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Brexit will continue in all likelihood. At the same time, the United Kingdom probably will exit the European Union's single market. Keeping Northern Ireland in the customs union may be the only way to solve the Irish border question, but this is a scenario London will try to avoid. A comprehensive free trade agreement is the most likely outcome of the Brexit negotiations. Even the failure to reach an agreement would be a stepping stone for a trade agreement down the line.The United Kingdom's exit from the European Union, set for March 2019, is less than a year away. The Brexit negotiations include two parts. The first is a withdrawal agreement, to establish the terms of the United Kingdom's departure. London and Brussels expect to finalize this agreement by October. The second part is an agreement on the future trade relationship. The United Kingdom is seeking a comprehensive free trade agreement with the European Union, but such a deal can be signed only after Britain leaves next March because the European Union cannot sign trade agreements with a member state.
In recent months, most of the provisions of the withdrawal agreement have been decided, including the future of British contributions to the EU budget and the status of EU citizens living in the United Kingdom and of British citizens living in the European Union. London and Brussels also agreed that Britain will remain in the EU single market during a transitional period until December 2020. However, a crucial part of the withdrawal agreement — the one about the future of the Irish border — remains contentious. This in turn will influence the negotiations over the future trade relationship between the European Union and the United Kingdom.
The Big Picture
Stratfor's 2018 Annual Forecast noted that the United Kingdom and the European Union would spend most of the year discussing Brexit terms and their future trade relationship. While there are many unanswered questions regarding Brexit, the strategic needs of the European Union and the United Kingdom make some exit scenarios more probable than others.
Brexit Is Happening
Broadly speaking, there are six scenarios for the future of the Brexit process. The first is there is no Brexit. This is the least likely scenario because while the United Kingdom's two largest political parties, Conservative and Labour, have different views of the terms under which the country should leave the European Union, they agree that Brexit has to happen. For Brexit not to occur, a series of major political events would have to take place before March 2019: leadership changes in the Conservative and Labour parties that significantly alter their positions on Brexit, for example; or a general election that leads to a surprise result, such as the victory of the anti-Brexit Liberal Democrats, who currently are polling at 7 percent; or a second referendum, which neither the Conservatives or Labour supports.
The second scenario is for the United Kingdom to remain in the EU single market, the area where goods, people, capital and services move freely, after the end of the transition period in 2020. This scenario would be the least disruptive economically, but it would force the United Kingdom to accept EU migrants, make contributions to the EU budget and remain subject to the European Court of Justice. As a result, the Conservatives and Labour oppose remaining in the single market. A decision to stay would involve a drastic change of direction halfway through the Brexit process, and most of what's been negotiated so far would have to be scrapped. Such a radical change in the British government's strategy is unlikely without a major political event, such as an early election during which Labour or the Conservatives change their minds on the single market, or there is a significant change of heart by the British public. Just like the first scenario, this one is also improbable.
Customs Questions
A third scenario would involve keeping the United Kingdom in the EU customs union, the area where member states share the same external tariffs for imports, after March 2019. This option would exempt the United Kingdom from accepting EU migrants, making payments to the EU budget or being subject to the European Court of Justice. It also would allow for the Irish border to remain open, because the United Kingdom and the European Union would be sharing the same external tariff for products entering their markets and there would be no need for border controls.
Prime Minister Theresa May's government has rejected remaining in the customs union, promising instead to retain a regulatory "alignment" with the European Union. But there are several things that could make it change its mind. For example, a rebellion including Labour and pro-remain Conservative parliamentarians could force the British government to keep the United Kingdom in the customs union. Alternatively, the government could reach the conclusion that keeping the Irish border open is the most important of all its Brexit goals and that remaining in the customs union is essential for the United Kingdom to preserve its trade ties with the Continent.
But should the United Kingdom remain in the customs union, it would not be free to sign its own trade agreements with other countries. This would put the United Kingdom in a situation similar to Turkey, which has to open its market to those countries with which the European Union has free trade agreements, without having a say in those deals. This would involve a significant concession of national sovereignty by the United Kingdom, something hard-line Brexit supporters find unacceptable. While the European Union may allow the United Kingdom to participate in its free trade negotiations with other countries or blocs, Brussels is unlikely to give London veto power over the final deals. As a result, the United Kingdom is unlikely to accept an agreement that forces it to accept trade deals it cannot influence.
