Talking Trade blog
Special edition: How out is out?
Published 19 July 2016
It has now been several weeks since Britain voted to leave the EU and the political aftershocks keep coming. The ruling Conservative party has quickly changed to a leader who is Euro-sceptic but still quietly supported Remain on economic grounds. New Prime Minister Theresa May’s troika of foreign ministers, Liam Fox, David Davis and Boris Johnson all campaigned strongly to Leave and now they must lie in the bed they have made. Perhaps Brexiteers never expected to win, perhaps they could not agree. Regardless, there is currently no plan for Britain’s continuing relationship with Europe.
There are several levels of economic integration that already exist in Europe, and a non-single market FTA is also an increasingly likely looking option. This Special Edition Talking Trade post explains the options available to the UK and looks at their feasibility.
We have tried to simplify and summarise the main types below. (For clarity, we have omitted several economic groupings and countries)
Eurozone: The Eurozone is the deepest level of European integration. It includes: a monetary union based on the euro currency, ‘four freedoms’ of economic activities (goods/services/people/capital movements), national representation in a parliament to agree on laws related to these activities among others, and common external trade policy. Legislation in European parliaments covers justice, trade, agriculture, fisheries, and regional development. Eurozone countries include the major economies of Germany, France, Italy, Spain and the Netherlands.
European Union: members do not use the euro and maintain national currencies, but otherwise have the same commitments as the Eurozone members.
The EU Single Market (EEA) guarantees free movement of the four factors of production, though agriculture and fisheries are not covered (which was seen as an important carve out for the Norwegian fishing industry). EEA agreements require continuous updating so they accord with EU laws on competition, consumer protection, company and employment law, and the environment among other matters. EEA members have no formal input to the creation of these EU laws. The single market includes all EU members and several neighbouring EFTA countries. [Croatia is provisionally participating as it awaits official acceptance.]
European Free Trade Area (EFTA) is similar to the EEA, but with a narrower scope. Switzerland instead has a series of narrowly defined, mutually dependent bilateral agreements on a limited number of areas such as technical barriers to trade, public procurement, security etc. Effectively Switzerland is an EEA member in most regards, and pays into various EU funds as EEA members do. It also has no decisionmaking power into EU laws or regulations.
A referendum in February 2014 to impose quotas on European immigrants to Switzerland has not yet been enacted, but it would trigger the ‘guillotine clause’, that breaking the rules of one treaty voids all others. European governments are still contemplating how to effectively implement this referendum.
EU Customs Union: covers only the movement of goods that may travel within the area customs-free, and imposes common external tariffs on all goods coming in. Turkey's agricultural products are excluded.
A free trade agreement (FTA) could be designed to deliver high liberalisation of goods, services and capital, while avoiding the vexing issue of migration. Modern agreements such as the TPP and EU-Canada are untested but highly comprehensive, and could neutralise much of the economic impact on the UK and EU. Note, however, that the EU-Canada agreement just got sent back to 27 national level parliaments for approval in addition to the EU parliament where, after years of delay, it faces a more perilous and uncertain future.
Which model is best? From a trade point of view, and assuming Brexit means Brexit, the EEA makes the best of the situation. This gives businesses access to the single market, allays the uncertainty to which seems to destined to plunge the country into recession while repatriating agriculture and fishing policy to the domestic legislature (though these are less significant in Britain’s economy). It also means Britain is able to negotiate bilateral agreements with major economies, though as we wrote last week, this should be approached with great caution.
Some have suggested Britain can unilaterally liberalise and drop tariffs across the board. For small, open economies like Singapore, this makes some sense. But for a larger country with a diverse economy it could visit sudden and painful adjustments on those most unable to face another onslaught of globalisation. The negotiating environment is also such that Britain may be desperate for any agreement, but its bargaining power is weaker than when it was part of a 28 member bloc.
The government is now looking at the possibility of an FTA with Europe, with reports that the German government would countenance this. Britain runs a large trade deficit with the rest of the EU, which has its own economic problems, and may look to minimise the impact of Brexit. However, the EU is the destination of half of Britain’s exports while the UK takes 10% of EU exports so Britain is perhaps not in the position to dictate terms as David Davis might hope.
Davis is a long-standing Eurosceptic with a good deal of foreign policy experience, and he will need every ounce of it. He said recently that Britain wants continued free-market access to Europe, but with controls on migration. Convincing every other EU member, who will want to dissuade others from following Britain, have limited reserves of goodwill and have their own elections to attend to, will be difficult.
France and Germany have elections in the next year, and neither will give the European Commission free reign on negotiations. Britain, like Switzerland, may seek to negotiate some form of immigration quota but this would break one of the EU’s core tenets and the European Commission will worry that other members seek similar dispensation. After all, if members could get all the benefits of membership and bear none of the costs, every member would prefer this arrangement.
Davis will need to stop the bluster, move out of campaign mode and start thinking seriously about how Britain can negotiate this and other trade agreements. At the moment there are not enough trade officials in the UK to play a football match, let alone negotiate a trade agreement. It could take months to staff the newly formed Department of International Trade.
Both Davis and Liam Fox are aiming to begin the Brexit process this year and leave by 2019 which seems perilously optimistic. The new chancellor, Philip Hammond, expects it to take more like six years. Either way there will be a lot of economic and political uncertainty while Britain’s claims are debated.
There is a prosperous path through these negotiations, but it may mean keeping something similar to the current EU arrangement. This would paradoxically mean less sovereignty than Britain currently enjoys and betray the reasons so many people voted for Brexit.
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