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Empty threats? Britain’s Brexit negotiating chips

Construction cranes are pictured near Tower Bridge in London at sunrise on Wednesday. (AFP)
LONDON: British Prime Minister Theresa May on Tuesday outlined her Brexit blueprint, stressing the need for good relations with the EU but also warning that the bloc would suffer if no deal were reached.
May told European partners that a harsh approach in talks would be “an act of calamitous self-harm” that would make the EU “poorer” and could prompt Britain to slash taxes to attract businesses.
The government looks set to focus on the following key issues for leverage once negotiations get under way as expected later this year, but how much clout do they give Britain or are the threats empty?
Britain’s leading role in fighting terrorism in Europe and also fending off provocations from Russia through its hefty NATO contribution will be a crucial bargaining chip in the talks.
With incoming US President Donald Trump calling NATO “obsolete,” European leaders will be keen not to alienate the alliance’s second-largest funder, which has sent troops to the Baltics to counter Russian aggression.
“Britain is the intelligence superpower in Europe; we are critical to the defense of Europe from terrorist threats and we are critical to the military support of Europe,” Brexit Minister David Davis said on Tuesday.
However, The Times said that any move to reduce its security commitments would be politically “explosive” and May’s hand could also be weakened if the EU forges ahead with plans to integrate defense sources.
Britain’s vast finance sector contributed 11 percent of the government’s tax receipts in 2015, rendering access to European markets a crucial requirement of negotiations.
But Bank of England chief Mark Carney last week told MPs that the EU was also vulnerable to any trade barriers with the City of London, saying Europe relied on it for three-quarters of its foreign exchange activity, half of its lending and half of its securities transactions.
David Collins, professor of international economic law at London’s City Law School, told AFP that London’s huge capital reserves gave it “massive” leverage over the EU, but that erecting barriers restricting the flow of credit — a potential threat to precarious continental banks and governments — would be “a self-defeating... stupid strategy.”
The European single market is Britain’s biggest trading partner, accounting for around 44 percent of all exports, and leaving without a trade deal is expected to hit exporters with an average nine percent tariff, highlighting the urgency of striking a deal.
But Britain also runs a trade deficit of £68.6 billion ($83.6 billion) with the continent, meaning that although companies would face a European tax bill of £5.2 billion, the Treasury would receive £12.9 billion in import tariffs at current levels, according to independent think tank Civitas.
Critics say the EU could impose non-tariff barriers, such as regulations and red tape, to hamper British exporters.
Collins also warned that services, which make up around 80 percent of Britain’s economy, would not be covered by the World Trade Organization (WTO) rules that would determine the terms of trade in the event of no deal, adding: “That would be a problem.”
May warned that any attempt to punish Britain for leaving the EU would result in Britain “changing its economic model.”
“We would be free to strike trade deals across the world and we would have the freedom to set the competitive tax rates and embrace the policies that would attract the world’s best companies and biggest investors,” she said.
Britain would be within its rights to slash taxes, but EU Brexit negotiator Guy Verhofstadt called the threat a “counterproductive negotiating tactic” while British opposition Labour leader Jeremy Corbyn said it “demeans her office and our country’s standing,” highlighting the domestic political risks of such a move.
May has already offered other EU leaders to guarantee the rights of EU citizens currently residing in Britain in return for a similar agreement for British citizens in the EU, but was rebuffed.
“Many of them favor such an agreement — one or two others do not,” she said.
There are estimated to be around three million EU nationals living in Britain and over one million British nationals living in other parts of the EU.

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