Alternatively, Britain could agree to keep only Northern Ireland in the customs union, while the rest of the United Kingdom exits it. This may end up being the only option that solves the problem of the Irish border, especially if the United Kingdom fails to convince the European Union of the benefits of regulatory alignment and the use of technology to keep the border open. From the European Union's point of view this is the default alternative if no other solution is found. While this would solve the Irish question, it would come at a high political price for the United Kingdom. This basically involves the United Kingdom granting a different legal status for Northern Ireland, where different tariffs and trade regimes apply. The United Kingdom has dealt with devolution before (Scotland was given its own parliament in the 1990s, for example), but granting a special status to Northern Ireland would involve fragmenting the United Kingdom's internal market and opening the door for a potential reunification of Ireland. Moreover, it could reignite calls for Scottish independence. This scenario would involve significant political massaging by the British government, which would have to present this as a victory for the United Kingdom rather than as a first step toward its dissolution.
From No Deal to a Deal
The fifth scenario would be a no-deal situation. This could happen in March 2019 if the parties fail to reach a withdrawal agreement, or in December 2020 if the transitional period ends without an agreement on the future trade ties. Several things could lead to such a situation: London and Brussels could fail to reach a deal; they could reach a deal the British Parliament later rejects; or the British government could be replaced by hard-liners who withdraw from the negotiations. Both the European Union and the United Kingdom stand to lose in this scenario. A no-deal situation would be particularly damaging for the British economy; it also would have a negative effect on Britain's main trade partners in the European Union, such as Germany and the Netherlands. Because of the strong trade ties between the European Union and the United Kingdom, this no-deal scenario probably would be temporary, because at some point the parties would be interested in going back to the negotiating table to discuss a free trade agreement. In other words, a no-deal Brexit would probably be a stepping stone toward a free trade agreement down the line.
All things considered, a free trade agreement emerges as the most probable outcome of the Brexit negotiations. Remaining in the customs union probably would force the United Kingdom to surrender its trade policy to the European Union, while membership in the single market would force it to accept the free movement of workers or the jurisdiction of the European Court of Justice. The European Union, in turn, has warned London that it cannot access some parts of the single market (for example, the free movement of services) but not others (most notably, the free movement of people). This leaves a comprehensive free trade agreement that covers most goods but probably a limited list of services as a probable outcome of the Brexit process. Negotiations can start before March, but the final deal can be signed and ratified only after the United Kingdom formally leaves the European Union.
This scenario would still require significant arrangements between the European Union and the United Kingdom, including regulatory alignment, customs cooperation and the use of technology, to keep the Irish border as frictionless as possible. The free movement of people should be easy to preserve, because the Common Travel Area between the United Kingdom and Ireland (an agreement that predates the European Union) can remain in place. The movement of goods, on the contrary, may require some soft controls that involve technology. Because Ireland probably will reject this situation, at least initially, the trade negotiations could continue well beyond the official Brexit date of March 2019 and consume most of the transition period. An extension of the transition period to buy more time for negotiations cannot be ruled out. Over time, the Irish settlement could lead to increasing tensions in Northern Ireland and growing demands for a unification referendum.
The Wild Cards
While the six scenarios presented here are the most logical, there are many wild cards that could disrupt the Brexit process. For example, a return of violence in Northern Ireland could force the United Kingdom and the European Union to change their positions in the name of peace, making London more willing to keep Northern Ireland in the customs union or Brussels more accepting of the use of technology and regulatory alignment to keep the border open. At the same time, a massive campaign for Irish reunification could change the political agenda and make the border question irrelevant, because the United Kingdom and Ireland would now be dealing with the prospect of a united island.
At the same time, another financial crisis in the eurozone, or the escalation of a trade war between the European Union and the United States, could make the European Union more willing to accept a comprehensive free trade agreement with the United Kingdom to solve the Brexit question as fast as possible. Conversely, Spain could use its veto power to extract concessions over Gibraltar, or divisions within the European Union could prevent it from ratifying whatever agreement is reached. Either of these scenarios could lead to a no-deal situation. But barring any of these extraordinary events, Brexit is likely to be a complex and protracted process that extends well beyond the official deadline of March 2019.
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