A look into “A Definitive Guide to the Brexit Negotiations” in Harvard Business ReviewBy: Sadaf Alidad, MBA studentAlzahra University of Tehran, Oct 2016 https://hbr.org/2016/08/a-definitive-guide-to-the-brexit-negotiations

What is Brexit?� Brexit is an abbreviation for "British exit,” which

refers to the June 23, 2016, referendum whereby British citizens voted to exit the European Union

What does this article discuss?

�How will the UK and EU negotiate their split?

How does this article analyzethe split?

� examining important elements of the process,

� the key interests and issues to be negotiated,

� the leverage each side has,

� some of the barriers to reaching a deal,

� potential outcomes,

� and strategic options on both sides of the table.

What Is the Brexit Process?

Brexit means Brexit

What Are the Major Issues?

� Trade and Immigration

� Money paid to the EU

� Regulations

� Free movement of people

� Financial services

Trade and immigration

Trade and Immigration� David Davis:

� Donald Tusk:

Simply put, the UK wants to keep the trade relationship with EU members as it is today (free trade) but significantly change the rules surrounding the free movement of people between the EU and the UK. Roughly half of the immigrants to the UK come from the EU, and polls conducted in the run-up to the referendum suggest that over 50% of those who supported Brexit considered immigration their biggest concern.

Money paid to the EU

� Leave campaigners and supporters argued that the money saved through Brexit could be used elsewhere (e.g., to enhance the UK’s National Health Service)

� There is clear precedent for this stance. Norway, which is not a member of the EU, pays into the EU budget in order to have access to the single market. The precise amount that the UK would pay will have to be negotiated.

Regulations

� Leave supporters complained about onerous regulations imposed by the EU, including environmental standards, product safety rules, and minimum working conditions for employees.

First, many (perhaps most) regulations will continue because they or similar ones are important for the UK, even if the EU is not imposing them

Second, the EU could continue to impose certain regulations after Brexit in exchange for the UK’s access to the single market.

Free movement of people

� Millions of UK citizens live and work in Europe, and even the loudest proponents of Brexit want them to retain their rights

� Boris Johnson: “British people will still be able to go and work in the EU; to live; to travel; to study; to buy homes and to settle down.”

Financial services

� A particular concern for the UK in these negotiations is the fate of London’s financial services sector. It plays an outsize role in the broader EU financial industry, where it has a trade surplus of almost £20 billion with the rest of Europe.

Leverage:EU vs UK

EU Leverages:

The economics of trade.

� Leave supporters have made the argument that the UK will be negotiating from a position of strength because the EU exports more to the UK (around £290 billion) than the UK exports to the EU (around £220 billion).

� The argument is a flawed assessment of the actual state of economic leverage. The key is to look beyond absolute numbers and consider the percentage of total exports they represent for each party. While the UK exports a lower nominal amount to the EU, these exports represent about 44% of total UK exports. In contrast, exports to the UK are only about 10% of total EU exports. By this measure, a “no deal” (or a deal that hurts trade, to be more precise) is much worse for the UK than it is for the EU.

The need to deter future exits.

� This deal will be closely watched by nationalist parties in other countries. If the UK is able to negotiate terms that give it a better deal than it had when it was a member state, that could encourage additional exits, which could jeopardize the union’s very existence.

� Martin Schulz, president of the European Parliament, has stated, “There is no intention to ensure that the UK receives a bad deal, but it is clear that there can be no better deal with the EU than EU membership. The EU moreover must look out for its members’ interests and uphold its founding principles. The single market, for example, entails four freedoms (capital, goods, services, persons) and not three, or three and a half.”

EU Leverages:

� Too many veto players. It narrows the zone of possible agreement but also allows the EU to credibly say that the UK will have to make significant concessions to bring enough EU votes on board.

� The psychology of precedents. Although it’s a smaller factor than those listed above, the psychology of deal making is currently working against the UK. All of the precedents in place — Norway, Switzerland, and even Canada — instantiate the European claim that there can be no “sweetheart deal,” and that it is not possible to get access to the European market without serious conditions and contributions.

UK Leverages:

� Economic impact on the EU. Albeit less than what the UK stands to lose, the EU would lose financially in the event of a deal that is bad for trade (e.g., high tariffs). While this might not be sufficient leverage on its own, it does help to chip away at the problem for the UK.

� Influence over key players. Notably, a number of the most influential countries in the EU (such as Germany) are the ones that are most dependent on trade with the UK.

� How these relationships are managed and how they can be used to influence the Brexit negotiations with the EU will be crucial considerations for the UK.

UK Leverages:

� Security concerns. Everyone loses when the UK and EU drift apart on matters of security. And yet there are reasons that Europeans should take the threat to strategic cooperation seriously. The recent referendum shows a strong isolationist attitude in the UK, and the EU might want to consider the degree to which relationships might deteriorate if the eventual deal is perceived as one-sided (or punitive) by the British people.

� Timing of invoking Article 50. Only the UK can invoke Article 50. When everyone wants something that only you can provide, you have leverage. This raises the possibility of the UK agreeing to invoke Article 50 sooner in exchange for concessions

A Key Barrier: False Promises

The amount of money going to the EU was overstated;

The ability to limit contributions to the EU following Brexit was exaggerated;

The impact of immigrants on the economy was misstated;

The ability to control immigration after a deal was inflated;

And how much the National Health Service would benefit from a Brexit windfall was so inaccurate that the promise was walked back literally the day after the Brexit vote.

The problem of Scotland

What Are the Possible Outcomes?

� No deal = WTO rules. If no agreement is reached within two years and the EU treaties expire, the default is that the UK and EU would trade according to World Trade Organization rules.

� The Norway model. There already is a model in place for European countries that do not wish to join the EU but want access to the single market. Norway accesses the market through the European Economic Area. In exchange, Norway agrees to many conditions, including the free movement of people, most EU regulations, and financial contributions to the EU.

What Are the Possible Outcomes?

� Other national models. Other models to follow include those used by Switzerland and Canada.

� A unique UK deal. A one-of-a-kind deal is what the UK government will push for, but it would be foolhardy to think that any UK deal will ignore precedents or allow London to get all of what it wants without significant concessions in other areas.

� A partial deal. Any extension to the negotiations beyond the two-year time period will require unanimous consent from the 27 EU nations remaining. The UK and EU negotiators would be wise to wrap up whatever portions of a broader agreement they can before having things go to a vote on extending talks.

NO BREXIT!

� Not following through on Brexit after all. Currently this option is not on the table — but once you consider each side’s leverage and how difficult it will be to achieve a “good” deal (especially for the UK), negotiators might want to keep this option alive (albeit unspoken) as they assess their bargaining power and craft their strategy.

In Conclusion

� The worst mistake either side could make right now is to take aggressive unilateral steps to improve its bargaining position without taking into account how this might cause the other side to escalate further.

� While EU leaders have seemingly ruled out any talks, however informal, before Article 50 is invoked, I find it hard to believe that back-channel conversations are not under way. (And if they are not, they should be.)

Negotiating the Impossible

� So, even seemingly impossible situations can be handled well if negotiators:

1. stay cool,

2. prepare systematically,

3. strategize with an eye on all relevant factors,

4. have empathy for the needs and constraints of the other side,

5. and understand that the goal is not to “win” but to achieve their objectives.

THANK YOU!