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The way forward post-Brexit

Keith Haurie  Vice President of Business Development, ONESOURCE Global Trade Management, Tax & Accounting, Thomson Reuters

Keith Haurie  Vice President of Business Development, ONESOURCE Global Trade Management, Tax & Accounting, Thomson Reuters

The global market is finally beginning to get some clarity on the way forward post-Brexit. But, unfortunately, this clarity does not add up to a great deal of certainty.

The backdrop continues to be protectionism, which is generally a disruptor of the global supply chains evolving from trade policies, emerging markets, and changes in consumption. Brexit negotiators, by all appearances, want to preserve the economic status quo while obtaining from the rest of the European Union a higher level of autonomy over immigration.

These two objectives may not be compatible.

Brexit as an initiative is deceptively complex. While it was prompted by a majority of Britons who took a couple hours out of their workday to show up at polls and answer a one-question referendum, what comes next involves many variables and stakeholders. The United Kingdom is party to four agreements that bind it to the rest of the EU region: It is currently part of the EU’s single market, the European Economic Area, the EU’s customs union, and the World Trade Organization.

Brexit affects all of these ties, and they are therefore all under scrutiny now as the UK pursues its exit from the region. Which relationships will remain intact and which will be re-negotiated or severed greatly affects businesses in the region and, to a lesser but meaningful extent, everywhere else. Being prepared for all plausible outcomes will allow companies to operate with some degree of direction, though the environment will continue to be cloudy.

It is first important to revisit what the four ties are.

EU-UK Trade: Four Ties

  • European Union single market: Shared regulation on free movement of goods, services, capital, and people between the 28 EU nations and four non-EU nations.
  • European Economic Area: Legislation that allows Norway, Iceland, and Liechtenstein to enjoy some EU single-market benefits without being part of the Union.
  • EU Customs Union: A customs agreement between the EU and Akrotiri and Dhekelia, Bailiwick of Guernsey, Bailiwick of Jersey, and the Isle of Man, UK territories which are not part of the EU, as well as Monaco.
  • World Trade Organization: The 164-country intergovernmental organization that regulates international trade.

Looking from the outside in, only one of these ties would seem to be able to withstand withdrawal.

There are strong signals that UK voters favored Brexit because of a desire to have more autonomy over immigration and other issues more related to demographics than to trade. This would make negotiating access to the EU single market as a non-EU member a non-starter for the simple fact that the EU single-market regulations control immigration regulations. The UK cannot have autonomy over immigration policy while being party to the single market.

Strike one.

Prime Minister Theresa May expressed in a speech in January that the UK intends on leaving the single market but has not explicitly stated what the UK intends to do with respect to the EEA, customs union, or WTO. Which begs the question: What might happen with those three ties?

One unanswered question thus far is about whether the UK, once separated from the EU, still continues to be part of the the EEA. Article 126 of the EEA Agreement states that it applies to the territories establishing the European Economic Community, now the EU, and to Iceland, Liechtenstein, and Norway. Article 127, however, states each contracting party “may” leave the EEA Agreement “provided it gives at least twelve months’ notice in writing.”

If the UK does not provide a withdrawal in writing, would it continue to be a member of the EEA? Conversely, if the UK ceases to be part of the EU, could it negotiate EEA membership with the EU countries it just divorced? And crucially, would the UK have complete autonomy over immigration if it were to become an EEA member post-Brexit?

The answer to the latter question would appear to be “no.” If the UK were to remain a part of the EEA, it would continue to enjoy the trade of goods and services within the EEA, but it would have to accept the free movement of workers and abide by EU law as stated in the EEA agreement.

This may explain May’s remark that the UK does not intend to have a “half-in, half-out” approach to leaving the Union.

Strike two.

To have autonomy over immigration policy, the UK could exit the EU’s single market but retain membership in the customs union. However, this may sabotage potential bilateral or multilateral deals because the customs union also regulates trade agreements with third party non-EU countries.

Furthermore, this move would force the UK to abide by trade rules without having a say in what those rules are. Unless something changes and a new deal is struck, membership to the customs union and autonomy in negotiating outside trade deals would not appear to be compatible.

Turkey and Andorra have negotiated deals with the EU customs union to bring their economies into the fold. The Turkish model allows certain industries to enjoy benefits of the customs union while also being able to negotiate third party trade agreements.  While May said the UK will “not seek to adopt a model already enjoyed by other countries,” it is possible the UK could vie to take this route and include certain industries into the EU customs union, or cut some other kind of deal. However, Article 50 of the guidelines for negotiation, published April 29, states that individual markets will not be carved out.

Strike three.

Leaving the customs union altogether, while seeming most plausible, creates an administrative headache. The exit would add new administrative costs for border checks and certification of where goods come from. Additionally, the land border with Northern Ireland would have to be secured. Considering this, it still seems that the UK will cease to be part of the customs union as well.

Membership to the WTO seems to be the trade tie most likely to remain.

If the UK completely pulls out of the EU single market, customs union, and the EEA, trade relationships could still be governed by the WTO rules — that is, if the UK continues its membership.

As a founding member of the WTO, the UK would probably not need to re-apply for membership. If it does, watch out: The WTO operates by consensus, not voting, meaning just one objection could hold up the talks. This is one reason why WTO negotiations take so long.

Assuming the UK keeps its WTO membership, it could enforce WTO tariff regulations on imported goods from the EU, or it could unilaterally remove tariff restrictions from the EU keeping trade open without change. The former option could disrupt imports significantly, while the latter would be a sensible, if short-term, option to seek reciprocity from the EU until a trade agreement could be drafted, negotiated, and closed.

There are two other options, should the UK leave the single market and customs union altogether: joining the European Free Trade Association or negotiating a new customs area with EU.

Brussels hardliners have been steadfast that they will not negotiate a trade agreement with the UK until a withdrawal agreement is complete. However, there has been a recent slight softening of the EU’s position. As reported by Reuters News, on April 29, the European Union established seven guidelines for their chief negotiator, Michael Barnier, to follow.

  1. Phased approach: If sufficient progress is made toward an “orderly withdrawal” on March 29, 2019, talks on a long-term trade agreement between the EU and Britain could begin. The discussions depend on Britain’s contribution to the EU budget and treatment of EU expats residing in Britain.
  2. Transitional arrangements: Britain could continue enjoying the benefits of EU membership after March 2019 assuming it abides by EU rules and supervision by the European Court of Justice and other EU authorities.
  3. Sticking together: The EU is united in its efforts to thwart Britain’s efforts to divide and conquer since EU authorities believe that the EU has leverage in the negotiations.
  4. No dumping: Any free trade agreement with Britain must be balanced, which means it will not result in Britain receiving competitive advantages over EU members.
  5. Rights and benefits: The EU will not negotiate an agreement that provides Britain with more favorable terms outside of the EU than its current membership.
  6. Brexit bill: Britain must pay its share of potential losses from guarantees given by the EU.
  7. Border trouble: The EU wants to ensure peace within Northern Ireland as Britain contemplates how to erect a new EU border between Northern Ireland and the Republic of Ireland. Similarly, the EU needs to address the status of British military bases in Cyprus and Spain which are part of the EU, not Britain.

Given the complexity of the negotiations, what this means for business is monitoring how the guidelines above unfold.

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