Briefing: #Article50 and #BlackWednesday

Today Theresa May pulls the Brexit trigger. Read all about what this means for markets following the links below.

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Articles

  1. Grexit, Brexit και τα παραμύθια (23.3.17) The Huffington Post in Greek
  2. No-Deal Brexit And Fear (17.3.17) The Huffington Post
  3. The City of London is preparing for a hard Brexit (19.1.17) Newsweek
  4. How Eastern Europe is best placed to hit the ground running after a hard Brexit (15.12.16) The Conversation UK
  5. #Marmitegate: what the tumbling pound means for our favourite products (13.10.16) The Conversation UK
  6. Why TTIP will live on, but not for the EU (30.6.16) The Conversation UK

Media

  1. 10.16 Guest on BBC Radio 4 Today Programme, speaking about Brexit (listen here
  2. 06.16 Guest on ΣΚΑΙ radio, speaking about Brexit -in Greek- (listen here).
  3. Horror Show: Brexit unleashes a political nightmare (1.7.2016) Raconteur Magazine,

@iGlinavos

The consequences of Brexit

Since 2016 I have been writing on the potential consequences of Brexit. Before the referendum, the aim was to inform the public of the dangers ahead, were Leave to prevail. After the referendum, the aim is to steer policy away from a hard-Brexit.

After Theresa May confirmed she is after a Hard Brexit, I wrote an explanation of what this means for the City, and by consequence the country.

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The prospect of Brexit is already making every wage earner in Sterling poorer, as explained in my Marmitegate piece for The Conversation.

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While we knew of the potential effects of a Brexit vote on currencies, few people appreciate what a hard-Brexit (with no successor agreement) will mean for investment and trade. My article on opportunities for Eastern European investors in a hard-Brexit scenario should surprise many on the Leave side.

conversation-romanians

My other published work on Brexit can be accessed via this link.

@iGlinavos

Why Hard Brexit is now impossible

scary-judge

An unexpected thing happened today, the High Court in London passed judgment on a case involving the correct process of starting the British withdrawal from the European Union.

The court said that the government can only activate Article 50 (and thus start the 2 year countdown to exit) after Parliamentary approval.

What does this mean and what are the options Theresa May is faced with now?

The short of it is that the hard-Brexit trainwreck has been delayed, perhaps even postponed indefinitely. Why so?

In the current Parliament there is no majority for Brexit. This is both because the majority of MPs in the Commons stood for Remain, and because the Lords are likely to be strongly opposed to the idea.

Now, this does not mean that a majority of MPs cannot be found to vote in favour of activating Article 50. In the current circumstances, as the majority of constituencies in England voted in favour of Leave, it would be political suicide for most sitting MPs to vote against Article 50 activation.

An indication of how the Commons votes on Brexit issues is given by the failure of the proposal to protect the rights of EU citizens already resident in the UK recently. A narrow majority of MPs voted against common sense and decency. Why? Because they are afraid of their Leave voting constituents.

Is all this struggle in favour of Parliamentary involvement for nought then? Actually no. Saying that MPs will not want to openly defy the will of their constituents is not the same as saying that the majority of MPs will go along with May’s apparent desire for a hard Brexit.

From the point of view of an MP, suicide now (by voting against Brexit) against suicide after (once the consequences of a hard-Brexit begin to bite) is not a great choice. A better choice is to vote for Article 50 when given the chance, but with caveats that make participation in the Single Market a requirement for negotiations.

The logic behind this is that Brexit does in fact mean Brexit, but without meaning the utter destruction of the country’s economy. This is a sensible compromise between the public’s democratically expressed desire to commit suicide and the MPs desire for self-preservation.

This of course is relevant for the Commons. I am not investigating whether the regions will need to agree to activating Article 50, as it seems that they will not get a veto after the decision of the Belfast court. What the Lords will do is another question. The Lords do not need to (and do not) care what people think. They could block Brexit indefinitely, or force May’s hand.

Force May’s hand to do what you wonder? The answer is obvious. If the current Parliament cannot authorise a hard-Brexit and a hard-Brexit (translated as exit from the Single Market in order to achieve this fictional control over immigration) is what May wants, we need a new Parliament. We can get a new Parliament only by having an early General Election.

The chips are on the table for Mrs May. This court decision means that she buries any dreams of a hard Brexit, or she brings her hard edged dreams in the form of a party manifesto (for disaster) to the people and see what happens.

