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After a heated political campaign, voters in the United Kingdom decided by a slim margin, on

June 23, to exit the European Union, leading to a change in government. Now that a new prime

minister has taken over, the next big question looms: How will the UK and EU negotiate their

split?

I have spent almost 20 years researching, teaching, writing about, and advising companies and

governments on how to negotiate when things seem impossible. In this article I offer an analysis

of the negotiation landscape facing UK and EU negotiators, along with advice on how they might

navigate the process more effectively. For the record, I have not (at the time of this writing) been

asked by either side to advise on the negotiations.

I structure the analysis in much the same way as I would approach any complex deal where I was

asked to lead (or advise on) the negotiations. I examine 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.

You can learn more about the history and factors leading up to the British referendum here and

here.

CHAPTER ONE

What Is the Brexit Process?

The clock only starts when Article 50 is formally invoked by the UK.

It’s important to remember that the British referendum is not legally binding: The UK

government must initiate “Brexit” by invoking Article 50 of the Treaty on European Union. There

seems to be an emerging consensus that Members of Parliament will respect the wishes of voters

if called to vote on the matter, despite the fact that most MPs were against leaving the EU.

Moreover, Theresa May, the new UK prime minister, has made it clear that “Brexit means Brexit,”

and that she intends to oversee the process.

Once Article 50 is invoked, the EU and the UK have two years in which to negotiate a withdrawal

agreement and the UK’s future relationship with the EU. Any agreement being accepted by the EU

requires the assent of a “qualified majority,” which means that 72% of the member states,

representing at least 65% of the population of the EU, must vote in favor of the agreement.

If an agreement is reached, the treaties that currently govern the relationship between the EU and

the UK (as a member state) will expire. If no agreement is reached, the treaties will automatically

expire two years from when Article 50 was invoked.

Because the clock only starts when Article 50 is formally invoked by the UK, there has been some

wrangling over when it should occur. There is an option of extending negotiations beyond the

two-year time limit, but it requires the consent of all countries in the EU.

Two other points of process are worth mentioning. The first is that many parties within the EU are

involved, and because a member state has never exited before, the internal process on the EU’s

side of the table is itself being negotiated. The key groups are the European Council, the

European Parliament, and the European Commission. (See here to learn more about these three

institutions, and here for more information on the role they are expected to play in the

negotiations.)

The second issue is more crucial. If the agreement reached between the EU and the UK is broad

enough in scope to be considered a “mixed agreement” — which it certainly will be if the parties

negotiate not only trade but also security and foreign policy issues — then the agreement will

need to be ratified by the parliament of every member state, which means every EU country

would have a veto. From a negotiation perspective, this not only increases the amount of time

needed to reach a comprehensive agreement but also lessens the likelihood of a deal.

CHAPTER TWO

What Are the Major Issues?

The EU is based on the idea of a single market, characterized by four freedoms. They are the free

movement, across borders, of goods, services, capital, and people.

Protestors demonstrating against Britain’s proposed membership of the European Economic Community, January 22, 1972. The UK

joined the EEC the following year.

Let’s start with some context. The European Union is based on the idea of a single market,

characterized by four freedoms. They are the free movement, across borders, of goods, services,

capital, and people.

There are three consequences of this arrangement that are of particular relevance to Brexit

negotiators: free trade between EU member states (think “tariff free”); businesses in the member

states being subject to EU regulations; and citizens of any member state being able to move to

another member state to live or work there. All of these were important factors leading up to the

Brexit vote, and they are central to the negotiations that will take place between the UK and the

EU.

Trade and immigration. Two of the most important issues are trade and immigration. It is worth

considering them together because doing so helps to highlight a key conflict in the negotiations.

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.

David Davis, who was appointed Secretary of State for Exiting the European Union by PM May,

believes both of these goals are achievable: “The ideal outcome (and in my view the most likely,

after a lot of wrangling) is continued tariff-free access. Once the European nations realize that we

are not going to budge on control of our borders, they will want to talk, in their own interest.”

Unfortunately, this is not at all how the EU sees it. Donald Tusk, president of the European

Council, has made clear that for the UK to have access to the single market “requires acceptance

of all four EU freedoms — including freedom of movement. There can be no single market à la

carte.” Other EU leaders have made similar pronouncements. How much wiggle room there is,

and what kinds of concessions might be made on trade and immigration, remains to be seen (and

negotiated).

