Aspects for a post-Brexit Trade Deal

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05/02/19 Economics Reference this

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What are the most important aspects of a post-Brexit trade deal with the EU, from a UK perspective?

Brexit, the abbreviation of the two words Britain and Exit, is the result of the June 23rd referendum in 2016 which decided the fate of Britain and its position to leave the Economic and political union – the European union. The unexpected result led to the sudden turmoil and uncertainty of the future of Britain and let to the resignation of the then current Prime Minister David Cameron, and the subsequent ‘fall in the value of the Pound to its lowest level in 30 Years’ (Connington, 2018).  In this essay, I will help ascertain and breakdown the impacts that ‘Brexit’ will have for Britain, mainly focusing on trade and how this will affect not only consumers and businesses, but the economy as a whole. From there, alternative trade models will be analysed to help decide a viable future that has Britain’s best interests at heart, before coming to a conclusion.

The EU and Trade Theory

Trade is the action of how economic partners interact with each other while exchanging commodities. (Economies of Trade 1970-1979).  The European union is based on the proposition of ‘Free Trade’ an argument proposed by David Ricardo a 19th century Economist who first developed the thought of comparative advantage whereby each country produces what it specialises regardless of its absolute advantage, thus as a result world output is increased, and each country benefits the most it can out of the situation. Free trade encourages economies of scale and reduces the formation of oligopolies due to market liberalisation and the ability to sell to a wider market outside of their domestic space.

Current EU implications

The process to leave the EU, is a long and arduous one, taking many years and possibly even as long as a decade before the process is complete, during that time the UK can still take advantage of its benefits until new terms and conditions are met. The EU, taken as a whole is the UK’s largest trading partner. In 2016, UK exports to the EU were £236 billion (43% of all UK exports). UK imports from the EU were £318 billion (54% of all UK imports) (Ward and Webb, 2018). Evidently this is hugely significant as the UK relies on its trading strengths with the EU to be able to generate and sustain its economy.

The EU has over 500 million people living in it, and accounts for 23% of the global GDP. Over a decade (1993-2003) the free market agreement has expanded the EU’s GDP by over £588 billion, this equates to £3,819 extra income per household (Webarchive.nationalarchives.gov.uk, 2018). The Free movement of people act, has created the emergence of a flexible economy. Labour shortages, for example the manual jobs in Ireland and UK have been met due to the migration of eastern European workers. Migration has aided countries to reach productive capacity preventing wastage of raw materials, these migrants are often young people who are less of a drain on the health service and can contribute to the tax revenue of the host country. EU migrants cost the UK government £408.12 per second in public expenditures and contribute £463.35 per second in revenue (Dustmann and Frattini, 2014) – this figure is set to rise as more and more educated migrant workers choose to work in the UK, a prospect now able to happen with the help of the Erasmus programme., where students can complete studies abroad and be able to utilise previous qualifications in the UK where they will be recognised universally (Webarchive.nationalarchives.gov.uk, 2018).  The possibility to study abroad is considered positive by 84% of EU citizens Furthermore, inward investment grew by almost 8x in just over a decade reaching £106.5 billion – the UK now being the 5th largest source of inward investment and its attractiveness from Japanese firms largely being created by its involvement in the single market.

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However, there is an opportunity cost in the UK’s involvement in the EU, and subsequent drawbacks. Firstly, the UK contributed in 2017 a net contribution to the EU of an estimated £8.9 billion (Keep, 2018). This in simplest terms means the direct monetary value the EU receives from the UK is less than we receive – this immediately presents a large opportunity cost that could be better spent elsewhere.  This leads onto the fact that in order to generate such a large sum of money, the government will have to raise it from most likely consumer and corporate taxes, as of today spending per head is currently at £126 per capita (BBC News, 2018).

Inefficient policies are another criticism EU membership faces.  Around 40% of the total EU Budget is spent on the common agricultural policy (EPR Service, 2018), which ensures farmers continue to produce and survive through both volatile weather and market conditions – this is mostly done via annual direct payments., the setting of minimum product prices, the buying of any over-supply and the setting of import tariffs. This has caused farmers to produce far more than is necessary, with prices remaining at a set minimum and eventually the EU having to purchase the oversupply, this has led to an increasing budget with it now totalling £200.2bn, the period 2014-2020 with the UK receiving £20bn over the course of the seven-year period (Civitas: Institute for the Study of Civil Society, 2018). Consumers, especially on lower incomes are faced with now having to purchase farm goods at set minimum prices, even if there is over supply – causing income inequality.