Now, the alternative avenue, appealing the court decision, is not a very clever move. The decision rests on an interpretation of Article 50 as the beginning of a process leading inevitably to irreversible loss of rights (everyone in this trial agreed this to be so). If May appeals the decision to the Supreme Court, then (as a matter of EU law interpretation) the nature of Article 50 (the crux of the matter in this case) will need to be investigated. The Supreme Court will have no choice but to refer the matter to the Court of Justice of the EU for an interpretation of Article 50. If the CJEU returns the opinion that Article 50 is irreversible, there is no basis for overturning the High Court decision. If it says it is reversible, then the decision will probably be reversed, but May will have opened an avenue for a different government (or political pressure) to stop Brexit within the two year period through another referendum, or executive decision.

You understand therefore that appealing is a lose-lose situation for May.

What is the outcome for the merry Brexit circus? Soft Brexit or an election.

What role can you play? 1- If you are against Brexit, or in any case not insane (and could live with a soft Brexit, if it cannot be avoided altogether), and 2- are lucky to be a resident of Richmond, then you could vote for the Liberal Democrats in the Richmond Park by-election on December 1st. This way you achieve two things with one vote. You ensure that another MP against Brexit joins this Parliament (need I remind you that golden boy Zac is a Brexit supporter?) plus, you send a message to May that a hard Brexit manifesto will not fare well in the ballot box.

I leave you with this thought. If May is ignorant enough to appeal this decision, how fun would it be to have the process of withdrawal from the EU become the subject of a CJEU decision?

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@iGlinavos

The City and Brexit: A Primer

passporting

Chapter 1: Passporting

The prospect of Brexit has created a tsunami of information as people try to get to terms with the various consequences of a British exit from the European Union. As a teacher of Banking Law, I realised that while a lot of terms are commonly referenced in the financial press, our students – and the wider public- have little appreciation of what is happening and what the implications are.

I am starting therefore a series of short posts on issues Brexit-related from a non-technical perspective for a non-legal audience. You can view this as a primer on the relationship of the world of business with Brexit.

We start with the City and the perceived threat Brexit poses to Passporting. This post presents what Passporting is, why it is important and how Brexit is likely to affect the operation of financial firms & banks out of the UK and with what consequence. This piece is meant to be informative, not partisan, so I will make an effort to avoid repeating why I think Brexit is a very, very bad idea.

What are we talking about?

The City is worried that if the UK departs from the Single Market it will lose Passporting rights. A core consequence of Freedom of Movement for (financial) services is that authorisation granted to a banking business in one Member State will suffice for operations across the EU and it is not therefore required that the process be repeated in another. This principle – nowadays almost sacrosanct as a European principle of banking and financial law – is commonly referred to as ‘Passporting’. The notion of a ‘European passport’ is inexorably linked to the parallel concept of ‘passported activities’. Such activities are termed ‘activities subject to the mutual recognition’. The main reserved activities are, on the one hand, the acceptance of deposits or other repayable funds and, on the other, lending including, inter alia: consumer credit, mortgage credit, factoring, with or without recourse, financing of commercial transactions (including forfeiting). Also, it is important to note that this universal green light applies to the activities a financial institution wishes to perform in another Member State either by means of cross-border, distant services, or by means of a branch office in that other Member State.

Is this important?

The City is a key driver in the British economy. Britain has the highest ratio of services exports to GDP in the G7, at 13%. It also has the biggest share of financial services exports by some way, at 29% in 2012 (the US comes second at 15%). In 2014, financial and insurance services contributed £126.9 billion in gross value added (GVA) to the UK economy, 8.0% of the UK’s total GVA. London accounted for 50.5% of the total financial and insurance sector GVA in the UK in 2012. The sector’s contribution to UK jobs is around 3.4%. Trade in financial services also makes up a substantial proportion of the UK’s trade surplus in services. In 2013/14, the banking sector alone contributed £21.4 billion to UK tax receipts in corporation tax, income tax, national insurance and through the bank levy.

It is not perceived to be in anyone’s interests to sharply and artificially reduce the size of the financial sector in the short to medium term.

What can Brexit do?

Let us assume that Brexit does happen in one of its extreme versions, taking the country out of the Single Market. This will mean loss of Passporting rights, but it will not mean that the heady proportion of GDP contributed by financial services will disappear in its entirety. PwC estimates that the GVA of financial services to the economy will decline by 6-10% (roughly) by 2020, representing a reduction around £7-12 billion in value. Loss of employment is estimated between 70-100.000 in the financial services sector. Why is the projected impact so severe? One after all could point to banks operating successfully in countries outside the EU. An argument of the Leave camp is that reduced connection with Europe frees up options for increased trade in services (including financial services) beyond Europe.