Money paid to the EU. The UK pays more into the EU budget than it gets back in rebates and other

payments to sectors of the UK economy. 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).代写GROUP PROJECT - FINM8007 TOPICS IN INTERNATIONAL FINANCE Here, we see the same conflict: From the EU perspective, if the UK wishes to have

continued access to the single market, it will be required to pay dues.

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. Although Brexit would put an end to EU-imposed regulations, there are two

important factors to keep in mind. 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. The UK will

not, for example, abolish all product safety or environmental regulations after Brexit. Second, the

EU could continue to impose certain regulations after Brexit in exchange for the UK’s access to

the single market. Again, this is consistent with the Norway precedent, although UK negotiators

will want to avoid regulatory influence from the EU.

Free movement of people. Much of the Leave campaign’s rhetoric was aimed at stemming the

tide of immigrants from Europe, but barriers to free movement of people would hurt both sides in

the negotiation. Millions of UK citizens live and work in Europe, and even the loudest proponents

of Brexit want them to retain their rights. Former mayor of London Boris Johnson, a leading voice

in the Leave camp who now has been appointed foreign secretary, promised as much in an

opinion piece he wrote following the referendum: “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. As the German equivalent

of the CBI — the BDI — has very sensibly reminded us, there will continue to be free trade, and

access to the single market….The only change — and it will not come in any great rush — is that

the UK will extricate itself from the EU’s extraordinary and opaque system of legislation.”

The desire to address the anxiety of the British people is understandable. What is difficult to

understand is how the foreign secretary intends to secure the rights of British citizens to free

movement without offering reciprocal rights to citizens of other EU member states (or, for that

matter, without offering any concessions at all).

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. (The threat to this important sector

of the UK economy is explained in some detail here and here.) How far the UK is willing to go (or

be lobbied to go) to protect the sector — or, put differently, how much the EU is able to extract in

exchange for concessions to City — is an open question.

CHAPTER THREE

What Leverage Does the EU Have?

Because the EU needs to deter future exits, threats to walk away even from economically

attractive deals become credible.

Euro stars on the glass doors of the main portal to the Palais de l’Europe, the European Parliament in Strasbourg.

There are four important sources of leverage for the EU.

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.

This doesn’t mean that a good deal is impossible for the UK to achieve, but it does mean that

putting too much weight on this political talking point would be unwise for negotiators.

The need to deter future exits. If the only players in this story were the UK and a firmly united

EU, the UK would have more room to demand concessions. But the EU is not monolithic. One of

the biggest concerns of EU negotiators will be the risk of setting a costly precedent. 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.

As a consequence, there may be several agreements that the EU is tempted to accept on purely

economic grounds (preferring them to “no deal”) but that are off the table because they could

incentivize other defections from the EU. Because the EU needs to deter future exits, threats to

walk away even from economically attractive deals become credible. This gives the UK leverage,

albeit at the cost of making “no deal” more likely. As 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.”

Too many veto players. As mentioned previously, any final deal will require agreement from a

qualified majority of EU member states, or unanimity in the event of a mixed agreement. This

potentially gives veto power to many small coalitions of member states — or to every individual

state if there is a mixed agreement. 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.

CHAPTER FOUR

What Leverage Does the UK Have?

A number of the most influential countries in the EU are the ones that are most dependent on

trade with the UK.

British businessman and politician Oliver Smedley (1911–1989) leaving to demonstrate in Rome as part of his Keep Britain Out

campaign to oppose British membership of the EEC, 1967.

UK negotiators also have at least four sources of leverage, although I do not wish to imply that

this means both sides have equal leverage (as I discuss below).

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. It is important to note that EU-level data masks considerable

heterogeneity that exists across EU nations with regards to the balance of trade with the UK.

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. I disagree with those who

think the UK’s leverage vis-à-vis Germany is all that matters, and that this one trade deficit

ensures a good UK-EU deal — but it certainly will play a role in the negotiations.

Security concerns. If the only issues on the table are trade and immigration, the EU arguably is in

a strong position. But if the UK can make a strong case that a bad deal with the EU would threaten

cooperation on other matters (e.g., security), that could help tip the scales. Such a threat ought

not to be credible: In my view, two centuries of UK history show that every time the British have

moved further away from Europe, they eventually have regretted the decision — and have had to

return when things unraveled on the continent.

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. The number of European leaders who are urging the UK to invoke

Article 50 without delay is long and comprehensive, including European heads of state, the EU

president, the European Commission president, and the European Parliament president.

Meanwhile, the UK governments seem to be in no rush to pull the trigger, not least because there

appears to be no negotiation strategy currently in place.