The annual cost of the burden EU regulations has brought to the UK now stands at an estimated £7.4bn per annum. Red tape regulations have severely taken away the sovereignty of individual decision making from host countries., even more so by the introduction of Qualified Majority Voting, – a process by which decisions can be made often against the public interest of a particular country, for example, in EU decision making, Luxembourg has one vote for every 200,000 inhabitants whist for Germany to get the same number of votes, 8 million people are needed (Euro-know.org, 2018).

The current alternatives

The Government have a tough decision to make in the process of leaving the EU, it is paramount that the UK still benefits from many of the EU’s current offerings to stay competitive. There are two options, adopt existing trade relationship models or create a bespoke model.

The first option, is the Swiss model, whereby bilateral agreements have been negotiated between the EU and Switzerland. This entitles the country to be a part of the single market for goods, but not services. Switzerland also has to negotiate extremely frequently with the EU, regarding matters such as the 2014 immigration quota, to ensure Switzerland’s rules are in line with the EU’s from enforcement via the European court of justice. London accounts for 51% of the financial service income for the UK economy (Tyler, 2018), so entering into an agreement with the EU that does not allow for it to be part of the single market for services is extremely   unlikely as it would damage the economy of the capital far too greatly.

The joining of the customs union, much like Turkey has done, comes with the same drawbacks as the Swiss arrangement. Not only would the UK not have any access to the service markets, but it would not have any in the setting of the tariffs it is bound to., furthermore any arrangements the EU forms with other parts of the world would remain inaccessible.

A perhaps more likely situation, however not without its problems is a Free Trade Agreement. A free trade agreement is simply an improved version of the World Trade Organisations rules i.e. lower tariffs. However free trade agreements such as the Canada template offer very little access to the service market, and do not set our regulatory procurement guidelines for the country to follow. If the UK was to somehow create a more developed agreement, EU member nations would insist on ensuring the UK’s adoption of European rules. Furthermore, ‘The recently leaked UK government analysis concludes that, under such a deal, UK gross domestic product might be 5 percentage points lower than it would otherwise be, after 15 years — a loss of about a fifth of the potential increase in output by that time’ (Tyler, 2018).

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Trade under the WTO rules would mean that the UK would be subject to the common external tariff. and UK firms would lose their comparative advantage. Domestic firms such as the construction, aerospace and retail would find costs would rise dramatically causing cost push inflation for the consumers. Even though that accounts for only 20% of the UK’s GDP, it is still a dramatic effect. The WTO has also made very little progress in the deconstruction of the EU’s service industry, so again free market access for the UK would be hindered.

Bespoke Models

The “cake and eat it” model was first proposed by Boris Johnson and Theresa May. Its focus was on a deal that “allowed preferential access to the EU market, but with clear compromises over issues like immigration and the role of European Courts” (Ft.com, 2018). This model would allow the UK to benefit from both goods and services free trade, be able to help cut the detrimental ‘red tape’ bureaucracy that is costing the UK economy almost £8 billion a year and banish membership payments to the EU. Its success however was short lived, Brussels chief negotiator Michel Barnier told a conference in the Belgian capital that the “EU wants to offer its “most ambitious free trade agreement” to the UK but warned that there was no question of Britain “cherry picking” elements of the single market which it wanted to keep” (Porritt, 2018).

The Florence Model refers to the speech that Theresa may’s speech and proposed options given in September 2017. The model outlines that the UK will ensure that payments into the EU budget up until 2020 will still be paid as well as honouring any commitments in that time. EU citizens living in the UK and vice versa, will have their rights protected and the European Court of Justice will still have considerable weighting.

Canada plus model follows the same ideas as the ‘Comprehensive economic and Trade Agreement’ i.e. the Canada model, however it has been altered and expanded to cater for the UK’s needs. The removal of goods tariffs, access to the single market is granted, but at the same time control of immigration rules and not having to contribute to the EU’s budget. Theresa may hailed this model quoting “ This agreement should allow for the freest possible trade in goods and services between Britain and the EU’s member states. It should give British companies the maximum freedom to trade with and operate within European markets” (Martin, 2018).

The final bespoke approach is a “strongly mitigated no deal”. This is whereby no deal is reached, and both parties cannot come to a ‘compromise’, instead the UK would no longer have access to the single market and trade under WTO rules. Oxford economics have recently published that his would be a detrimental outcome, and the “UK stood to lose an estimated £75bn in trade directly from exports and another £50m from supply chain impacts by 2020” (Supply Management, 2018). The government is looking for every possibility to not adopt this model, however with the looming 29th of march 2019 getting closer, with the EU rejecting appeals to extend it, it may be an option that the UK is forced to take.