The answer of why the impact is so severe is rather mundane. It is a matter of increased costs and upset balance sheets. No one is suggesting that banks headquartered in Britain will no longer be able to do business in Europe. The problem is that if the industry loses Passporting, compliance and administrative costs will increase markedly. Funds will need to move to the continent if accounts in Euros can no longer clear from London. While this does not mean that banks will close (after all, major banks already have a presence in the continent), it does suggest costs in the short and medium term. With the movement of funds, some (but not all) jobs will go. The cumulative impact of Brexit (especially if it also means exit from the Single Market) is that Britain will present a very different business proposition than it does now. This difference amounts to a few billion pounds wiped off the country’s GDP. This is not apocalyptic, but it is unavoidable if a hard-Brexit is the base scenario.

There is another aspect of Brexit impacts arising from a reduction to the size of the City. The Revenue will face a sharp loss of income if significant amounts of economic activity migrate to the continent. This, on top of increased budgetary needs due to a deteriorating economy (especially since the UK runs a budget deficit at around 6% at the moment) will be a bad hit to state finances.

Can other business, attracted from overseas, compensate? The answer to this question is yes, but only partly. The UK cannot, and should not, seek to become a big-island tax haven. It cannot jump from being the centre of European finance to Singapore-by-the-channel. Even if this were the aim, the price to pay for attracting international funds will be tax breaks and sharp tax cuts. This will not compensate for the loss of tax income, even if it helps firms retain a presence and preserves some part of the City.

Conclusion

Passporting is important and stepping out of a harmonised zone for the provision of financial services entails a loss of business which will not annihilate the sector, but will significantly reduce it. Any adjustment will take place over the longer term and in 2030, the City will still be smaller than it was in June 2016. Brexit, if it means exit from the Single Market, will not turn Canary Wharf into a parking lot, but it will not do any favours to the Treasury or growth in the British economy.

@iGlinavos

Legitimate grievances and a brown guy on TV

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A lot of us in the Remain camp (and a lot of Leavers to be honest) have spent a lot of time trying to convince ourselves that the Brexit vote (and everything else) has an economic justification in its core.

People are marginalised by globalisation, capitalism, neoliberalism, whateveryouwannacallitism. They are ‘left behind’. They are unrepresented by normal politics and turn to the extremes. They wanted to ‘stick it to the man’, to express their dissatisfaction. This is why they voted for Brexit, why they support Trump, why they vote for neonazis across Europe.

While this is a wonderful explanation, in keeping with our Marxist methodological frameworks, it is sadly not true. Also, it is inconveniently passing the blame for all this mess back on us, university profs, the metropolitan elite, normal politics, the 1% (etc etc).

We know how to blame (and deal with) neoliberalism, austerity, unemployment and the rest. We do not know how to deal with bigotry and racism. We do not know what to make of this alliance of the rancid rich with the racist poor, of the snooty Londoners and provincial bigots. We are at a loss. We are also responsible. Read this great piece by @zackbeauchamp in VOX, and you won’t be able to pretend anymore either.

Why are we responsible you say? Because we found ourselves appeasing the bigots, of saying things like: Immigration is a legitimate grievance.

It is not. Do you hear me? Immigration is not a legitimate grievance.

I can prove it.

I can prove it on the systemic level by showing you rims of statistics that prove migration to be a net benefit to the UK, to Europe, to USA, to everyone.

I can prove it on the personal level too.

Next time a cousin comes along who says ‘You know they do have a point on immigration’, do not accept it. Question him. We have gone along with this lie for so long, we handed the referendum on a platter to the likes of Farage.

Ask people: Why is immigration a problem for YOU? What have YOU experienced that makes immigration a legitimate problem?

Try it and you will discover a surprising thing. They have read a lot of headlines from Nazi-like rags like the Daily Express. They have heard other people complain. They have seen once a brown person on TV.

Enough of that. Enough of the bigotry and racism. Enough with the pretense that this is somehow legitimate. Did you miss a council house to an Afghan? Did you lose your job to a Pole? Where you handicapped by a Greek doctor? Did you have to wait at A&E while they pulled a knife out of a foreigner? Do people speak foreign languages in the bus? Do you see a lot of headlines about all those 70 million Turks on their way here?

No Sir, immigration is a fiction. Other people are supposedly affected and you are scared. You are a fat, tatooed English-man in Manchester, scared of brown people on TV. This is why you voted for Brexit. And we let you do it. Well done to you, now you can vote for Andy and complete the circle.

The left lost this game because it abandoned its core principles and internationalism. You have now Labour MPs talking about ‘restrictions’, taking about reducing immigrants, talking about ‘legitimate concerns’. Talking the UKIP talk. To hell with them.

