The UK voted to leave the European Union, but that doesn’t mean it will leave right away.
To start the official exit process, the UK must first activate what’s known as Article 50 of the Lisbon Treaty (an agreement governing EU membership). It will take the UK roughly two years to exit the EU — and lose its benefits and laws associated with its membership. This means the UK will no longer be part of the European market and must negotiate a new EU trade deal.
The details of this trade deal could influence the long-term effects of the Brexit.
The EU’s sheer size gives it the upper hand in shaping the trade agreement, as does the fact that nearly half of British exports go to the EU (according to a British fact-checking nonprofit, Full Fact).
The UK’s actual trade agreement with the EU could also take far longer than two years to implement, according to a number of recent analyst notes. That’s because of the massive number of details involved with trade in a post-Brexit world: tariffs, regulations and immigration are just the big three.
What’s more, the Brexit campaigners may not have had an adequate plan for post-Brexit trade.
“In our view, the Leave Campaign did not offer a detailed version for the UK outside the EU in the campaign period before the vote,” commented HSBC analysts in a note Friday.
The EU may also not be incentivized to give the UK a good deal, given the rise of euroscepticism in other EU countries. After all, people all across Europe will be looking to this trade agreement as a model for what they could get if they leave the EU.
The UK’s current trade details with the EU may gives us a better idea of what to expect in the final trade agreement.
Open Europe, a think tank that did not take an official position on the Brexit issue, published a report examining the potential effects of Brexit a year ago. In that report, the think tank included a sector by sector breakdown of where British trade with the EU had the greatest risk of disruption, which can be seen below:
Pay close attention to the sectors the UK has a trade surplus with versus the sectors where the UK has a trade deficit. The EU is likely to make life more difficult for the former sectors, given the UK benefits more from that type of trade.
It’s clear that financial services are likely to be have harsher trade conditions attached to it in the future. Other analyst reports back up the likelihood of this prospect.
“The EU would be unlikely to offer the UK migration restrictions without some quid pro quo,” the previous HSBC analysts commented in their note Friday. “Most likely it would seek to limit the freedom of movement of capital and services, since these are areas where it potentially would have most to gain and the UK a lot to lose.”