Conclusion

The UK is in a difficult position, with the UK economy almost completely founded on the service sector currently, it is vital that a deal can be met that allows for access into the single market in terms of services. Secondly, with the UK being a consumer nation, with very little manufacturing, the retail and food industry relies upon the current EU agreement to maintain competitive price and supply levels. Without this, the consumer would be faced with ever increasing expenditure on goods, as the UK is forced to pay tariffs. Whilst current immigrants living in the UK will have their rights protected future immigrants and their ability to work and live in the UK is uncertain. This could impact skills transfer into the UK economy and lead to future labour shortages. Foreign direct investment is another big issue, with many foreign firms locating to London in order to benefit from access to the single market, if this was taken away, attractiveness of future and current firms in London will be diminished potentially leading to relocation. Swiss Banking Giant UBS has recently stated that “As many as 15% of EU companies with operations in Britain plan to move all of their UK staff out of the country after Brexit” (Martin, 2018) The two-scenario’s looking most likely (Switzerland/Canada) are not the best situation for either the UK or the EU, on the on hand, moving towards a Switzerland type approach creates a loss of democratic control, whilst taking a Canada route, would mean restriction of market access, therefore a balance between sovereignty and EU laws needs to be met to be in the best interests of the UK.

Word Count: 2192

Reference List

(Connington, 2018) Connington, J. (2018). From $5 to $1.22: the 200-year journey of the pound against the dollar. [online] The Telegraph. Available at: https://www.telegraph.co.uk/money/special-reports/from-5-to-122-the-200-year-journey-of-the-pound-against-the-doll/ [Accessed 3 Apr. 2018].

Ward, M. and Webb, D. (2018). Statistics on UK-EU trade. [online] Researchbriefings.parliament.uk. Available at: https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7851 [Accessed 3 Apr. 2018].

Webarchive.nationalarchives.gov.uk. (2018). European Union Membership – The Benefits – DTI. [online] Available at: http://webarchive.nationalarchives.gov.uk/+/http://www.dti.gov.uk/europeandtrade/europe/benefits-eu-membership/page22676.html [Accessed 4 Apr. 2018].

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Dustmann, C. and Frattini, T. (2014). The Fiscal Effects of Immigration to the UK. The Economic Journal, 124(580), pp.F593-F643.

Webarchive.nationalarchives.gov.uk. (2018). The Benefits and Achievements of EU Single Market  | Policies | BIS. [online] Available at: http://webarchive.nationalarchives.gov.uk/+/http://www.bis.gov.uk/policies/europe/benefits-of-eu-embership [Accessed 4 Apr. 2018].

Economics of Trade. (n.d.) The Great Soviet Encyclopedia, 3rd Edition. (1970-1979). Retrieved April 7 2018 from http://encyclopedia2.thefreedictionary.com/Economics+of+Trade

Keep, M. (2018). The UK’s contribution to the EU budget. [online] Researchbriefings.parliament.uk. Available at: https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7886 [Accessed 8 Apr. 2018].

BBC News. (2018). How much does the EU Budget cost the UK?. [online] Available at: http://www.bbc.co.uk/news/uk-politics-eu-referendum-35943216 [Accessed 11 Apr. 2018].

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Tyler, G. (2018). The financial sector’s contribution to the UK economy. [online] Researchbriefings.parliament.uk. Available at: http://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN06193 [Accessed 14 Apr. 2018].

Ft.com. (2018). Britain’s road to becoming the EU’s Canada. [online] Available at: https://www.ft.com/content/e72bf154-1566-11e8-9376-4a6390addb44 [Accessed 17 Apr. 2018].

Porritt, R. (2018). Have our cake and eat it? ‘No’ says Barnier. [online] The New European. Available at: http://www.theneweuropean.co.uk/top-stories/have-our-cake-and-eat-it-no-says-barnier-1-5288165 [Accessed 17 Apr. 2018].

Martin, W. (2018). MORGAN STANLEY: Britain is heading for a ‘Canada-plus’ Brexit deal.

Business Insider. Available at: http://uk.businessinsider.com/morgan-stanley-on-brexit-uk-canada-plus-2017-1 [Accessed 18 Apr. 2018].

Supply Management. (2018). Hard Brexit could cost EU economy £100bn. [online] Available at: https://www.cips.org/supply-management/news/2018/january/hard-brexit-could-cost-eu-economy-99bn-by-2020/ [Accessed 21 Apr. 2018].

Martin, W. (2018). UBS SURVEY: 15% of eurozone companies plan to move everyone out of the UK after Brexit. [online] Business Insider. Available at: http://uk.businessinsider.com/ubs-survey-eu-companies-move-all-staff-out-of-uk-brexit-2017-9 [Accessed 21 Apr. 2018].

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