Britain is voting on whether to leave or stay in the EU. A decision by the UK to remain is likely to prolong the current state of generalised gridlock in EU trade politics. Yet at least we will have ‘the mess we know’: a state akin to being in a purgatory. Brexit would bring about the devil we don’t know – and we will meet him in hell. By Iana Dreyer.
If I had placed a bet with a British bookie I would have been among those putting my money on Britain staying in the EU following the in-out referendum on 23 June 2016. I hope my bet would not only be the reflection of my personal wish, which is to continue to see Britain in the EU. The recent days have shown that the tide has turned somewhat in public opinion in favour of the ‘Remain’ camp. But nobody can seriously pretend he or she knows what will happen.
Trade has been one of the central topics in the debate on UK exit from what is the world’s largest trading bloc. A lot has been said about what would be the economic and trade policy implications of Brexit for the country: recession, capital flight, geopolitical marginalisation, potential slide of the City of London into a dodgy offshore financial centre role. Some studies have also dwelled on the economic impact of Brexit on the EU itself. But what if the UK decides to stay? Back to business as usual on trade in Brussels?
Yes and no. Though the ‘Bremain’ scenario at least spares everyone years of big uncertainty and protracted negotiations – for Britain with the EU and other WTO members, and for the EU, with Britain – it’s not going to be smooth sailing. In both cases trade policy will become even more challenging for EU than it already is.
Britain has traditionally been a staunch supporter of free trade policies in the EU. In alliance with the Netherlands and Nordic countries, and on occasion also with Germany, Britain has spearheaded free trade initiatives and – successfully so far – blocked trade policy moves in the EU heading potentially in the other direction, such as ongoing plans to soften trade defence rules that keep the levels of punitive antidumping duties relatively low – ‘TDI reform’ – or plans to potentially loosen EU government procurement rules in retaliation against third countries not opening their public bidding markets to Europeans (‘IPI’ for the aficionados).
In the EU Parliament Tory MEPs are the staunchest supporters of EU free trade agreements, of China, of open markets. The UK wants a free trade agreement with China and is one of the big supporters of the idea of reviving stalled free trade talks with India. Getting TTIP done was one of Cameron’s key demands in the British ‘EU reform’ negotiation with Brussels a few months ago.
United Kingdom edging towards less economic openness?
In case the UK remains, would this pattern of behaviour continue? It all depends on domestic politics in Britain. If the vote is decisive on ‘Remain’, then one can hope for British re-engagement in EU politics, and notably in trade policy. The country has been a bit absent-minded in Brussels in the last months and years – well, since Cameron came to power six years ago. But that is the optimistic scenario. The less optimistic, but more realistic, scenario is that of a very narrow win of the ‘Remain’ case. This would mean the coming government would have to continue to fight with the country’s inner demons, and the governing Tory party face a prolonged period of inner tear and wear.
The Brexit campaign has revealed a profound desire in many parts of Britain to put up walls. Many supposedly ‘free-marketeers’ of the Brexit campaign have clamoured for robust protection from steel imports from China in the context of the current crisis in the sector. The ‘Leave’ camp’s desire to clamp down on migration, on which the UK’s public sector and in particular the UK’s highly competitive services sector depends, cannot but be named “protectionism” (apart from being strongly motivated by racism and xenophobia).
Though some in the ‘Leave’ campaign have called for an end of the EU’s common agricultural policy, senior leaders have tried to reassure UK farmers that, should the country leave, they would continue to receive some protection. After all, the core ‘Leave’ electorate lives in the English countryside. The labour unions that support the Labour party are also wary of trade. Its leader, Jeremy Corbyn, has made only a half-hearted case for ‘Remain’, indicting EU trade projects such as TTIP.
This campaign has revealed that the UK no longer is the happy globaliser of the late 1990s and early 2000s many have started to take for granted. This will reflect on Britain’s attitude to trade policy sooner or later, unless the English (yes English) working class suddenly starts finding a way back to optimism and self-confidence. A similar trend is notable in the Netherlands, the UK’s traditional friend on trade matters.
