By Stephen Fidler

The U.K.'s aims in its negotiations with the European Union over Brexit remain a mystery, as Ivan Rogers made clear when he quit this week as British ambassador to the bloc.

Setting negotiating objectives is still a long way from Britain's settling the future relationship: The remaining 27 governments in the EU have a say too. But some likely outcomes are evident before divorce talks start in earnest later this year.

1. Unless Prime Minister Theresa May reverses her pledge to the Conservative Party conference in October, neither Norway nor Switzerland will be the model for future U.K.-EU ties.

That rules out membership in the European Economic Area, possibly the least economically disruptive version of Brexit, in which the U.K. would stay inside the EU single market.

Mrs. May hasn't ruled out continuing membership in the EU's customs union, which would mean staying within the bloc's common external tariff. But that would be inconsistent with her promises that the U.K. wouldn't be subject to the rulings of the European Court of Justice, the EU's top court, and would be free to negotiate trade agreements with other countries. If so, customs-union membership would be possible only as a short-term staging post.

2. As a result, the prospect is very dim that U.K. financial firms will be able to rely for the long term on so-called passporting rights that allow firms based in one country to do business across the bloc.

3. To avoid a hard landing after Brexit, the U.K. will likely need a transitional arrangement of some kind with the EU.

There is no escaping the fact that any future EU-U.K. trade agreement can't be fully negotiated -- let alone ratified by more than 30 national and regional parliaments in the EU -- in the two years allowed for the divorce negotiations.

If a trade deal is in prospect but not completed, both sides will likely want to avoid a tariff spike. But negotiating a transitional deal, along with a divorce, won't be simple and both sides have reasons to ensure any transition is as short as possible.

4. Whatever happens with the transition, it will be a long time before the U.K. escapes EU regulation. In the first place, Mrs. May has announced the entire body of EU laws will be copied and pasted onto the British statute books. Only over time, therefore, will U.K. laws diverge from EU legislation.

Yet even as they do so, any company selling goods or services into the EU, which takes 45% of U.K. exports, will need to comply with EU regulations. The U.K. can set its own product regulation and standards but exporters won't be able to ignore EU rules. Likewise, financial firms would only be able to perform business across the EU if the U.K. is deemed by the European Commission to have regulatory standards equivalent to the EU's.

In other areas of cooperation, such as official sharing of data on airline passengers, criminal records and the like, the U.K. will likely have to abide by privacy rules set by the EU.

5. The U.K. budget won't benefit by GBP350 million ($429 million) a week from leaving the EU. It was abundantly clear even before the referendum that the figure, used extensively by the Leave campaign, was false.

The number was derived from the roughly GBP18 billion in annual gross British contributions to the EU. But of this, a GBP5-billion agreed rebate was never remitted to Brussels, and a further roughly GBP4.5 billion of EU money was spent in the U.K., on items like farm subsidies and research funding. This left a net annual budget contribution of about GBP8.5 billion.

EU officials have said they would start divorce talks by handing the EU a big bill -- some EUR55 billion to 60 billion (at least $57.4 billion) -- to clear the accounts so it can leave. While that bill will be subject to negotiation, the U.K. won't be able to ignore EU demands if there is to be a negotiated exit.

Leaving also implies increased budgetary costs to do things the EU now does. Apart from the new trade negotiators and civil servants required to bring Brexit to fruition, the U.K. will need to set up a host of new regulatory agencies covering sectors like medicines, food and chemicals as well as hire new customs officials to police its new trade arrangements. And Mrs. May hasn't ruled out some continuing contribution to the EU budget after leaving.

(END) Dow Jones Newswires

January 05, 2017 16:18 ET (21:18 GMT)

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