Theresa May Walks Brexit Tightrope after Two Senior Officials Quitted, Key Dates ahead

While the optimists suggest that the latest political turmoil in the UK has increased the chance of a “soft” Brexit which is positive for UK’s economic outlook and the British pound, we see ongoing uncertainty in the negotiations with the EU. Pro-Brexit Dominic Raab has replaced the David Davis as Brexit Secretary, while Pro-Bremain Jeremy Hunt would assume the role of Foreign Secretary, replacing Boris Johnson. The new appointments exemplified the contining tug of war between the Brexit and Bremain camps. While British pound has stabilized after volatile trading in the aftermath of the resignations, we expect risk to skew to the downside.

In short, the “Chequers Plan” agreed upon last Friday would keep the UK effectively in the EU Customs Union and the Single Market for goods, but not services. Meanwhile, although PM May had pledged to end European Court of Justice’s (ECJ) jurisdiction, the role of which would be assumed through a joint reference procedure and a joint Committee. The arrangements signal that the government has leaned towards a “soft” Brexit. While a similar approach has been revealed in PM May’s “facilitated customs arrangement” released ahead of the Chequers meeting, it is the first time that “soft” Brexit is adopted as a government stance.

BBC summarizes the plan as follows:

1. The UK would accept continuing “harmonisation” with EU rules on the trade in goods, covering only those necessary to ensure frictionless trade
2. Parliament would have the final say over how these rules are incorporated into UK law, retaining the right to refuse to do so
3. There will be different arrangements for trade in services, including financial products, with greater “regulatory flexibility” and “strong reciprocal arrangements”
4. Freedom of movement as it stands will come to an end but a “mobility framework” will ensure UK and EU citizens can continue to travel to each other’s territories and apply for study and work
5. A new customs arrangement will be phased in, with the goal of “a combined customs territory”
6. The UK will be able to control its own tariffs and develop an independent trade policy
7. The jurisdiction of the European Court of Justice will end but the UK will pay regard to its decisions in areas where common rules were in force

There is significance of the resignation of two top-level officials. This could mobilise pro‐Brexit Tories to act against PM May, leading to a leadership challenge. 48 Tory members of the parliament (MPs) are needed to trigger a vote of confidence in PM May. This is achievable as there are about 60 pro-Brexit hardliners in the parliament. However, it is not likely that PM May would lose as 159 votes are needed to actually remove her from power. Just as pro-Brexit Tory MP Jacob Rees Mogg has noted, it is unlikely to be a success to hold a confidence vote on the prime minister for now. Indeed, many MPs remain hesitant to kick PM May out for now. They could hardly find a viable alternative for the PM position to her. Moreover, the party rule that only allows Tories to hold the vote of confidence once every twelve months has suggested that they prefer to reserve this “right” for the most critical moment.

If PM May manages to survive the crisis, she could be in a better position to push her “soft” Brexit plan. The next challenge lies in the negotiations with the EU. We expect the UK would need more concession in order to reach a trade deal with the EU. For instance, we doubt if EU would accept the current proposal of adopting a common rulebook only for goods, but not services, with the option of diverging later. So the dilemma remains: if UK seeks to get a better trade deal, it has to make more concession to the EU. However, more compromises would trigger harder resistance from the pro-Brexit camp.

Important Dates for Brexit Negotiations:

• 18 October 2018: The key EU summit. Both sides hope to agree outline of future relations to allow time for UK parliament and EU members to ratify deal by Brexit day
• 13 December 2018: EU summit. If deal not done by October, this is the fall back option if the two sides still want to reach agreement
• Commons and Lords vote on withdrawal treaty – MPs could reject the deal but it’s not clear what would happen if that is the case
• The UK Parliament also needs to pass an implementation bill before Brexit day
• 29 March 2019: As things stand, deal or no deal, Brexit is due to happen at 11pm UK time
• 31 December 2020: If all goes to plan a transition period will then last until midnight on this date