Given all these tendencies, we might, in a few month’s time, be left with EU member state governments not able to or willing to stick their necks out on trade and on key projects like the transatlantic TTIP in the face of their party backbenchers or electorates: France and Germany will face decisive polls in the midst of surging populism in their countries next year. France will most likely see a presidential run-off vote involving the nationalist leader Marine Le Pen, who is campaigning on an outright protectionist platform, and calling for “Frexit”.
Brussels faces a potentially prolonged period of gridlock and paralysis on important trade policy files. This is reflected in never-ending internecine disputes in Brussels over issues like the authority to ratify international trade agreements (e.g. the ‘mixed agreement’ conflict over CETA with Canada and the Singapore FTA), over competency in investment policy, over the crucial China ‘market economy status’ decision later this year, and in endless ‘trilogue’ discussions over regulations affecting trade (‘conflict minerals’, ‘antitorture regulation’).
‘Bremain’ won’t change that.
In the short term we risk being faced with a British government mired in contradictions on trade: pushing for what is in the UK’s national interest – get TTIP through, have China be recognised as a market economy – but unable and unwilling to do the necessary compromises with other member states – such as on TDI reform – for political reasons (you shan’t be outvoted!) while potentially facing a backlash over this strategy in its inner ranks. In the longer term, we could have a Britain less enthusiastic about trade. It is already quite remarkable that the country has turned against the very pet projects it promoted throughout the 1990s and 2000s: EU enlargement, and Turkish EU membership.
Negotiating “theoretical freedom” for Britain
Sounds awful? If Britain leaves, then we will have clearly even more awful years ahead. EU trade commissioner Cecilia Malmström was overheard this week saying that a UK exit would not change the EU’s current trade strategy and existing trade negotiations would go on. There is no reason indeed why this should not be the case. Yet losing London as a key backer of TTIP, CETA, and China market economy status won’t make life easier for the Commission. Also, negotiating the divorce with Britain – notably finding a new trading arrangement with the UK – could absorb quite a lot of resources and political capital. Expect a nasty divorce.
Prime Minister David Cameron has said he would lead his country out of the EU’s iconic single market, the very single market London prizes so dearly. This is indeed the only possible solution should the UK not wish to comply with EU obligations to maintain the free movement of labour, a fundamental demand of the ‘Leave’ camp.
Any arrangement involving its continued participation in the single market – the EU EEA arrangement with Norway or the EU Switzerland 1994 arrangements – all involve what Eurosceptics abhor: paying into the EU budget and allowing free movement of labour. The only plausible way out would be working towards a classic free trade agreement with perhaps special sector-specific arrangements to participate in the single market.
Non-participation in the EU single market poses a serious challenge to Britain’s global financial services sector. It would lose the so-called EU ‘passporting’ rights that allow them to freely operate in the other member states. Hence the most plausible scenario, outlined by a recent legal report by the General Council of the Bar is de facto alignment with EU legislation, in particular if the UK wants to avoid becoming a shady offshore centre. The UK would need to have its regulations recognised as “equivalent” to the EU’s to be able to operate on the Continent and continue attract the financial industry’s crème de la crème.
“A need to benefit from equivalence decisions after any withdrawal may encourage the UK to maintain and develop legislation in line with that of the EU. That may make rather theoretical the freedom from EU law and regulation resulting from Brexit”, the Bar Council reckons.
Whereas most discussions in the UK on trade after Brexit stop with the notion that in the end its relationships with the EU would be based on standard WTO rules. This option is presented as a simple solution by its proponents. Recent comments by the world trade body’s director general indicate that achieving that would most likely not be quite as simple as proponents imagine.
WTO boss Roberto Azevêdo recently argued that the UK “would need to re-establish its terms of trade within the WTO. The UK, as an individual country, would of course remain a WTO member, but it would not have defined terms in the WTO for its trade in goods and services. It only has these commitments as an EU member. Key aspects of the EU’s terms of trade could not simply be cut and pasted for the UK. Therefore important elements would need to be negotiated”, Azevêdo said, adding that this could take many years.
In trade policy, ‘Bremain’ would be the devilish situation we know: being in a purgatory. But obviously Brexit would be outright hell.