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. Given the order of events (Article 50 will be invoked before substantive

negotiations get under way), any concessions demanded from the EU likely would have to focus

on the process of eventual negotiations (timetables, sequencing, etc.) or on an agreement on

principles that would frame the negotiation. This does not mean that the UK should invoke

Article 50 before it’s prepared, but it does suggest that there may be some scope for a trade.

There are risks to using this point of leverage, however. If the EU decides to punish delays (or

threats of delays) to the process, things could escalate and get ugly. The EU has the option of

invoking Article 7 of the Treaty on European Union, which would take away the UK’s voting rights

in the EU on the premise that the UK has committed a “serious and persistent breach” (or is at

“clear risk of a serious breach”) of EU values, as specified in Article 2. Arguably, the values listed

in Article 2 would not be breached simply because the UK is dragging its feet on Article 50, but

such is the nature of escalation: Both sides could get into a death spiral of unhealthy and

unreasonable tit-for-tat.

CHAPTER FIVE

A Key Barrier: False Promises

The EU might come to the conclusion that since any deal is going to fall short of the extreme

promises made in the UK, it is not worth giving any special concessions at all. The UK

government will have to find a way to sell a lesser deal, or end up with no deal at all.

From a leverage perspective, one factor cuts both ways. The Leave campaigners, in their

enthusiasm for Brexit, seem to have promised more than they can plausibly deliver. And, in many

cases, they appear to have done so with little regard for facts, data, or statistics. To name a few

examples, 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.

Almost none of what was promised is actually possible — especially given the EU’s leverage and

other constraints — which means the UK government will have to find a way to sell a lesser deal,

or end up with no deal at all. But remember: Constraints can be a source of leverage. UK

negotiators might be able to credibly say that they can’t possibly go back to their supporters with

significantly less than what they promised on the eve of the referendum. In other words, the EU

will need to make more concessions to avoid no deal.

Map of England in the ninth century from A Short History

of the English People, by John Richard Green, published

by Macmillan and Co., 1911.

But the situation is a double-edged sword: The EU might come to the conclusion that since any

deal is going to fall short of the extreme promises made in the UK, it is not worth giving any

special concessions at all.

CHAPTER SIX

Two Looming Strategic Issues for

the UK

Could the different parts of the UK (England, Wales, Scotland, and Northern Ireland) each

negotiate a different relationship with the EU? And will the UK leave the EU customs union?

The problem of Scotland. While a majority of all

voters in the United Kingdom voted to leave the

EU, a majority of voters in Scotland voted to

remain. This is a problem for the government in

England, which lives under a constant latent

threat that Scotland might vote to leave the UK.

A referendum in 2014 resulted in a majority of

Scottish voters choosing to stay within the UK,

but a second referendum is now being openly

discussed.

While Scotland cannot legally veto UK’s exit

from the EU, it can exercise leverage over PM

May, who is faced with the delicate task of trying

to keep the UK together. When it comes to Brexit

negotiations, Nicola Sturgeon, first minister of

Scotland, has made clear that she wants to

ensure “Scotland is playing a very full part…

including having the ability to put forward

options for Scotland that would respect how

Scotland voted.” To this end, she has suggested

the possibility that the different parts of the UK

(England, Wales, Scotland, and Northern Ireland) might each negotiate a different relationship

with the EU.

The leaders of Wales, Northern Ireland, and Scotland recently have called for each of their

devolved parliaments to be allowed to vote on any Brexit agreement. Even if nothing comes of

this legally, the threat of a break-up over Brexit creates a problem for UK negotiators and further

limits the set of deals that everyone can live with. Managing these relationships ought to be a first

order of business for the UK.

Whether to leave the EU customs union. In order for the UK to negotiate its own trade deals with

non-EU countries, it has to leave the EU customs union, which requires all members to accept the

same rules when it comes to trading goods (though not services) with outsiders. (Learn more

about the difference between a customs union and a free trade area here.)

Although it might seem obvious that Brexit would entail leaving the customs union, the two do

not go hand in hand. Turkey, for example, is part of the EU customs union without being part of

the EU. Leaving the customs union would make it harder and more costly for the UK to export

goods to the EU, especially for goods that are made partially outside the UK.

Another problem is that leaving the customs union would raise serious concerns in some parts of

the UK that already are against Brexit — most notably Northern Ireland, which would have to

erect a customs barriers on the border with Ireland, something few would like to see. The issue

will need to be decided soon, and is currently being debated. Some Leave supporters seem

confident that the freedom to negotiate trade deals is worth the costs, while others are less

convinced.

