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What is Brexit: Understanding Theresa May's Proposed Brexit Deal Between UK and the EU

Professor of Financial Economics and Part-time Value Investor, Transfin.
Nov 19, 2018 6:00 AM 3 min read

British Prime Minister Theresa May gained her Cabinet's approval for a Brexit deal last Wednesday, technically moving the battle away from the Government to the Parliament.


May’s government however remains starkly divided on the 'draft withdrawal agreement', which encapsulates her proposal defining the shape and form of Brexit, at least from the UK’s perspective.


Dominic Raab, the Brexit Minister and Esther McVey, her Work and Pensions Secretary have resigned. So, have several of her junior Ministers. MPs are openly declaring their opposition to the agreement.  


[Listen in from 17:00 onwards to learn more on the potential consequences of a No Deal Brexit]


With the deal now due to hit the British Parliament for approval (where May lacks a lower house majority) before being presented to EU leaders for further negotiations and seek consent of all 27 Member States – there is no dearth of roadblocks!


Considering the draft agreement represents at least a specific proposal to structure the Brexit deal, we thought it may be worthwhile to try better understanding this key covenant, irrespective of its chances to go through unscathed.


The deal assumes a “transition period” till December 2020.


Both UK and the EU (excl. UK of course) would aim to forge a trade agreement 6 months before the end of the transition period to drive future movement of goods and services.


If a trade agreement is not reached by then, the UK-EU could jointly extend the “transition period” or otherwise kick-off the “backstop plan”.


The backstop plan is the most controversial part of this agreement due to its conditionality on the Northern Ireland/Republic of Ireland border.


Due to the turbulent history between Northern Ireland (part of the UK) and Republic of Ireland (an Independent country and an EU Member State), the idea of a backstop plan was accepted to avoid a hard border between the two.


The main pillar of this plan is that the whole of UK would continue to stay in a customs union in case a trade deal is not finalized by the end of the transition period, implying the UK may continue to be a part of the European Single Market even post transition.


This is obviously against the very “principal” of Brexit.


Moreover, the UK won’t be free to withdraw from the customs union without the consent of the EU.


Thirdly, the UK won’t be allowed to pursue any free-trade deals with third party countries till it remains part of the customs union.


Last, the UK would be required to comply with all “level playing field” commitments (i.e. employment, environment standards, competition requirements etc.) of the EU as part of its customs union, without having any say in them.


London’s financial centre would only enjoy a basic level of access to EU’s markets.


London would have access to EU’s markets akin to the US or Japan, based on the principal of “equivalence”. This would be a much-diluted level vs. what Britain enjoys at present.


Free movement of people will be curtailed. Though EU citizens and their families would be able to live and work in the UK (and vice versa) until the end of the transition period, conditionalities would be applicable for those who come later.


There is not much clarity on those who take up residence after the transition except a separate non-binding political declaration which mentions potential arrangements for temporary entry for ‘business purposes’, short-term visits etc.


Zoom out: Some form of a residence document or visa would be needed by citizens of EU who move to the UK after December 2020 (and vice-versa).


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