On June 23rd 2016, the British people will vote in a referendum on whether they wish for the United Kingdom to remain in or leave the European Union. A vote to “leave” would be a major geopolitical event, but how would Britain’s EU exit (or ‘Brexit’) affect trade and industry?
The UK voting to “leave” the EU is broadly associated with uncertainty and risk. The governor of the Bank of England, Mark Carney, says that a vote to “leave” could expose the UK to a “material slowdown in growth”. Indeed, the perception in the City is such that traders may well make such an outcome a short-term reality. By contrast, it is generally perceived that remaining in the EU means endorsing a static status quo.
Before discussing Brexit, therefore, it is important to acknowledge that the UK voting to “remain” in the EU is not without uncertainty or risk. The EU’s ‘Five President’s Report’ lays out a timetable for the completion of economic and monetary union (EMU) by 2025. European Commission President, Jean-Claude Junker, has announced that he will present a White Paper on the subject of EMU in June 2017.
What further consolidation of the Eurozone would mean for the UK, with its euro opt-out and equivocal approach to political union, is not yet clear. The “special status” that Prime Minister, David Cameron, says he has negotiated with the other EU Member States, raises more questions than it answers.
What really interests and intrigues people, however, are possible post-exit scenarios.
Broadly speaking, there are three immediate post-exit options for the UK: the WTO option, the ‘Swiss’ or bilaterals option, and the ‘Norway’ or EFTA/EEA option. Before looking at each of those, however, it is important to note that what the UK government would be able to negotiate with its EU counterparts is constrained by political realities.
The first and foremost political reality is the fact that the only legally constituted means for an EU Member State to leave the EU is via Article 50 of the Treaty on European Union (TEU). Moreover, Article 50 guarantees only two-years to negotiate an exit agreement. The negotiating period can be extended, but the decision to do so requires unanimous agreement among the remaining EU Member States and, according to a UK Government Command Paper, such an extension would be likely to come at a price. The paper says: “Article 50 provides for a two year negotiation, which can only be extended by unanimity. There could be a trade off between speed and ambition. An extension request would provide opportunities for any Member State to try to extract a concession from the UK.”
Thereby do we begin to limit the ‘plausibility scope’ for the negotiation. Indeed, with a two-year deadline in mind, the idea of agreeing a comprehensive free trade agreement (FTA) is a total non-starter. The EU-Canadian Comprehensive Economic and Trade Agreement (CETA) has taken seven years to negotiate and is not yet ratified. Likewise, the Transatlantic Trade and Investment Partnership (TTIP) is three years in the making and nowhere close to completion. There is not one FTA listed on the EU Treaty Database that took less than three years to complete negotiation and ratification.
Some of those in the “leave” camp suggest that, in lieu of an FTA, the UK could resort to trading with the EU under WTO rules. That would be a disaster for UK-EU trade. Under WTO rules, the EU is categorised as a Regional Trade Agreement (RTA) which, the WTO acknowledges, “by their very nature are discriminatory”. As such, RTAs are permitted to discriminate against third-countries, which, were the UK to leave the EU without a replacement trade deal, would include the UK.
The outstanding issue under those circumstances, would not be tariffs, but non-tariff barriers (NTBs), or what are otherwise known as technical barriers to trade (TBT). Without mutual recognition of conformity assessment and an ongoing commitment to regulatory convergence, UK exporters selling into the EU market would have no way to demonstrate conformity to EU standards. It is not sufficient to conform, exporters must be able to demonstrate conformity, and that means having the right paper work.
What a WTO only arrangement would mean in practice is customs inspectors having to detain shipments and take samples to send to approved testing houses. The associated costs would have to be paid by UK exporters, but the associated delays would be even more damaging. Highly integrated European supply lines, relying upon components shipped from multiple countries under a ‘just-in-time’ regime, would be very badly impacted.
Writing on EUReferendum.com, political analyst, researcher and anti-EU campaigner, Dr Richard North, asserts: “Then, as European ports start having to deal with the unexpected burden of thousands of inspections, and a backlog of testing as a huge range of products sit at the ports awaiting results, the system will grind to a halt. It won’t just slow down. It will stop. Trucks waiting to cross the Channel at Dover will be backed up the motorway all the way to London.”
A pragmatic compromise
Obviously it would be in the best interests of all concerned to avoid such a catastrophic outcome. So, what then is the alternative? Fortunately, there is one, although it would require a degree of political compromise.
In short, the most realistic exit option involves the UK maintaining regulatory continuity by applying to rejoin the European Free Trade Association (EFTA) so as to participate in the European Economic Area (EEA) agreement. The EEA is the 31-member state area that forms the Single Market, made up of the EU-28 plus three of the EFTA members—Norway, Iceland and Liechtenstein. Switzerland is a member of EFTA, but has a separate set of bilateral agreements for managing EU trade and participation in co-operative ventures.
