Following the EU referendum on 23rd June 2016, the British people voted to leave the EU, i.e. NOT to be a member of the SEM.
The government tell us that Brexit means Brexit, but not what Brexit means. This is an attempt to set out a negotiating position.
The current government have committed to invoke Article 50 before the end of March 2017 but what does this involve?
Essentially, this provides a mechanism for withdrawal from the EU and is made up of 3 clauses:
Clause 1 relates to the need to make a statement of intent to leave
Clause 2 the negotiation of an agreement as to future relations between the UK and EU
Clause 3 EU treaties will cease to apply to the UK after 2 years unless an agreement is not reached and both the UK and all EU member states agree to extend negotiations
In short, if an agreement is reached, it has to be agreed and ratified by EU member states. No deal takes us to a default position.
So what happens if an agreement is not reached?
Britain will regain its independent status under World Trade Organisation (WTO) rules.
Agreements that were reached between the EU and the rest of the world were made on behalf of the EU and its member states. Therefore, Britain is bound, in the absence of fresh trade deals, to those treaties that have already been signed up to by the EU. In short, nothing changed with the outside world, unless or until other arrangements are made.
What is the EU?
To many, the answer is a Single European Market (SEM), a free trade area affording member states to trade with each other without barriers. This includes the free movement of citizens between states, with the right to work and be treated as citizens in each others’ countries. Notionally at least, there is free movement of capital.
Outsiders can also see the EU as a customs union. Member states jointly agree to place barriers, whether tariffs, quotas or technical, to trade from outside. Individual member states are not permitted to relax barriers to other trading partners.
The EU is also increasingly a political union, its `competences’ growing with each new treaty. EU members have common policies (in a variety of areas, such as fish stocks, agriculture, social policy, consumer protection and areas of employment law. For those members whose currency is the Euro, monetary policy is decided by an EU institution. Member states also agree, again notionally, to follow certain fiscal rules. These apply equally to Germany and Greece as well as the rest.
The EU perspectives of Article 50
Several EU leaders are on record as suggesting that Britain should not appear to benefit from leaving the EU, no deal should make Britain better off for leaving.
When Britain leaves, in theory at least, the UK net contribution to the EU will cease. This leaves a hole in EU accounts to the tune of almost £10 billion per year. Put another way, 14% of the EU budget will be lost.
At first sight it would seem that if not agreement is made within 2 years, negotiations could be extended. This would have the effect of Maintaining Britain’s financial contribution.
As a customs union, the EU has been slow to negotiate new trade deals. Both the Canadian deal, CETA and the American deal which is still to be reached, TTIP, have been ongoing for several years. It would be no surprise if the EU sought to draw out discussions indefinitely.
As soon as a deal is implemented, the EU has to identify how to modify budgets. The big questions are is the EU’s overall budget to be reduced or will the other richer nations such as France and Germany have to make up the difference? Is either solution politically acceptable to voters in every single member state?
In any event, should a deal not be negotiated, whilst Britain is still a member, any integration measures that the EU seek to implement requiring unanimity are at risk.
As major parties undergo change, we can still see that a majority of parliamentarians were out of step with public opinion. The Remain camp form a majority of the parliamentary Conservative and Labour parties with the Liberal Democrats and SNP both overtly pro EU.
Various media have reported that MPs may seek to delay independence from the EU. The majority of MPs seem to take the perspective that access to the SEM, however defined, is paramount.
Britain has other historical relationships, such as Commonwealth members which account for 1/6th of world income and 1/3rd of the world population, as compared with the EU having 1/6th of world income (down from a quarter in the mid 1980s) and 1/15th of the world population.
Before being members of the EU, its members accounted for around 20% of British trade. This figure peaked at over 50% although since 2008, the EU had become less important than the rest of the world. Currently, the EU accounts for around 44% of our trade.
In short, the rest of the world is growing in importance whilst the EU is stagnant.
