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Theresa May, the UK prime minister, leaves number 10 Downing Street, to deliver a speech setting out her plan for leaving the EU on Tuesday, 17 January 2017. Photo: Bloomberg

The UK wants restrictions on migration that are incompatible with the fourth freedom of the single market – the free movement of labour.

This excludes a Norwegian solution. Norway, along with Iceland and Lichtenstein are outside the EU but within the single market. The UK will instead seek to negotiate a free trade agreement with the EU. This is a Swiss solution – although the terms will differ of course. Theresa May stressed that the UK's goal should be to retain as many of the three other freedoms as possible.

A global Britain

The title of Theresa May's speech was a global Britain. She was not nostalgic about the colonial empire – her government's purpose, she said, was to engage in as many free trade agreements as possible in Europe and elsewhere. This implies that the UK will have to leave the EU's custom union, as this union erects barriers to trade outside the European Economic Area.

Unilateral free trade

Since Theresa May wants as much free trade as possible in goods, services and capital with the rest of the world, one might wonder why her government has not contemplated a policy of unilateral free trade. Free trade agreements are better than protectionism, but they are not a prerequisite for free trade.

The UK initiated free trade by unilaterally scrapping the Corn Laws in 1846; laws that imposed restrictions and tariffs on the import of grain. It could repeat that success, and once again be the torch-bearer of free trade, by eliminating all its own barriers to international commerce. This is the Hong Kong model.

A counter-argument is that without free trade agreements, other countries might maintain their barriers to British produce and capital. It is not obvious that this would be the case. Britain, by illustrating the virtues of commercially open borders, might be able to export the value of unilateral free trade legislation. Even if that were not the case, it is by no means clear that the net free trade effect of negotiating a multitude of so-called free trade agreements would benefit the typical British citizen more than if all homemade protectionist walls were eradicated.

The reason such a policy is not going to be pursued is the sad fact that much of the electorate and most politicians do not understand the free trade wisdom of Hume, Smith and Ricardo. Due to special interests, misguided mercantilist ideas never died – and they hardly seem to fade away.

Too early to say

Is Brexit now for real? That depends upon political developments in the UK and the EU over the next few years. In my view, parliament will vote before Ms May triggers article 50 in the Lisbon Treaty. It is likely that the majority will – reluctantly – vote in the government's favour. Negotiations should then be finalised within two years, but the haggling between London and Brussels may well continue beyond that.

The Prime Minister said that parliament will vote on the divorce treaty. However, if there has been a new general election in the UK by that time, and if the majority of the new parliament supports continued membership of the EU, it is by no means certain that the new parliament would be constrained by an advisory referendum called for by the current parliament.

The divorce proceedings may very well end up in a loveless "till death do us part" marriage between London and Brussels. It's still too early to tell.

The markets' response

Having depreciated in advance of the Prime Minister's much-anticipated speech, the pound rebounded yesterday, advancing about 2 percent relative to the euro. The London stock market lost about 1.5 percent though.

However, it is unclear how much of this reaction can be attributed to the speech. Inflation came in higher than expected and the Bank of England uttered a few slightly hawkish words. The initial market reaction is, in any case, not always a good guide to how markets interpret political signals. It takes time to digest news and figure out the probabilities of different scenarios. So far today the pound is slightly weaker and stocks slightly more expensive.

Beside all other influences, the financial markets' reaction to the Brexit process depends on the likelihood that the UK will in fact leave the EU and, if so, how successful the UK will be at negotiating trade deals. To conjecture beyond this today would be to ignore the dark forces of time and ignorance – to borrow a phrase from Keynes – that engulf the British island's commercial relationship with the EU and the rest of the world.

Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on market developments, the fund manager's skill, the fund's risk profile and management fees. The return may become negative as a result of negative price developments.