has caused political turmoil in Britain.
Firstly, Prime Minister Theresa May is facing a revolt in her party over these proposals. Keep in mind that the Conservative party has a strong euro-sceptic faction.
In fact, in the week following these initial Brexit proposals, we’ve seen two high-profile cabinet members resign from the British government, as reported by TIME.
The first was David Davis, the former Brexit Secretary. His resignation letter cited concerns over the amount of power that was being given away to the EU.
The second was Boris Johnson, the former Foreign Secretary. He cited similar concerns to David Davis. However, many political analysts believe Boris Johnson holds leadership ambitions of his own.
According to the Huffington Post, many Conservative MPs are waiting for Boris Johnson to challenge Theresa May’s leadership.
This is a primary reason why a ‘No Deal’ Brexit is likely. The diminished authority of Theresa May, plus the divided nature of the Conservative party, means this ‘Softer Brexit’ vision is already in trouble.
Negotiating With The EU
Lets’ presume for a moment that the UK manages to unite behind this ‘Softer Brexit’ vision. The next task would then involve persuading 27 EU countries to agree with it.
Remember, Brexit is set to happen in March 2019. It only leaves a matter of months for complex negotiations to take place. Clearly, this a significant diplomatic challenge.
Furthermore, the EU will also be acutely aware of Theresa May’s political vulnerability. Her weakened position could give the EU the confidence to be aggressive in its demands.
This is another reason why a ‘No Deal’ Brexit is likely to happen.
Why ‘No Deal’ Isn’t Necessarily Bad
While GBP is likely to face some downward pressure in the event of a ‘No Deal’ Brexit, it isn’t necessarily a bad outcome in the long-term.
One problem with Theresa May’s Brexit vision is that it hampers the ability for Britain to negotiate trade deals with countries outside of the EU.
Let’s look at the US as an example. During his recent visit to the UK, President Trump told The Sun that Theresa May’s Brexit would likely kill any prospect of a US/UK trade deal.
Why? Because the US finds complying with EU regulations problematic. By following a ‘Common Rulebook’ with the EU, the UK could inherit this problem.
But it doesn’t have to be this way.
A system could be adopted where Britain doesn’t align itself with any ‘Common Rulebook’. In this scenario, British businesses would be free to manufacture products that meet the requirements of a particular export market.
For instance, those businesses that manufacture products for the EU can continue to follow EU rules. However, businesses that export to the US could have the flexibility to follow US rules.
Some argue that trade tariffs could be introduced in this scenario. However, it’s likely many EU businesses will want to ensure frictionless trade with the UK continues.
Remember, the UK is a leading export destination for many EU businesses. Plus, the EU will likely want to avoid more trade hurdles for its businesses, considering the recent tariffs introduced by the US.
What Traders Should Monitor
Firstly, traders should closely monitor the movements of Boris Johnson. Should there be any hint of the former Foreign Secretary launching a leadership bid, the markets will experience volatility.
In particular, GBP is likely the face short-term downward pressure, as a change in leadership (especially to a Brexiteer) increases the likelihood of a ‘No Deal’ Brexit.
Why A ‘No Deal’ Brexit Is Likely
In this article, we’ve explored why a ‘No Deal’ Brexit is likely.
Particularly, we’ve explored the political hurdles facing current British Prime Minister Theresa May.
In addition, we’ve explained the difficulty the UK will likely have in negotiating a ‘Soft Brexit’ with the EU. We’ve also looked at how a ‘No Deal’ Brexit could make Britain agile in global trade.
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