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Brexit does not provide a single major opportunity to improve the UK economy in the long term

tumbleweed empty desert
tumbleweed empty desert

Flickr / Mick_tn

LONDON — Prime Minister Theresa May is going to trigger Article 50 on Wednesday, starting the two-year negotiation process of Britain leaving the European Union.

Berenberg Bank, one of the oldest investment banks in the world, wrote a report for clients ahead of the trigger on how Brexit talks are likely to shape up. In it, the bank posed and answered the question: "Does Brexit create any opportunities for the UK?"

The answer is pretty simple — no. There's nothing that will provide a major positive effect on Britain's economy in the long term.

May is expected to trigger Article 50 on Wednesday around lunchtime. She is taking Britain towards a "hard Brexit" — shorthand for Britain leaving the European Union without access to the Single Market in exchange for having full control over immigration into the country.

"Beside some scope to strike new trade deals with non-EU countries, Brexit does not provide the UK with major opportunities to improve its long-term economic prospects," said Berenberg in its report entitled "Brexit: key issues as Britain heads for the exit." Even on the prospect of trade deals, the bank is downbeat.

Berenberg did identify some small windows of opportunity but argues that the chances of them working out well for Britain are very small. Here are the opportunities:

1. Britain could pursue its own trade deals

theresa may6
theresa may6

ReutersProminent business people that back Brexit have voiced their optimism for Britain's ability to forge ahead in creating new trade deals for itself.

Sir James Dyson, one of the world's most successful inventors, this week said he is "enormously optimistic" about Britain's trading landscape after it breaks away from the European Union because Europe accounts for only a small slice of over global trading.

"Europe's only 15% of the global market and the really fast-expanding markets are in the Far East. I'm enormously optimistic because looking outwards to the rest of the world is very, very important because that's the fast-growing bit," he said.

Berenberg says: "The UK could offset some of the Brexit costs by pursuing growth-friendly policies in other policy areas.

"Outside the EU, the UK would be free to seek trade deals that are most in line with its own economic orientation, ie focused on services. The nimble UK may even be able to conclude trade deals faster than the much larger co-operative multi-country EU."

But Berenberg also says we should not get ahead of ourselves (emphasis ours):

"But large economies have more to offer when negotiating trade deals and can thus secure better outcomes for themselves. Without the EU’s economic weight, the UK would be the weaker party in bilateral trade negotiations with large economies such as the US, China, Japan or India.

"Geography and size matter more for trade than trade deals. The EU is the UK’s major market, first, because it is so huge, and second, because it is so close. The EU27 will remain the UK’s biggest market long after Brexit. No combination of bilateral deals with far away non-EU countries can match a comprehensive trade agreement with the EU."

In other words, Britain faces an uphill struggle to end up with a trade deal that's as good as what we enjoy with the EU now after Brexit. The chances are we'll end up net losers.

2. Britain could relax regulation — but this could cost it trade deals

A child peers through a cut made in one of the stars that make up the European Union flag, during a support rally organised to mark the EU's 60th anniversary of the Treaty of Rome in downtown Bucharest, Romania, March 25, 2017.
A child peers through a cut made in one of the stars that make up the European Union flag, during a support rally organised to mark the EU's 60th anniversary of the Treaty of Rome in downtown Bucharest, Romania, March 25, 2017.

Inquam Photos/Octav Ganea/ReutersLeaving the EU would allow Britain to relax regulation to an extent. Onerous regulation and EU bureaucracy were reasons Brexiteers gave for supporting leaving the EU.

But Berenberg points out that the UK is actually one of the most relaxed countries when it comes to regulation (emphasis ours):

"Contrary to some media and Brexiteers’ claims that the UK is burdened with excess regulation – which it could scrap after Brexit – the UK is already one of the most lightly regulated economies in the developed world.

"This holds especially for areas where the EU has some influence on regulation, such as in labour and product markets. The UK is less regulated than most of its European counterparts and far less regulated than China and India. Although UK labour market regulation is not quite as lax as the US, there is little evidence that this is having a major negative effect. The UK labour market made a strong recovery from the post-Lehman crisis because of its high degree of flexibility."

If Britain does decide to relax laws even further, it could cost the country the trade deals it hopes to secure after it leaves the Single Market (emphasis ours):

"In addition, if the UK decided to materially alter or reduce its regulations in key areas such as labour market laws, product markets and financial services, it may run into trouble securing trade deals with other advanced economies. Trade agreements are intended to reduce the costs of doing business across borders.

"One way is to reduce or remove tariffs. Another is to harmonise product and business regulation. Knowing that one country’s goods and services can be bought and sold in another’s without checks and approvals brings down costs of business and boosts efficiency. That is how the single market works. For whatever parts of the single market the UK wanted to maintain access after Brexit, the UK would need to adhere to the EU common standards. The UK would not be able to influence those standards, since that is the exclusive right of EU members."

So, yes — there are a few opportunities available to Britain post-Brexit. But unfortunately, they look a lot worse than what it available as an EU member.

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