Brexit: a loophole

Uncertainty awaits during these next two years of experimenting under the Treaty on European Union article 50. After Brexit results came up, the UK is foreseen to enter into a loophole full of undetermined drawbacks and advantages. The EU single market main effect is the access to a wide array of consumers and goods among the 28 –now 27 countries– without having to pay any tariffs. Ergo, to face this new realty, will the EU impose quotas to the UK future goods and services sold here in European territory? Which political and trade option is the UK going to join?

The first and obvious outcome has been the fall in sterling the very same day ‘Leave’ voters emerged victorious. Notwithstanding this outlook, depreciation is expected by some economists to make exports cheaper, thus boost them, strengthening other currencies such as the American dollar, hence damaging gradually American exports[1]. Furthermore, this situation resulting in imported goods higher prices, the UK would need to set a tariff-free basis in, for instance, imported cars – as nowadays the European duty has been established at 10%[2]– in order to balance its devaluated economy.

Nonetheless, it has been proved over the past years that negotiating a free trade treaty with the European Union is rather tricky and it implies a relinquishment of some claims. As a case in point, Norway, as a part of the EEA contributes to the EU budget –about as much as other member countries– and EU regulations are imposed automatically without having a vote on the approved rules. What’s more, in return for free trade, there exists a mandatory freedom of movement. Being this last statement what pro Brexit voters want to flee from, therefore, it is unlikely that Britain would want to be part of the EEA in exchange to single market. Another option could be to apply for readmission to EFTA, preserving free trade with the EFTA states. Although also upholding free movement, not being such a hard commitment since EFTA states have high standards of living, so they don’t represent any mass migration risk[3]. This option, has been being carried out by Switzerland since 1960, proven to be efficient due to the multiple bilateral deals with the EU that allow both parts to join in the same single market. For the UK, however, as a possible future EFTA state, those bilateral deals would probably be in trade-off free movement. Moreover, Switzerland does not have free trade in services inside the EU territory, whilst this area is of major importance in UK exports[4].

As default, if within two years an agreement is not reached between EU and UK, the latter would assume its own sovereignty in negotiations, establishing or abolishing tariffs and making deals with other non EU and EU countries, under the World Trade Organization agreements. Britain will cease to be attached by EU treaties, therefore to its mandatory external imports tariffs, and finally the British will have its own competence as long as they keep under WTO framework, which implies a non-discrimination basis in trade relations. Besides the legal right to reduce tariffs as the UK future international trade group sees fit. Nevertheless, the main pitfall would be the reduced access to EU common market for UK goods manufacturers and services providers, taking into account that, the EU territory is equivalent to a 50% or more of UK exports and vice versa[5]. Furthermore, the non-discrimination principle, would not become a way to surpass the corset of Europe, due to Europe’s low tariff rates in most trades.

On the other hand, as last resort, the UK could try to achieve a free trade agreement among NAFTA members, despite of keeping the restricted access to the EU single market.

Continuing with the analysis of some possible aftermaths, if the UK wants to retain preferential access to all markets covered by Europe negotiations and treaties, it should be a top priority to renegotiate them with its countries without further ado. For instance, the EU, has been hammering out since 2013 –on behalf of its members– the Transatlantic Trade and Investment Partnership (TTIP) with the U.S. Therefore Brexit would imply the UK to re-negotiate separately a new trade agreement with the U.S. Albeit a difficult and long way ahead due to Obama’s recent statements warning that this deal may take ten years to happen, given the heavy lift on any trade agreement. What’s more, quoting Obama “the U.K. is going to be in the back of the queue” as a result of the UK not being even among the U.S top trading partners. Whereas, Liam Fox is dissident with Obama’s assessments, having established that “Whoever it is that will be at the helm of the United States won’t be Barack Obama […] It will be the next president, and the next Congress, who will be in charge of any trade arrangements.”

To conclude, Britain still honors the “Thatcherism” [6] – referring to Margaret Thatcher’s economic politics , a woman also known as the Iron Lady–, thus after the UK leaves its Europe mainland comrades, the Commission might likely seek to confront free trade deals in a conservative basis[7]. Although, still being the EU one of the world’s largest exporter and importer[8], even without Britain in its ranks. Undoubtedly, Britain would have a minor voice in trade negotiations, therefore having a less bargaining power against WTO countries such like the U.S. This statements, however, might prove to be a distorted picture bearing in mind the countless triumphs Britain has achieved over the years, being a pioneer country in breaking customs such as the gold standard period, emerging unscathed and even with an economic growth outcome. Taking all that into account, what the European Union leaders know with total certainty, is that there is a complicated way ahead through the unknown path of article 50.

[1] McMillan, Brad (24 June 2016) “Brexit After All” Retrieved from: http://blog.commonwealth.com/independent-market-observer/brexit-after-all

[2] Julian Rendell (29 June 2016) “Brexit: UK government to push for tariff-free car trade with EU”. Retrieved from http://www.autocar.co.uk/car-news/industry/brexit-uk-government-push-tariff-free-car-trade-eu

[3] Swati Dhingra and Thomas Sampson (2016) “Life after BREXIT: What are the UK’s options outside the European Union?” London School of Economics and Political Science.

[4] Ibid.

[5] Data retrieved from: http://atlas.media.mit.edu/en/profile/country/gbr/ and http://www.bbc.com/news/uk-politics-eu-referendum-35757324 among others.

[6] Roger Bootle (April 2013) “Margaret Thatcher: the economic achievements and legacy of Thatcherism” The Telegraph. Retrieved from: http://www.telegraph.co.uk/news/politics/margaret-thatcher/9979362/Margaret-Thatcher-the-economic-achievements-and-legacy-of-Thatcherism.html

[7] Jack Ewingjune (June 24 2016) “Some Early Signs of ‘Brexit’ Upheaval” Retrieved from: http://www.nytimes.com/2016/06/25/business/international/signs-suggest-warnings-of-brexit-upheaval-could-prove-true.html?_r=0

[8] Data retrieved from: http://ec.europa.eu/trade/policy/eu-position-in-world-trade/