While these are two of the major implications of Brexit, a number of other things could happen, and it’s worth watching how they play out.
First, there’s been a lot of talk about trade barriers since the EU is the most important market for U.K. goods. The theory is that any competitive gains from a cheaper pound would be negated by trade barriers that result from Brexit. It’s unlikely, however, that trade barriers will be the United Kingdom’s biggest problem. Even if the United Kingdom doesn’t negotiate well for access to the EU and reverts to World Trade Organization (WTO) rules, most goods would still be protected.
What is problematic is services. They’re not covered by current WTO rules, and they dominate U.K. exports, which, as I’ve noted, will likely decline. The uncertainties are asymmetrical, to say the least.
Also problematic is regulatory uncertainty. While the United Kingdom wasn’t a part of the euro, it was part of the European single market. As a result, many regulatory bodies, such as the European Banking Commission, are domiciled in London. Now, imagine what happens when a community’s banking regulator is not part of that community. It’s like the Federal Reserve setting monetary policy but entrusting Sao Paulo to execute it. That probably isn’t going to work well.
Finally, how does this all take place? As the United Kingdom unwinds its legislation, it then has to rewrite it, chapter by chapter. And debate it in Parliament.
It also has to negotiate trade deals, and the United Kingdom hasn’t had to do that since 1973 because the EU has done so. Now the United Kingdom has to build an entire department, staffed with experienced people, and do so quickly, because it’s going to have to negotiate at least 53 bilateral trade agreements (how many the EU has).
And all of this has to happen within the next two years. That’s a very tall order when you consider that the EU-Canada trade agreement now in effect took seven and a half years to negotiate.
In fact, it’s nearly impossible that this will all happen in two years. What will most likely happen is that the United Kingdom will seek to replicate EU legislation, which leads to the somewhat obvious question: Why leave the EU in the first place?
Olga Bitel is an economist at William Blair.