It remains to be seen how well the UK can actually negotiate non-EU trade deals. On the one

hand, it will be able to negotiate without the constraints imposed by the demands of other EU

countries; on the other hand, the UK’s economy is much smaller than the EU’s, so it has less to

offer (meaning less leverage) in these negotiations.

CHAPTER SEVEN

What Are the Possible Outcomes?

The possibilities are many, from the Norway model to a unique UK deal to the chance that Brexit

might not happen at all.

May 1, 1975: Government documents about to be published for the British Common Market Referendum vote on June 5.

There’s an infinite number of potential outcomes in a negotiation like this one, but it’s useful to

keep in mind a few salient possibilities.

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. Notably,

these rules cover only trade, not the many other issues the two sides need to negotiate. The

problem (i.e., cost) of the WTO outcome is that trade barriers, such as tariffs, would emerge

where none existed before, hurting all sides, but especially the UK.

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.

In other words, using the Norway model would mean the UK would accept roughly the same

conditions as those prior to Brexit but with an additional cost: losing a vote in the EU halls of

power.

代写GROUP PROJECT - FINM8007 TOPICS IN INTERNATIONAL FINANCEd 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. Because divisions and disagreements

regarding how things are shaping up are likely to emerge during the two years, the possibility that

one or more countries would cite domestic pressure to vote against an extension — or use the

threat of a veto to demand excessive concessions — should not be ignored. 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. Although there are costs to negotiating a deal

piecemeal (e.g., trading across issues is difficult), in this case it would be wise to think carefully

about whether and how to partition the full set of issues into those that are crucial to finalize

before the risk of deadline pressure and those that should remain open until there is a full, final

agreement.

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.

CHAPTER EIGHT

Who Has the Greater Leverage?

A “no deal” scenario is still possible.

Analytically speaking, this is a trick question. On the one hand, when you look at the alternatives

to reaching a deal, it seems that the EU has significantly more leverage than the UK because it is

bigger economically and because it can credibly threaten to veto any deal that would make the

exit option attractive to other member states.

The real problem, however, is that when you think about the interests and constraints of both

sides, it becomes hard to envision any deal that all parties can accept — unless UK negotiators are

able to go back to their constituents and sell a deal that falls well short of what was initially

promised. This has a few implications:

A “no deal” scenario is very possible.

If a deal is going to happen, it will require tremendous creativity as well as sensitivity to the

needs of the other side. Both sides will have to make as many concessions as they possibly can.

The UK will have to ask for what it wants in ways that allow the EU to make concessions

without setting dangerous precedents. The EU will have to make symbolic concessions that

allow UK negotiators to sell the deal internally to a potentially disappointed audience. A unique

UK deal is possible, but it is unlikely to meet the aspirations of Leave voters.

Given the fact that a “no deal” is possible and that a deal might disappoint UK voters anyway,

might there not be a path toward reversing Brexit? There may come a time when the only

outcome that allows all parties to declare victory entails no Brexit. EU negotiators obviously

would be happy. PM May could say she tried but would not accept the EU’s likely terms (or the

dismantling of the UK). Leave campaigners in the government could resign in protest — or gain

in popularity for opposing the outcome.

CHAPTER NINE

In Conclusion

Smart negotiators know that the goal is not to “win” but to achieve their objectives.

In writing this analysis, I have tried my best not to take sides, nor to make unnecessary

predictions. This is in part because there are limitations to doing a truly comprehensive or

definitive analysis in a situation where all of the facts are not in the public domain. It is also

because there are many paths forward and the outcome will be determined by how each side

plays the hand it has been dealt.

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.) Even if no substantive aspects of the negotiation

are discussed, these conversations are opportunities to shape expectations, coordinate on

process, build rapport, and create trust before deal making shifts to the media spotlight. These

early moves could pay huge dividends when substantive deal making gets started — or reveal the

need to revisit currently unpopular options (e.g., reversing Brexit).

As I write about in Negotiating the Impossible, if there is one lesson we can learn from some of the

worst conflicts and deadlocks in history, it is that even seemingly impossible situations can be

handled well if negotiators stay cool, prepare systematically, strategize with an eye on all relevant

factors, have empathy for the needs and constraints of the other side, and understand that the

goal is not to “win” but to achieve their objectives.

Deepak Malhotra is the Eli Goldston Professor of Business Administration at Harvard

Business School and the author of Negotiating the Impossible.

This article is about NEGOTIATIONS

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