Theresa May last week summoned European Union diplomats to the ornate Long Gallery of Lancaster House for a classic British power play. In a gilded Georgian mansion looking across The Mall to Buckingham Palace, the British Prime Minister was in charge and laying down her terms on Brexit.

But the precariousness of her position was revealed within hours, as HSBC confirmed it was moving 1,000 jobs from London to Paris and Toyota said it was considering how it would "survive" after Britain leaves the European Union. But for now, Mrs May was a latter-day Margaret Thatcher, anointed by the British tabloids as a new Iron Lady.

The ambassadors nodded politely as she set out her objectives for Brexit, a speech couched in conciliatory language about a "new partnership", shared values and her desire to find a Brexit deal that worked for both sides. But when her peroration approached, the mood changed abruptly as she abandoned diplomatic niceties and delivered an outright threat to the assembled guests.

If Britain did not get the trade deal it wanted, Mrs May would walk away. If Europe tried to impose "a punitive" arrangement on Britain, she would fight back, ripping up the country's European economic model and setting "the competitive tax rates and the policies that would attract the world's best companies and biggest investors".

This threat to turn Britain into a low-tax Singapore of the West - coupled with an implicit hint that British defence and intelligence contribution to Europe might be at risk if the EU cut up rough - delighted the British press. But Europe is asking: Is she bluffing?

Mrs May's move to get her threats in early - before the expected start of Brexit negotiations once the UK triggers Article 50 in March - was meant as a show of strength, a sign that she would not go to Brussels for talks as a supplicant, but with a Plan B in her pocket. On Thursday, she took the message to the World Economic Forum in Davos.

Others saw it as a sign of weakness. French Finance Minister Michel Sapin says warnings that the UK could cut taxes and loosen rules as compensation for loss of access to the single market simply show "how helpless the British government is in the face of a situation that some of them didn't want".

Professor Pieter Jan Kuijper of the University of Amsterdam, a previous top trade lawyer for the EU and World Trade Organisation (WTO), describes Mrs May's threats as "extremely childish". "Both sides will play at this game, it happens in trade negotiations," he says. "It is not the right thing to do."

Mrs May's speech, the most important she has made since becoming Prime Minister last July, laid out her terms for a possible deal. Britain would set its own immigration rules and would thus leave the single market, but would seek a "bold and ambitious" free trade deal with the EU, including tariff-free access. It would pay an entry fee to the single market, but on a limited scale.

But the speech left plenty of grounds to think that Mrs May will struggle to get what she wants. There was no mention of Britain's exit bill - likely to be the first flashpoint in negotiations, which have to be concluded within two years. Brussels estimates the liabilities at €40 billion to €60 billion (S$60 billion to S$90 billion).

Even if Mrs May agrees on the divorce terms, there is a widespread view in Brussels that she is being wildly optimistic in believing she can then conclude a free trade deal within two years. German Chancellor Angela Merkel has said Britain cannot "cherry pick" what it wants from the single market. The EU will ensure that Britain must pay an economic price for leaving.

Although Mrs May insists her proposed trade deal is "economically rational" for both sides, the EU is a political project fighting for its life. If she decides the offer is not good enough, will she really let Britain crash out of the EU on WTO terms and head down the route of aggressive tax cutting and deregulation?

Mrs May has not spelt out what her Plan B might look like exactly, but many see a "Singaporean model" involving significant changes not only to tax rates, but also potentially to financial, business and environmental regulation. "It is obviously not plan A," says director of policy Stephen Booth at Open Europe. "That remains on the table to get a deal with the EU. But if you can't get free trade, you have to find a way of softening the adjustment."

TAX POLICY IS ONE LEVER

Corporate taxes are one obvious lever. The government's current plan is for corporation tax to go down to 17 per cent by 2020 - coincidentally the same rate as in Singapore. Further cuts to the headline rate are possible although these would erode the tax base, undesirable for an administration struggling to cut a £76 billion (S$133 billion) annual deficit.

Each one percentage point reduction costs the Exchequer roughly £2 billion a year.

Former Treasury head Nicholas Macpherson (2005-16), says: "If you want to be a tax haven, you would have to have some fairly big discussions with the public about how you are going to fund areas like the National Health Service."

Mr Mats Persson, a Europe adviser to former premier David Cameron, says: "It is more likely they would look at measures specifically aimed at getting foreign companies to locate activities in Britain."

One possibility might be for Britain to decide not to implement the EU's corporate tax avoidance directive, due to be enacted by the end of 2018. An initiative originally championed by then Chancellor George Osborne, it is designed to reduce the scope for multinationals to move profits artificially to the lowest tax jurisdictions.

Not doing so might make it easier for London to design incentives to encourage multinationals to route royalty income through Britain. Withdrawal from the EU would also loosen British state-aid rules, giving policymakers more freedom.

Experts have questioned how far Britain could push aggressive competition of this sort without provoking a reaction.

"There is a possibility that changes could provoke retaliation in the EU - whether in terms of domestic measures such as a country's corporate tax rate, or wider EU measures to target EU companies with UK subsidiaries," says KPMG tax partner Robin Walduck. "It's worth remembering that tax isn't the only thing that drives foreign investment," he adds. "There's also infrastructure, migration and - currently in the UK's case - access to the EU single market."

