WEEKLY COMMENT 15-09-2016
By Barry Edwards
Now some time has passed since the ‘Brexit’ decision, we can reflect on the reality of the implications of the negotiations to be conducted and the UK economy. Although we are still members of the EU, the UK is regarded as an estranged associate by all 27 countries and we are not invited to attend important meetings that will affect us directly until we leave the union. The surprise result shocked the whole world and the real consequences are yet to be analysed and the negotiations to actually implement the decision are untested and potentially precarious.
None of the reality of what would be involved in this separation was discussed prior to the referendum other than a serious adverse effect on the economy. The complications of renegotiating trade deals were wholeheartedly ignored with very good reason; the complexity is only understood by a very small number of specialists. To help with this difficulty, the Liberal Democrats recently published a very easy to read short paper (8 pages) to explain the process and highlight the problems ahead. Also, Chad Brown of the Petersen Institute published a paper (5 pages) explaining his view of the difficulties ahead for the UK government. If you click on the links below you can read both papers, they are both well worth reading;
Below is a slightly adapted extract from the LibDem paper to give a hint at the difficulties ahead;
“When we leave the EU, the UK would have to rely solely on its basic schedule of commitments as agreed in the WTO. However, this is unlikely to be plain sailing. The UK’s schedule of commitments has to be adopted by consensus among the 164 members of the WTO. Some WTO members may try to secure better access to the UK market than they were able to secure when the UK was part of the much larger EU bloc. Or they may choose to block on wholly unrelated grounds as a means to exert political or economic pressure on the UK. We would also face immediate tariffs on our exports to the EU, bureaucratic customs checks, loss of passporting rights for services, and substantial non-tariff barriers on goods and services, including the prospect of trying to certify our exports as being in conformity with EU rules without any recognised approved UK certiﬁcation authority.
It is, for example, hard to see how any signiﬁcant animal and animal product exports to the continent could continue given that imports to the EU have to pass through designated Border Inspection Posts, of which there are precisely none on the other side of the Channel. This is a £1.5bn export trade which would disappear overnight. And the wider £18bn food and drink export industry would be hit by signiﬁcant tariffs which would inevitably damage sales on the continent.
For these reasons, the Treasury estimated the cost to UK economy of the ‘WTO option’ as 7.5% of GDP after 15 years.”
From the Petersen paper, the following extract is entitled “The Implications”;
“Determining the UK’s new relations with the world will take time. Britain was completely unprepared for a post-Brexit future. Tellingly, one of the UK government’s first steps after the referendum was to announce it was seeking 300 new trade negotiators to staff up the role.
Unfortunately, there are important costs to an elongated process. This includes the uncertainty as to the terms of the UK’s future world engagement. Uncertainty makes firms hold back on investment, for fear that they will guess wrong. They make only short-term hiring decisions and limit long-term investments in people and training.
There is no guidebook for how this will play out. While the UK vote triggered the start of the process, many of the forces holding back resolution are now completely outside of Britain’s control. So much for any immediate-term payoff to the promise of new sovereignty!”
It is clear from both papers that there are many unknowns and uncertainties ahead for Britain and that is assuming that the UK itself holds together. If the UK does break up it would involve two sets of negotiations going on at the same time which would dominate government activity and have serious consequences for the economy. That is the most pessimistic outlook for this momentous decision and there may be some surprises in store that we cannot possibly predict at this time.
The most optimistic of outcome is that the EU itself changes enough to fulfil the demands of the Brexiteers and we remain a member of the union; it would certainly be the best option for business and the economy. As the public begins to understand the implications of the decision, the government may find it has more flexibility than it originally thought, we can only wait and see.
That’s all for this week, more observations next week.