U.K. Must Go Full Steam Ahead With Brexit in 2017
EU departure will bring strong growth, lower taxes, favorable trade
Early in 2017 U.K. Prime Minister Theresa May is expected to lay out plans for the nation’s departure from the European Union. Although leaving is not an easy process, when completed it will lead to more efficient regulation, higher GDP growth, and closer trade relationships with other countries, including the United States.
Steve Baker, Conservative Member of Parliament from High Wycombe and a leader of a group of pro-Brexit MPs, told me, “I’m excited to discover the possibility of the USA and U.K. catalyzing a new platform agreement for trade which works for everyone by promoting free and fair competition while defending against predatory practices. The opportunities are immense.”
In theory under EU rules, Prime Minister May cannot negotiate trade treaties with other countries until Britain triggers Article 50, calling for withdrawal from the EU. In practice, the EU can impose no meaningful punishment on Britain were it to negotiate such treaties in advance. Once Article 50 is triggered, the EU would begin to construct another agreement with Britain. Ratification of the new EU agreement would require 27 countries to approve.
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The simplest way of leaving the EU would be for Britain to voluntarily take up all EU laws at the time of departure, perhaps with a three-year sunset, and then begin a process of examination of these laws over the next few years. This would be faster than deciding which EU laws to keep and which to set aside before the agreement has been reached.
Britain is fortunate to be exiting the EU — one of the world’s most protected and defended markets, not by tariffs, but by regulations. What products can been sold, what level of safety of the products, what level of energy efficiency — all these and more are determined by EU rules formulated in Brussels.
For companies located within the system, it provides a vast internal market. Companies learn how to live by its rules. However, to be transformed from a company inside the EU to one outside is traumatic, and may well cause short-term problems. The adaptation from within to without is an extraordinary leap. U.K. companies are now having to make this adaption under an ambiguous time scale, under conditions that are uncertain. The new Department for Exiting the European Union cannot tell them, because it does not know. Business hates uncertainty.
For instance, a bank currently located within London might have to have a subsidiary within the EU. But what might seem to outsiders as a relatively simple step of opening such a bank takes two years of red tape. EU regulators will ask about the management, address, and even computer system of the new branch before beginning approval procedures.
The City would like a reciprocal arrangement by which EU regulators recognize British regulators and vice versa. That might be beneficial for both sides, and rational, because British financial regulators are some of the most respected in Europe and U.K. banks trade throughout Europe. Such reciprocal agreements would be rational, but it is in the interests of the EU bureaucrats to make life as difficult as possible for the U.K. so that other countries, such as Italy, do not follow Britain’s example and leave.
Some suggest that the British economy would be more stable if Britain were to stay in the EU. But the EU has substantial economic problems, with a weak banking sector, a low growth rate, underfunded public pensions, and swollen welfare obligations. Lack of control over its borders has resulted in more than one million refugees and economic migrants, some of whom are linked with ISIS and could be planning terrorist attacks, such as the recent one in Berlin. This is no recipe for stability.
In order to further stimulate its economy after departure from the EU, Britain is planning to cut the corporate tax rate from the current rate of 20%. While the new rate was originally going to be 17%, last month May said that it might decline to 15% or lower. That would give Britain the lowest rate of tax of the world’s 20 largest economies — unless President-elect Donald Trump gets his 15% corporate tax rate for America.
Next year will be noteworthy in many ways — and the Brexit negotiations will be at the top of the watch list.
This piece originally appeared on WSJ's MarketWatch
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Diana Furchtgott-Roth is a senior fellow and director of Economics21. She also serves on the transition team for President-elect Donald Trump. Follow her on Twitter here.
This piece originally appeared in WSJ's MarketWatch