Tax policy isn't the only lever Britain might be able to pull to step up cross-channel competition, but other alternatives also carry political and economic risks. For example, Mrs May has ruled out weakening Britain's employment rights, enshrined in EU law, after Brexit.

CLIMATE CHANGE

Other areas where the government could cut back include environmental protection laws. Freed from EU climate rules, Britain would be free to set its own domestic regime, for instance loosening EU climate targets that require it to reduce its emissions by at least 40 per cent below 1990 levels by 2030.

That would not affect the steps the UK has taken to cut carbon dioxide emissions, which have left domestic prices for industrial users nearly 30 per cent above the EU average. Nor would it necessarily change the long-term targets to which the country has committed itself. But it could slow the pace of fresh initiatives, relieving the subsidy burden. Mrs May would need Parliament's approval for the repeal of the 2008 Climate Change Act, which still enjoys majority support in the House of Commons. But assuming she overcame that, a change would make UK power prices more competitive with the EU's.

CITY OF LONDON

A third area of focus would be the City of London. There are limits to the changes that could be made to the regulatory framework, much of it rejigged after the financial crisis, not least because Britain already goes beyond EU standards in some areas due to the systemic risks posed by the banking sector to the country's financial stability.

"Huge swathes of regulation are driven by the need to comply with rules set at the international level by the Group of 20," says Mr Anthony Belchambers, who heads the advisory council of the Financial Services Negotiation Forum, one of the many bodies that have sprung up to offer the City advice about Brexit. "These can't be unscrambled, and many were drafted by the UK regulators themselves and reflect their preferred way of doing things."

But there would be scope to thin the rule book. First there is quite a lot of process-based regulation the UK could get rid of, particularly for domestic sectors like building societies. "There is red tape that could be cut away," says Mr Belchambers. "There are bits around the edges, particularly for firms that are not doing a lot of EU business."

Some rules irksome to bankers could be scrapped, such as the bonus cap. The UK could also get rid of EU regulations on fund managers in a bid to reinforce its leading position in the hedge fund industry.

"There is no doubt the additional flexibility would be a plus for London," says one banker. "It might help to cushion some of the costs and uncertainty of Brexit. Would it be a game changer, though? It is pretty clear that the City is still going to be around, come what may after Britain leaves."

For some months, the rhetoric from London on tax, regulation and financial stability has been causing unease in European capitals. Finance ministers, including Germany's Wolfgang Schauble, have stressed that Britain has international obligations on tax practices. "These rules apply to all, whether EU members or not," he says.

Similarly, Dutch Finance Minister Jeroen Dijsselbloem, chairman of the Euro group, last November said the bloc had "no alternative" but to stand firm on ensuring London is not a soft-touch regulatory haven with privileged access to the EU. "We can't allow the financial service centre for Europe and the euro zone to be outside Europe and the euro zone and to go its own way in terms of rules and regulations," he told the European Parliament. "We can't allow that to happen."

The explicit nature of Mrs May's warnings surprised EU officials. Although some brushed off the threats as "hollow", others say it was an "unconvincing and unnecessary" provocation, which detracted from the more positive messages in her speech. While some diplomats are alive to the danger of a walkout, others struggle to believe Britain would cut ties with its biggest trade partner and crash out of the union.

Not only would an unfriendly exit destroy any prospects of a trade deal, but it would also leave Britain with an even harder negotiation at the WTO - and in something of a legal wilderness. From the flying rights of aircraft to licences and importing radioactive material for healthcare, an entire framework of multilateral agreements would need to be renegotiated, a job made all the harder without EU support.

While the British leader may have succeeded in driving home the dangers of her Plan B, it may well have unintended consequences. The threats about the country's potential future as a low-tax Singapore are making some in the EU demand defensive measures.

EU-27 diplomats are taking Mrs May's cue and planning to bring matters of tax - such as the potential need to constrain Britain from any aggressive tax cutting as a condition of market access - into the Brexit talks. France, in particular, may seize the opportunity.

"If you talk about tax competition, you bring it into the negotiations," says one senior European figure involved in the Brexit process. "She said it. So it would be logical for us to ask for some safeguards against fiscal or social dumping. If you threaten to do things if there is no agreement, then the flip side is that we will make you promise not to do that if we have an agreement."

Meanwhile, British Chancellor Philip Hammond has told the German newspaper Welt am Sonntag that he wants the UK to remain "a recognisably European-style economy with European- style taxation systems and European-style regulation systems", trading freely with the EU on something close to current terms.

The Plan B hinted at by Mrs May is fraught with problems. Aggressively cutting taxes for companies and the rich would be politically problematic for a prime minister committed to tilting the playing field away from "the privileged few" to working-class people.

"Threatening to walk away if you don't get a good deal is a standard negotiating tactic, but if the threat is empty, you look a bit foolish," says Mr Charles Grant, director of the Centre for European Reform think-tank. "Everyone knows she is not an ultraliberal," he says, adding that it is inconceivable that Parliament would vote for big cuts to environmental, employment or social laws.

Mr Jeremy Corbyn, leader of the opposition Labour Party, accused Mrs May after her Lancaster House speech of "demeaning herself, her office and our country" by making such threats. But he may have no need to worry about his nightmare of "a low-pay tax haven on the shores of Europe" ever materialising.

As Mr Macpherson notes: "It's a perfectly good bargaining chip. But if it's such a good idea, why don't we do it now?"

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