Professor of International Business,
Aberystwyth Business School, Aberystwyth University,
So it’s happened but why and what does Brexit hold for UK trade policy in the near and not so near future? These questions are not just pertinent for the UK but also for the EU and the Baltic economies. For the UK it means no longer having to accept a trade policy that is a compromise. It can now set its own strategic trade priorities and pursue them independently. For the EU not only is there a loss of a major economic partner from its midst but also the creation of an economic rival on its doorstep. The EU Baltic economies may well experience some negative impacts as most have the UK as one of their top 12 export destinations and their fishing fleets have access to UK waters.
The UK’s departure from the EU was the result of a concerted campaign to re-establish British economic, political and legal sovereignty. It aimed at restoring the supremacy of the nation state by reducing the power and influence of the EU over the UK. The nationalist voice in economic affairs has been growing across the world; a backlash against globalisation and multilateralism.
Leaving the EU restores national sovereignty in economic affairs by re-establishing an independent trade policy, halting the free movement of labour, stopping direct payments to the EU and eliminating the jurisdiction of the European Court of Justice. This is often summarised by the phrase “taking back control”.
How will this refashion UK international trade policy? As far as multilateral trade policy is concerned the UK has retaken its seat at the WTO as an independent nation. At the WTO the UK wants to be seen as the champion of free trade and vows to work towards opening up world trade further. Certainly there would be benefits to both the World Economy and the UK if trade could be opened further. The Baltics would gain too.
In practical terms it requires the UK to cooperate with the EU and the US and other like-minded nations. It also require the UK to identify its international strategic interests and for these to be reflected in its tariff and quota structures. Current proposals suggest that 72% of tariff lines will see a reduction and the UK’s average tariff rate will fall from the current EU average of 7% to 0.7%. The automotive sector and ceramics gain extra protection.
The UK would also have to establish alliances with the EU, the US, Canada and Japan to tackle some of the common issues they face with China over intellectual property, subsidies to state owned enterprises etc. Simultaneously it would have to engage with China and others to bolster the multilateral trading system and the WTO currently under threat from US unilateralism.
Other issues requiring attention and focus include inputs into further developing the GATS trade in services agreement essential for an economy highly dependent on services (80% of GDP).
Bilateral issues are perhaps a little trickier as they involve negotiating a trade agreement with the EU and renegotiating the agreements with those countries with which the UK has agreements as a result of EU membership. Negotiating a free trade deal with the US may also present problems.
The UK proposes that its future relationship with the EU should mirror the EU-Canada or CETA with some extras dealing with agriculture, fisheries and services (financial services in particular). From the UK perspective only this type of agreement can meet the UK’s sovereignty requirements. If this is not accepted then the UK will revert to trading with the EU on WTO terms. This is sometimes referred to as “Australian terms” in UK government circles.
The EU on its part will grant the UK free access to its markets and the single market if the UK is willing to adopt and abide by rules and regulations (labour, environmental, subsidies) determined by Brussels and overseen by the European Court of Justice. That runs counter to the UK’s stance on issues of sovereignty. While these are more stringent conditions than those that apply to Canada the EU justifies its approach on the basis of geographical proximity. The EU could not tolerate a large competitor on its boarders which could access its markets freely and gain competitive advantages by adopting lower standards. The UK rejects this interpretation of its aims. While it offers to maintain high standards, sovereignty issues prevent it accepting EU standards or the authority of the ECJ in upholding them. This is seen to be particularly the case in financial services regulation and access to the UK’s fishing grounds.
Whatever the outcome future trading will be costlier for both UK and EU companies as both partners put in place additional and costly processes to check on the traded goods’ compliance with regulations and rules of origin. The UK has estimated it will need 50,000 new customs administrators to oversee trade relations. It is estimated that UK GDP will be impacted negatively by approximately 5%- 6%.
Further complications arise in the case of Northern Ireland which will be part of the UK customs area but tied into the EU’s Customs Union and single market. In political terms this arrangement upholds the Good Friday agreement but raises trading issues. For example goods originating from the EU and flowing to the UK would pay UK tariffs and vice versa. Rules of origin would also apply. Only goods destined for and consumed in Northern Ireland would be exempt. Joint EU-UK customs supervision has been agreed to oversee the application of the rules although the actual arrangements have yet to be completed.
Renegotiating trade deals with those countries with which the UK currently has deals via EU membership are also likely to produce some tensions and conflicts. Japan is not happy. It had lobbied hard for the UK to pursue a soft Brexit to protect its substantial investments. Its companies are concerned about current developments. Korea too has concerns over rules of origin and the continued use of EU components in manufactured products destined for the UK market. It, furthermore, wants to see any agreement reviewed every two years.
A trade deal with the US is also proposed. Originally viewed as a way of putting pressure on the EU negotiators this now seems unlikely. The current proposal is principally confined to trade and would only generate a £15.3billion boost to trade in the long term or 0.16% over the next 15 years. With an agreement on agricultural products reduced in importance over worries about US farm standards and financial services confined to a separate agreement, it is easy to see why a UK-US agreement won’t yield many benefits.
Brexit stemmed from a desire to re-establish sovereignty. It was confirmed in a referendum; the electorate voting 52% to 48% in favour. Brexit may well have been spurred on by the wave of economic nationalism; a reaction to the adverse impact of Globalisation on many UK communities but also to a questioning of the benefits of EU membership per se. The impact might well have negative economic consequences and it will require a resetting of the UK’s international trade policy; multilateral and bilateral. The UK is currently committed to supporting the multilateral system. In its bilateral relationships the UK is embarking on renegotiating and negotiating trade arrangement with former partners and potential new partners. When trade blocs are formed we know that trade is created between the new partners and diverted away from non-members. What we can say is that Brexit will lead to a relative decline in trade with the EU states including the Baltics. It will also lead to some trade diversion away from the EU as the dynamics of the new UK trade policy takes hold.
Expert article 2732