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Britain Needs Trump for Smooth Brexit

Our weekly commentaries provide Euro Pacific Capital's latest thinking on developments in the global marketplace. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.
By: 
John Browne
Tuesday, January 31, 2017
At the Washington joint press conference with Prime Minister May held on January 27th, President Trump told the watching world, “Brexit is going to be a wonderful thing.” The meeting did much to clear the way for Britain to stand alone and enter trade with the United States without the European Union (EU). Their talk of a U.S.—UK free trade agreement could do much to ease the fears of some key English Members of Parliament and counterbalances the fears that Britain will be punished by a bitter EU. The positive meeting occurred at a fortuitous moment. Only four days prior, the UK’s Supreme Court had ruled that Parliamentary approval must be specifically obtained before Her Majesty’s Government can sign trigger negotiations to exit the EU.
 
May’s speech to Republican Members of Congress on January 26th and her responses at the joint press conference made it clear that there were three central strategic aims for her visit. The first was to re-establish the ‘Special Relationship’ which had been downgraded deliberately under Obama to the disadvantage of both countries. First coined by Winston Churchill in 1946, The term “Special Relationship” grew from the countries’ shared culture and implied the closest economic, political, diplomatic and military cooperation. The President’s reference to it as the “Most Special Relationship” together with his immediate acceptance of an invitation to make a State visit to Britain this year should keep the momentum.
 
Second, May wanted Trump’s expressed reassurance that he was not intending to abandon NATO but to strengthen it by ensuring that all members abide by their agreed defense spending and force levels. In addition, May suggested calls for a NATO commitment to fight terrorism and cyber warfare. Trump affirmed her position readily. This will reassure many European nations, most importantly Germany.
 
May’s third and most difficult goal was to achieve Trump’s commitment to a free trade agreement between the UK and the United States, similar to that enjoyed by Canada. Whether promised unofficially or in letters of intent, an agreement would play a potentially crucial part in May’s negotiation of a soft Brexit. At present, the EU appears motivated to punish Great Britain for its audacity to leave and to force a so-called ‘hard’ Brexit. Such an outcome for the UK could dissuade other wavering nations like Greece, Italy and even France to follow suit. Being able to show that the UK has already a potential free trade agreement and an enhanced relationship with the U.S. might persuade the EU to accept a “soft” Brexit.
 
The sticking point for the UK to maintain continued access to the EU market, could hinge on British acceptance of free flow of people through its borders, including potentially millions of Muslim immigrants. But control of national borders was a key element in the Brexit vote. Therefore, May must strengthen her hand so the EU is forced to accept a more reasonable deal, hence the crucial value of a potential trade deal with the U.S.
 
Trade negotiations involve complex trade-off bargains on many strategic issues. They are particularly difficult when negotiated between nations like the U.S. and UK that have similar economies and important domestic vested interests. For instance, London and New York have struggled against one another to become the world’s dominant financial center. But as long as Britain remains in the EU, its ability to negotiate bi-lateral trade agreements will remain curtailed. However, if May could obtain a confidential and undisclosed commitment in advance, it would strengthen her hand greatly in bargaining with the EU. Some believe that due to the complexity and the time necessary such a clandestine provisional treaty never could be achieved. However, Trump is a renowned dealmaker, and as we have seen, he can deliver when needed.
 
Had former Prime Minister Cameron not felt so overly confident of victory, doubtless he would have thought to include provisions for a Parliamentary Bill that would follow an Exit outcome of the Referendum, thereby avoiding the embarrassing confusion that exists now. He should have made clear that the referendum result would be binding on Parliament, and what, if any, role Parliament was to play in the negotiations with the EU. The result of this gross oversight is that Prime Minister May, who voted ‘Remain’, inherited a mess. It is a mark of her integrity, skill and courage that despite powerful countervailing forces, she intends to respect the expressed will of the people.
 
Doubtless, May is relieved that the UK’s Supreme Court found expressly that she would not have to consult the devolved national Assemblies of the UK (Scotland, Wales, etc.), all of which are against Brexit. However, she won’t find much more sympathy in Parliament where some 74 percent of her own party in the House of Commons and a majority of Peers in the House of Lords hold Remain sympathies. However, 61 percent of constituencies voted for Brexit. (Jemima Kelly & Patrick Graham, Reuters, 11/3/16) Likely, only foolhardy Commons Members will defy their powerful party whips to vote against their constituencies and the general electorate so soon after a referendum. This will be true especially if May adds more pressure by making it a vote of confidence which, if lost, would trigger an immediate general election. As for the Lords, May can threaten to reduce further their already limited undemocratic powers. Therefore, May likely will sign the EU’s Article 50, triggering Brexit, at the end of March, setting in motion negotiations that could last up to two years.
 
During this extended period of uncertainty in the UK, investors could expect considerable turbulence in almost all asset classes. But if a soft Brexit can be achieved, and should a U.S.—UK trade agreement follow soon afterwards, UK equities, especially those involved in U.S., Japanese and Chinese trade, could rise. Investors should start having their advisors research which companies may stand to benefit, particularly in the fields of finance, agriculture and defense.
 
John Browne is a Senior Economic Consultant to Euro Pacific Capital.

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