LONDON — The most likely Brexit deal struck by the UK is the so-called “Canada-plus” option, according to Morgan Stanley’s UK economics team.
Morgan Stanley’s Jacob Nell and Melanie Baker base their conclusion on the contents of Prime Minister Theresa May’s momentous speech her Brexit plans on Tuesday.
Nell and Baker argue in a note sent to clients on Wednesday that Britain is now most likely to follow a deal similar to the Comprehensive Economic and Trade Agreement (CETA) signed by the EU and Canada at the end of 2016.
At its most basic level, the so-called “Canada-plus” Brexit would likely include many of the characteristics of CETA such as the removal of the majority of tariffs on goods, excluding certain parts of the UK’s services sector and some food items like eggs and chicken.
It would provide extensive access to the single market, but not include the immigration demands and budget contributions required of non-EU members in the European Economic Area like Switzerland and Norway.
Nell and Baker write in their note, titled “A Clean Brexit” (emphasis ours):
“There was a strong commitment to controlling EU immigration numbers and ending the jurisdiction of foreign courts (the ECJ was identified explicitly, but the approach sounded broader than this). Both of these make an EEA deal look much less likely and reduce the probability of a Norway like outcome (our Norway-minus scenario – as we had previously described in The Exit Negotiations). The explicit commitment to an FTA and willingness to entertain a no deal outcome (“no deal is better than a bad deal”) increases the probability of an FTA (like our ‘Canada-plus’ scenario) and a WTO outcome.”
Nell and Baker’s assumptions refer to a portion of May’s speech where she outlined the government’s priorities when it comes to trade. Britain’s commitment to free trade “starts with our close friends and neighbours in Europe. So as a priority, we will pursue a bold and ambitious Free Trade Agreement with the European Union,” May said.
“This agreement should allow for the freest possible trade in goods and services between Britain and the EU’s member states. It should give British companies the maximum freedom to trade with and operate within European markets — and let European businesses do the same in Britain.”
Morgan Stanley includes a useful flow chart of Brexit possibilities in its research, noting that the WTO option — where Britain drops out of the EU without a deal and defaults to WTO trade rules — is now more likely than ever following May’s assertion that “no deal for Britain is better than a bad deal for Britain.”
Here’s the chart:
Crucially, should Britain follow a similar agreement to CETA, the UK’s financial services sector would not be protected. That could mean the loss of vital “passporting” rights, one of the financial sector’s biggest concerns surrounding Brexit.
Banks currently have the right to “passport” their financial licences in one EU market to another, preventing them having to go through the costly and complicated process of being regulated in each market where they operate. Roughly 13,500 companies use financial passporting in relation to the UK with all types of businesses from newspapers to removals companies, all the way to a body that represents acupuncturists holding passports.
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