This pragmatic acceptance of an ‘off-the-shelf’ solution with respect to trade would protect jobs and investment while also fulfilling on the referendum outcome of taking Britain out of the political and judicial arrangements of the supranational EU. That would mean no immediate change to freedom of movement. However, as Roland Smith of the Adam Smith Institute argues, it is useful to conceive of Brexit as an “evolutionary process” rather than as a “one-time event”.
“In contrast to other exit plans that seek varying degrees of cut-off from the EU,” he remarks, in a report titled ‘Revolution Not Evolution: The Case For the EEA Option’. “The EEA option starts from a very liberal, cooperative agenda that is practical and realistic, and evolves the UK away from EU membership. This will be the first step of an ongoing evolutionary process that ultimately promises the start of a reinvigoration and re-maturing of Britain’s wilting democracy that is increasingly and worryingly held in contempt by many voters. And all the while, maintaining the very open trade and free exchange we have with our nearest neighbours and friends.”
An International Model
To appreciate the potential upside of EU exit in terms of trade, it is important to understand that trade is an exclusive EU competency. EU Member States do not have the power to make independent trade agreements and are obliged to adopt the EU’s “common position” on global bodies such as the World Trade Organisation (WTO). The significance of this is revealed when one rolls back the curtain on the hundreds of standard-setting bodies operating at the global level. Organisations such as the United Nations Economic Commission for Europe (UNECE) and the Codex Alimentarius Commission are in the process of transforming the EU from a law-maker into a law-taker.
In days gone by, it was possible to think of EU membership as giving the UK a seat at the ‘top table’ when it came to making rules for the Single Market. Today, that is no longer the case. Indeed, one of the biggest misconceptions associated with the EEA option is idea that it would mean complying with EU legislation with “no say” over the rules. In fact, more than 80 percent of the legislative categories defined in the Single Market or EEA acquis (body of law)—as distinct from the EU acquis—fall within the ambit of international organisations.
This apparently minor administrative detail is extremely significant in the context of Article 2.4 of the WTO Agreement on Technical Barriers to Trade, which says that, “Where technical regulations are required and relevant international standards exist or their completion is imminent, Members shall use them, or the relevant parts of them, as a basis for their technical regulations”. That little word “shall” transforms the relationship between global bodies and the EU, placing independent nation-states at the forefront of the regulatory agenda. In other words, the EU is no longer the regulatory ‘top table’.
In the area of vehicle regulation, for instance, the standards to which equipment manufacturers work are defined not by the EU but by the World Forum for Harmonization of Vehicle Regulations (WP.29), a working party of the Inland Transport Division of UNECE. There are currently 57 signatories, including the EU. Non-EU countries include major vehicle manufacturing countries such as Japan and South Korea. Outside of the EU, the UK would have full self-representation and the freedom to deal direct at the global level.
UNECE, which was established in 1947, prior to the foundation of the European Coal and Steel Community, which evolved into the present day EU, is also at the cutting edge of developing an “International Model” of regulation, through its WP.6 (Working Party on Regulatory Co-operation and Standardisation Policies). The ‘model’ provides a set of voluntary principles and procedures for countries wishing to harmonise technical regulations, bringing interested countries together to discuss and agree new regulatory frameworks that are then turned into Common Regulatory Objectives (CROs).
Notable successes include CROs for PC peripherals, legacy Public Switched Telephone Network (PSTN) terminals; Bluetooth, Wireless Local Area Network (WLAN); Global Standard for Mobile Telecommunication (GSM); and International Mobile Telecommunications (IMT-2000 or 3G). That is in addition to CROs for earth-moving machinery and equipment for explosive environments.
The process is nascent but extant, offering a viable model for a liberal, globally-minded, free trading country like the UK to reinvigorate the multilateral trading system, working to reduce technical barriers to trade under the aegis of UNECE and WTO.
The multilateral trading system
The ‘national debate’ as conducted among the publicly-funded campaigns is regrettably—although perhaps not unexpectedly—short on facts and perspective. There are viable alternatives to EU membership. But, especially in the initial phase, the UK would have to accept a compromise. The remaining EU Member States would not offer the UK a ‘better deal’. As John Springford and Simon Tilford of the Centre for European Reform, writing in The Daily Telegraph, affirm: “Germany and France will say: ‘it’s all or nothing’. Join the European Economic Area, or no deal.” Experts for the “leave” side agree. However, the advantages to be derived from driving the regulatory agenda at a global level, championing the multilateral trading system and intergovernmental co-operation, would provide enormous scope for an independent Britain to embrace a truly global role.