U.K.'s May Faces Pressure to Soften Brexit Approach

By Laurence Norman and Valentina Pop Features Dow Jones Newswires

Pressure is mounting on U.K. Prime Minister Theresa May to seek closer ties to the European Union after Britain leaves the bloc in March 2019, following her election setback last Thursday.

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Some senior Conservatives say the party's loss of its parliamentary majority in last week's vote was, in part, a rejection of Mrs. May's insistence on a clean break with the EU. They say the government will struggle to pass legislation needed to prepare Britain for exit without a change in approach.

Ruth Davidson, the influential leader of the Scottish branch of the Conservative party, said last weekend the government should look again at its Brexit approach and "move to a consensus within the country about...what we seek to achieve as we leave."

Yet for Mrs. May, there are no easy alternatives. Whether she seeks to maintain closer economic ties with the EU or simply drops her threat that no deal is better than a bad deal, there are risks involved.

For now at least, Mrs. May is suggesting her pre-election Brexit plans are unchanged. She says her government is ready to start negotiations with the EU team next week as planned, although no date was agreed during discussions in Brussels on Monday.

Her plan is for Britain to leave the EU's single market of goods and services, a zone of common regulation that allows a British company to operate and sell its products across the bloc.

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Mrs. May has also pledged to take the U.K. out of the EU's customs union -- which imposes zero tariffs on trade among EU members and a common set of tariffs on imports from nonmembers -- although she has said she is open to a future U.K.-EU customs union arrangement. She also wants an end to the jurisdiction of EU courts over British laws and regulations.

In the short-term, the least economically disruptive alternative would be to remain in the single market either inside the customs union or, like Norway, outside it.

The Norway model has delivered strong economic benefits, yet it would require Britain doing two things Mrs. May has ruled out: maintaining freedom of movement of EU citizens into the U.K. and continuing large budget payments to the EU.

It would also continue to give EU courts a key role in shaping British rules. In other words, Britain would have to accept some of the least attractive parts of EU membership while surrendering any influence over the bloc's direction.

"Make no mistake, the Norway option is not going to be an easy sell to euroskeptics, and has never been seen by Brussels as a credible model for the U.K.," said Mujtaba Rahman, Europe director with Eurasia Group, a London-based consultancy. "Norway...pays into the EU budget amounts that would basically be the same were it a full EU member."

Another alternative would be to leave the single market but seek customs-union membership. That would ensure Britain retained the benefits of the EU's 38 regional and bilateral trade deals and nullify one of the biggest risks from Brexit -- the imposition of EU tariffs and onerous customs checks on U.K. imports and exports to the EU.

It would also help resolve one of the thorniest issues sparked by Brexit: how to avoid a hard border in Ireland -- which is a specific pledge of the Northern Irish Democratic Unionist Party that looks set to enter an agreement to prop up a minority Conservative government. If Britain is in the customs union, major customs checks on the border with the Republic of Ireland won't be needed.

But staying in the customs union would thwart perhaps the strongest economic argument used by Brexiteers: It would prevent Britain from being able to negotiate and sign its own trade deals. The U.K. would have to continue to apply the common external tariff and rely on Brussels to negotiate new trade deals. EU courts would also likely continue to have oversight of U.K. rules and regulation.

There are two other options for the U.K. One would be to join the European Free Trade Association, an organization Britain helped found. That could offer some economic protection by allowing Britain access to EFTA's 27 trade deals covering 38 countries while also allowing the U.K. to start negotiating its own trade deals. Yet it isn't clear if EFTA would take Britain back and, in any case, it could take some time for Britain to have full access to those deals.

Most significant, the benefits in terms of new export markets would be relatively small compared with the EU single market and EU trade deals. That is why three of EFTA's four members -- Norway, Iceland and Liechtenstein -- all joined the EU's single market. Switzerland didn't, though it has some benefits and obligations of the single market through bilateral deals with the EU.

Mrs. May could also drop a stance she repeated before the election, that "No deal is better than a bad deal," which would signal a commitment to some kind of agreement during the two-year Brexit talks.

There is also one other option Britain could push: negotiating a long transitional agreement with the EU which allowed one of these alternative models to stand for a number of years before Britain fully exited.

That looks difficult. EU officials and lawmakers have said any transitional deal should be short-lived, no more than three years, according to the European Parliament.

--Jason Douglas in London contributed to this article.

Write to Laurence Norman at laurence.norman@wsj.com and Valentina Pop at valentina.pop@wsj.com

(END) Dow Jones Newswires

June 12, 2017 13:32 ET (17:32 GMT)