Brexit Paints Cloudy Picture for United Kingdom Trade

Boris Johnson, the former mayor of London and vocal Brexit advocate published an op-ed in The Telegraph on June 26 in which he promised that the recent U.K. referendum will allow the country to maintain access to Europe’s single market while ridding itself of regulatory barriers and retaking control of its immigration policy. Unfortunately for him, this will be easier said than done.

Europe's single market allows tariff-free trade between member states and eliminates technical barriers. Members must support what are known as the four freedoms - the movement of goods, people, services, and capital - and submit to a plethora of regulatory harmonization measures. The free flow of people and regulatory autonomy were two linchpins of the Leave campaign in the Brexit vote.

According to Bloomberg, seven of the United Kingdom's ten largest trading partners are in the single market. One model for U.K. single market access could be that of Norway. Despite not being a member of the European Union, Norway maintains access to the single market as a member of the European Free Trade Area (EFTA). However, EFTA members submit to most E.U. regulations and also respect the free movement of people, which do not coalesce with Brexiteer promises of regulatory autonomy and immigration controls. Alternatively, the United Kingdom could negotiate a bilateral agreement, like the Comprehensive Economic and Trade Agreement (CETA) between the European Union and Canada. Either arrangement would be subject to intense negotiations with the European Commission.

Given anxieties of similar referendums across Europe, the European Commission will likely take a hard line in exit negotiations to send a message to other Euroskeptics. In a speech to the Bundestag, German Chancellor Angela Merkel warned that the United Kingdom could not retain access to the single market without respecting the four freedoms of movement. Merkel declared: “Whoever wants to leave this family cannot expect to shed all its responsibilities but keep the privileges.”

The financial services industry is among the sectors most threatened by the vote. London only maintains its status as a global financial hub because it offers financiers free access to the rest of Europe. Almost as soon as the results were announced, reports surfaced of financial giant Morgan Stanley preparing to relocate over 2,000 jobs from London to Frankfurt and Dublin. Although a spokesman for the firm denied these claims to Reuters, the rampant rumors illustrate the uncertainty that companies face.

Upon leaving the European Union, the United Kingdom would also withdraw from the 22 bilateral and five multilateral trade agreements to which the European Union is party. Although the country could negotiate its own deals, doing so would take years.

The Obama administration, for its part, has indicated that the United Kingdom would have to "go to the back of the queue" if it were to vote for independence from the European Union and approach the United States about a bilateral trade agreement.

The Brexit also strikes another blow to the Transatlantic Trade and Investment Partnership (TTIP) being negotiated between the United States and the European Union. With talks already stalled, the political distraction of Brexit may be too much. If completed and ratified, TTIP would constitute an unprecedented trade agreement between the world's two largest economies. Although European Trade Commissioner Cecilia Malmstrom asserted at the Atlantic Council on June 29 that TTIP talks did not fundamentally change her outlook on TTIP negotiations, Brexit will both realign EU priorities and divert her resources in a way that does not bode well considering the serious challenges that already exist. Throughout her speech Malmstrom spewed optimism that seemed more to echo E.U. talking points than to reflect a pragmatic analysis of the situation.

The final outcome of all these factors cannot be determined until the United Kingdom invokes Article 50 and formally withdraws from the European Union. With trade, however, uncertainty can be as dangerous as protectionism. Even if the United Kingdom can pull off a negotiating miracle, its economy will suffer waiting to see.