Vast swaths of the British and European economies are structured specifically to take advantage of the open single market.JUSTIN TALLIS/AFP / Getty Images
Britain and the European Union may find they are inescapably bound by trade even as they negotiate a political divorce.
With the Brexit vote done, experts are turning their attention to the complex range of trade options facing the two sides.
The various possibilities include a unilateral decision by Britain to eliminate most barriers to imports; Norwegian-style membership in the European common market without a say over how it's run; or a fractious return to a steep tariff dike dividing the English Channel.
"After the shock wears off, the two sides are going to have to find ways to co-exist that preserve existing arrangements, as much as possible," argued Matthew Kronby, a partner at law firm Bennett Jones and Ottawa's former lead lawyer in the Canada-EU free-trade negotiations.
"The extent of the ties that have developed between the United Kingdom and the continent since the 1970s are such that it's hard to imagine why both sides wouldn't decide that it's in their best interests to be constructive about what comes next," he said.
Barring the negotiation of a new trade deal, the two sides would revert to treating each other as they do most of the rest of the world. That would mean significant tariffs, restrictions on the movement of labour and a host of other trade restrictions that are allowed under World Trade Organization rules.
The problem is that vast swaths of the British and European economies are structured specifically to take advantage of the open single market. More than 80 per cent of vehicles made in Britain, including at large Toyota and Nissan plants, are sold in the rest of Europe and assembled with parts from around the world.
London's massive financial sector is also heavily dependent on banks, fund managers and insurers being able to sell their services across the 28-country EU. A chunk of that industry could relocate to Paris and Frankfurt, the other two major financial centres in the EU.
HSBC has already warned it will move 1,000 of its British employees to Paris if the country leaves the single market. Other major companies are reportedly doing the same.
"Both sides are going to realize the benefits of having a more integrated trade relationship that goes well beyond what you see at the WTO," said John Boscariol, a trade lawyer at McCarthy Tétrault in Toronto.
Britain has a large and growing goods trade deficit with the EU – £24-billion ($41.5-billion) in the first quarter – but that's partly offset by a large surplus in services. Slightly fewer than half of British exports went to the EU last year, while goods from the EU make up 54 per cent of its imports.
The most discussed model for what happens next is Norway, which voted not to join the EU in a 1994 referendum but negotiated its way into the common market anyway. Norway, along with Iceland and Liechtenstein, are members of the European Economic Area. Norwegians pays hundreds of millions of euros every year to trade within the barrier-free zone. It has also adopted many EU rules and regulations, including the commitment to the free movement of goods, services, labour and capital.
And it gets no say in how the EU is run because it isn't a member of the governing European Council and doesn't elect members of the European Parliament.
"They [Norwegians] make pretty significant financial contributions to the EU, without a whole lot of say over what the EU does," Mr. Kronby pointed out. "In some respects, it's the worst of all possible worlds."
Another option for Britain would be to exit the EU, but move to unilaterally remove tariffs and trade barriers with Europe and the rest of the world and seek to negotiate free-trade deals with other key trading partners such as the United States, Canada and major Asian economies, including China, Japan and India. This would help reassure nervous investors that Britain won't be cut off by potentially destructive trade barriers as the two sides enter what could be years of legally and politically tricky negotiations.
"The more it gets drawn out, the worse it is for the United Kingdom," Mr. Boscariol said.
Another possible option would be a Norway-lite model in which the two sides agree to continue a close trading relationship, but without the free movement of people – one of the most contentious aspects of the EU for many of the voters who supported the Leave campaign.
While a reversion to WTO rules would impose a significant economic hit to Britain, unilateral trade disarmament would leave the country nearly where it is now, according to a 2015 study by Canadian economist Dan Ciuriak for Open Europe, a London and Brussels-based think tank. A full Brexit, on the other hand, would lead to a permanent 2.8-per-cent reduction in gross domestic product for Britain by 2030 and pain spread through the rest of the EU, the study says.
Any negotiations would be long and difficult, involving more than just Britain and the EU. The EU is party to 36 trade deals with 50 other countries plus its still-unratified agreement with Canada. Britain would likely have to renegotiate or abandon all of these deals.