Brexit: Trade-Off

An Update on the Situation

 

Young Kyung Kim

In A Nutshell

October 29th, 2016


Brexit isn’t official: Theresa May has yet to invoke Article 50 of the Lisbon treaty. This will officially begin the process of leaving--but things are already looking rocky for the UK. Voices like those of former deputy prime minister of the UK Nick Clegg sound a warning: Food prices wavering, banks projected to leave, the value of the pound dropping—all of these are signs of the paradox that is the current Leave stance on trade. That stance? Ensure free trade while rejecting EU immigration and court jurisdiction.

 

Before the Brexit vote, major proponents of Vote Leave (e.g. David Davis) promised that the UK and EU will able to settle on a free trade agreement (FTA). Regardless if that happens or not, here are some possibilities:

 

Single market participation?

Several ideas are currently circulating. One suggests that Britain will be able to continue to trade within the EU single market unrestricted, tariff-free because of its significant economic presence. But all other countries not of the EU who participate in the free market (e.g. Iceland, Norway) also join the European Economic Area, which means that they have agreed to all four freedoms (goods, services, people, and capital) of the single market. In addition, they are required to comply to all EU trade regulations and make a monetary contribution to the EU budget, without having a voice in the creation or revision of any of these rules. The Leave platform by nature rejects this pathway. And even if Theresa May were to support this step forward, the EU isn’t willing to cherrypick either: in the words of European Council President Donald Tusk, “The only real alternative to a hard Brexit is no Brexit.”

French president Hollande adds: “If Mrs. Theresa May wants a hard Brexit, the negotiations will be equally tough.” 

 

WTO trade baseline?

If negotiations fail and trade ties between the UK and EU are broken after the predicted year of negotiation, any commerce between the EU and UK falls underneath the World Trade Organization's (WTO) jurisdiction. In turn, that means that the European Union cannot treat Britain differently than any other country. The European Union’s current WTO average tariff on food is 22.3%--a steep hike.

 

Sectoral deals?

WTO EU tariffs tacked onto car imports range around 10%, a significant loss for many carmakers based in the UK (about 60% of the UK auto exports go to the EU). Sectoral deals, as Theresa May has already promised several car factories located in Britain (such as Nissan), are of growing interest as a solution. However, the World Trade Organization’s most-favored nation principle (if a trade barrier is opened for one trading partner, a group or nation is obligated to open it for all other nations under the WTO) will likely deter the European Union from making special deals, if only to waterproof the benefits of EU membership (the single market, etc.). Sectoral deals will also likely fall under the jurisdiction of the European Court of Justice, which May will want to avoid.

 

Customs union admittance?

Not out of the question, but that will still put Britain at a disadvantage. Turkey, currently applying to the EU and already absorbed within the EU’s customs union, enjoys a lack of tariffs on its goods flowing into the EU but still finds itself subject to EU trade regulations.

 

Either way, European politics (e.g. the impending (doom of?) trade deal CETA) and its incompatibility with the current Leave stance will be an issue worth following. Honestly, it’s hard to see where the trade-offs will really be.