The UK’s vote to leave the EU has thrown the markets in flux and creates uncertainty for many importers and exporters that work with both the United Kingdom and the European Union. Though not part of the Eurozone, the UK has previously benefitted as member of the EU through free movement of labor and goods across member states, market access to countries around the world through over 20 free trade agreements, and integrated regulatory systems with a market paving the way in harmonized trade and investment policy. Britain’s vote to leave the EU is crucial for not only the survivability of the EU, but the ability of the world to promote free trade and economic integration in a globalized world.
Here at TradeMoves, we are monitoring how Brexit can play out and affect trans-Atlantic trade. Several scenarios may present themselves as a result of Brexit which could potentially impact UK, EU, and US markets.
The UK After the Referendum
Originally, UK Prime Minister David Cameron promised a referendum to appease UK’s far-right constituency. The referendum was held on Thursday, 23 June with 52% of the voters voting that the UK leave the European Union and 48% voting to remain. Geographically, Scotland and Northern Ireland voted Remain while central and northern England voted Leave. Demographically, younger voters voted Remain while older, anti-immigration, and less educated populations tended to vote Leave.
The UK remains in “limbo” as the country sorts out its internal politics as a result of the referendum following the resignation announcement of David Cameron on 24 June. Two candidates, Theresa May (who voted Remain) and Andrea Leadsom (who voted Leave), emerged as the top contenders for PM. Leadsom subsequently dropped out of the race and endorsed May, who took up office on 13 July. May has stated that she will support proceedings for an amicable Brexit.
David Cameron had previously noted that he will not invoke Article 50 of the EU Charter, which begins divorce proceedings from the EU, until his successor is chosen. As the original decision for a new PM was supposed to be held on December 9, it is unclear with the moved-up timeline if/when Article 50 will be invoked.
Economically, the UK has already suffered a bond downgrades. S&P downgraded the UK from an AAA two notches to an AA while Fitch lowered its rating from AA+ to AA. Moody has changed the UK’s credit rating outlook to negative. Predictions show that UK will enter a recession in the last quarter of this year and the beginning of next year.
Going forward, the UK government will be able to analyze their options in light of the referendum results. In place of EU membership, May has indicated the UK can choose to pursue a special relationship with Europe similar to that of Norway or Switzerland. Alternatively, the UK government may try to justify remaining in the EU but negotiate additional exceptions relating to immigration.
Minimum Brexit: One option would be for the UK to remain in the EU but negotiate additional exceptions. This is not likely as EU positions on the UK are hardening; they have already stated that free movement of labor is non-negotiable to maintaining membership. The EU is concerned that by granting additional exemptions, they risk “contagion” as other Eurosceptic members consider the option to leave.
Another option is that the UK may be able to negotiate a relationship with the EU similar to that of non-EU members Norway and Switzerland. While still able to retain their own independent monetary policies, Switzerland and Norway have preferential access through the European Economic Area (EEA). However, EEA does not boast complete free movement of goods nor the same preferences as EU membership; Switzerland and Norway are still subject to select tariffs and quotas, particularly in agricultural goods. Further, Norway and Switzerland both have negotiated separate agreements with the EU regarding free movement of labor; as labor was a main concern in the referendum vote, it may be harder for the UK to negotiate a similar agreement. Nevertheless, the minimal divorce from the EU would result in promoting unity within the UK. Scotland and Northern Ireland may not feel the intense anxiety to vote to leave the UK as they would still receive several EU benefits, while Leavers will feel like they gain an independent immigration policy.
Maximum Brexit: The European Union has made it clear that freedom of labor is a prerequisite for staying in the market and does not have an incentive to grant the UK leniency when it leaves the EU. Brexit sets a dangerous precedent for Eurozone members that are not as economically secure as the UK. Members like Greece, Italy and Spain harbor the similar issues regarding immigration and unemployment, and are desperate to control their own monetary policy or risk default. More Brexit-like scenarios threaten the European experiment and regional integration of trade, regulatory, and investment policies in a globalized economy.
The EU may decide to make an example of the UK, and dissuade other Eurosceptic nations, by not allowing Britain to keep current benefits under the existing trade regime unless they agree to free movement of labor. A full divorce from the EU could mean that Britain would either need to renegotiate trade agreements or lose preferential access to key markets all over the world. As a member of the EU, Britain receives benefits from over 20 trade and investment agreements enforced around the world. This does not include the various regulatory harmonization agreements in sanitary and phytosanitary measures and customs processes that help streamline trade and reduce costs for businesses. In a world where all countries are scrambling to negotiate the latest, newest, and most streamlined processes, Britain would need to focus its efforts on not only un-stitching its own regulations and operations from the EU, but starting their trade policy from scratch if the EU refuses to keep them in the common market.
The US and Brexit: The UK and Europe are the United States’ closest and strongest allies and the outcome of the UK-EU relationship can strain both US trade and security interests on both sides. At a recent panel discussion sponsored by the Global Business Dialogue, Senior Counsel and former Ambassador Alan Wm. Wolff pointed out that the United States is uniquely placed to take a leadership role in establishing new economic ties between the UK and Europe, particularly in the context of the TTIP negotiations. The UK withdrawing from the EU will create several complications for TTIP: 1) it is still unclear whether or not the UK will remain party to the EU’s trade agreements with other nations; 2) the UK does not have the infrastructure or the expertise to pursue a robust trade policy as they have been relying on the EU for the past forty years; and 3) the United States has already issued a statement that if the UK were to pursue its own independent trade agreement with the US, it would have to wait at the back of the line.
One way to salvage TTIP would to allow the three parties to negotiate a modified trilateral partnership between the US, EU, and UK with limited language on nontariff barriers. The parties would provisionally implement suspensions on tariffs as a “down payment” as they continue to negotiate NTBs (what has been attracting dissension). This agreement would likely be consistent with WTO obligations and could pass with TPA. Agriculture would not be included in this agreement.
While Brexit is causing waves in the short run, the EU and the UK will likely resolve their trade relationship using elements from each of the above scenarios. In the meanwhile, new events regarding Brexit are unfolding daily and we continue to watch and wait to see how trade is impacted.