A business perspective
Whilst governments seek to protect their own interests, so do businesses. Currently, EU tariffs for the outside world average around 2-3%. During the referendum campaign, remain politicians were keen to highlight some particular areas, notably cars at around 10%, meats at up to 80% and dairy at 36%.
Our own example comes from the car market.
Should no agreement be reached under Article 50, it is indeed the case that the customs union of the EU may impose a tariff of around 10% on cars made in the UK and exported to the EU. Around 1/3rd of British made cars are exported to the EU, the majority going to the rest of the world.
In the British market, 85% of new registrations are EU made vehicles. Let us take Mercedes as an example of what might occur.
A reciprocal tariff can be levied on EU made cars. Immediately German made Mercedes vehicles are 10% more expensive. Free of the EU Britain can strike a trade deal with, for example, Brazil, another country in which Mercedes makes cars. Brazilian Mercedes can now be 10% cheaper than before. To maintain market share in Britain, production can be increased in South America, decreased in the EU with resultant shifts in jobs.
Similar principles apply to EU cheeses, meats, wines and a myriad of other goods.
Yes, Britain would love to maintain good relations with our neighbours. We have supported the EU for over 40 years, giving up control of fisheries, accepting EU migration, paying a net contribution and not least, providing a lucrative export market for EU based industries.
The infrastructure exists to maintain free trade, unless the EU chooses not to.
Our greater need is to sell our wares on growing rather than stagnant markets. We are a friendly, cosmopolitan nation with friends around the world. We wish to retain access to EU markets, recognising that we are more important to the EU as a market than the EU is to us. A trade deficit of £8 billion per month is testament to that.
Of course, we are prepared to pay for access to the SEM but having seen little value in return for our decades of sacrifice, we seek to charge for access to British markets as a percentage of the value of trade. It would cost the EU more. Alternatively, we can agree on free trade without costs to either party.
On passports for financial services, evidence given to various parliamentary select committees shows Britain has around 5,000 passports with the EU. EU members have around 8,000 with the UK. Both trade in goods and passporting should be linked, maintaining the status quo.
Britain remains a member of the G7, a genuine global power and one of few countries contributing 2% of GDP to meet NATO obligations. We are a powerful nation that has helped preserve democracy in Europe over centuries. We seek to maintain our status as a neighbour and friend but not at any cost.
We hope that the EU will recognise that on current trading patterns, Britain will be their single biggest export market with 16.9% share of their exports.
Of course, Britain has nothing to fear from the default position of WTO rules. In recognition of our history, we wish to reverse the racist immigration policy of discriminating against Commonwealth friends, many of whose families sacrificed lives to keep Europe free in two world wars. Free movement is therefore not an option.
Budget contributions are negotiable but dependent on balance of trade.
No treaty is acceptable that restricts Britain’s ability to negotiate bilateral or multilateral trade treaties with the rest of the world.
There should be no deal on goods without a deal on financial services. Passporting in its current form is a prerequisite for agreeing tariff free access to British markets for manufactured and processed goods. Adjudication and resolution of disputes must be through the offices of the WTO/ICJ rather than the European Court of Justice.
The two years to negotiate and ratify a treaty must be seen as a maximum rather than a minimum.
Quite simply, the British people decided that the government of the day should decide British policy for British people. If the deal is not what the British people want in 2019, then the next election is scheduled for 2020. It is up to parties to state in their manifestos how they would seek to negotiate an improved deal.
It is in the interests of EU member states to reach a deal within the two year time frame outlined in Article 50.
Certainty is provided with the fallback position of WTO rules. Britain’s history of being a resourceful trading nation with cosmopolitan links around the world places us well to grow and play a worthwhile role in the world. We can seek to help develop parts of the world which have been excluded in more than four decades of EEC/EU membership.
If the EU wishes to share in our prosperity as a global trading partner, we seek to maintain their markets with us. Should they instead choose to implode, we are willing to be a role model for the next new era of free trade growth.