You are scared of foreign people on TV enough to cut your own legs off via this idiocy of Brexit? You deserve what will happen to you, but do not expect me to cry along about your legitimate grievances. The time has come to make a stand. Yes, you are all racists.

enoch-powell

@iGlinavos

An evil plan would have been better than this

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When we (by this I mean fellow Remainers) tried to reflect on Brexit post the fateful referendum on 23 June, we assumed that Brexit was part of an evil plan.

Such evil plan consisted of a Thatcherite take-over under the guise of a far-right coup. We did not think for a second that Boris really wanted out of the EU, or that May was really that keen to rain fire on the economy just to appease UKIPers. We thought this is all a rouse, a clever way to gain power and finish the Thatcherite revolution that Blair ameliorated, and Cameron distorted through the self-imposed pain of austerity, while keeping the state living (albeit at a barely capable level).

Boris, May and the rest of the gang (we though) is out for a final push in the deregulatory, privatising revolution that will establish Britain as the new Reaganite America, the Land of Opportunity for the rich, corporates, foreign dudes with deep pockets.

We were wrong.

The reality it seems is far worse than a Thatcherite revolution. It could even be worse than a far-right takeover by the likes of that scumbag Farage.

The reality is this: Incompetence, lack of vision, lack of plan, lack of intelligence, coupled with utter bollocklessness.

This is it ladies and gentlemen. The famous Brexit government of Mrs May lacks all of the above and is unlikely to grow the necessary bits within a relevant timeframe.

What has the victorious Brexit government actually done after it took over from yellow dog Cameron? It has celebrated the Olympic successes (well deserved). It has gotten into arguments about secondary schools (less well deserved) and has given speeches. Lots of speeches. Brexit means, eh Brexit, in case you missed that one. It has not actually done anything pointing towards what Brexit will be like, when it will happen and how the economy, society and foreign policy will reallign as a result.

For a government that demonstrates this distinct lack of bollocks, a lot of it has appeared in public pronouncements. Sadly, Fox and Davis seem to understand little, and know less of what is involved and what they are doing. May in the meantime is being disgraced in international fora as the obvious realities (to everyone but 52% the electorate) hit home.

No discussions with Europe prior to Article 50 activation

No trade deals with Europeans before discussions are completed

No trade deals with anyone else before a trade deal with Europe

No buffers or interim arrangements while this goes down

The only thing in plentiful evidence is damage control. The Bank of England is trying to keep the economy breathing. The government is promising everyone money (without explaining how it will find it) to plug gaps that will emerge after the end of European supports. Projects are announced and promises made. This smells a little like Tsipras of Greece. Listen to May explaining how everything will turn out ok, and then listen to Tsipras’ speech yesterday in Thessaloniki. No cigar for spotting the commonalities.

Meanwhile, back in the City of London Financials are packing their bags. Why you ask? Because they are not stupid. Banks and financial institutions are not going to stick around to see whether this band of jokers will manage to maintain their EU passports (financial ones) in two years time. They will do two things (trust me on this): 1) They will relocate the bulk of their business to European capitals to be sure that there is no disruption in their business. 2) They will keep a presence in London from which to run international business in a ZERO-TAX environment, which the government will need to institute as a sweetener to keep everyone from fleeing as the excrement hits the fan post Article 50 activation (which cannot be delayed post 2017). It is a win-win for the industry. It is a sorry deal for Britain.

Also, the Europeans are not stupid either. Brexit presents them with a golden opportunity to snatch resources, business and human capital. You will see not only preferential conditions offered to the financial industry to relocate, but also incentives for businesses and staff to set up in Europe. For example look at universities. We have been losing market share (international students) to European institutions teaching in English for a while now. Brexit gives a unique opportunity to institutions to expand their English business-focused programmes and there is a strong incentive for well respected staff from the UK to relocate to Europe. And they will, in droves.

Brexit was a crap idea even before everyone realised the entire thesis for it was lies, mistakes and racism. The total utter lack of ability to make Brexit happen is even worse than the stupid idea to begin with. Even if you were positively inclined towards leaving the EU, for whatever reason, before this summer, you ought to have realised now what it really means. If you are still a staunch Brexiteer, I am sorry to pass judgment on you, but you are an idiot. Further, you are an idiot that deserves what will happen to you.

An evil plan would have been better than  this.

pinky-and-brain

@iGlinavos

Brexit and Prospects for Trade

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Nick Clegg, the ex-Lib Dem leader and former deputy-PM published this briefing paper recently that explains very well why the Brexit dream of trade deals is and will remain a dream. The paper was drafted with help of independent experts and is co-authored by Peter Sutherland, the founding Director-General of the World Trade Organisation. I am reproducing the report here in full as it needs to have the widest possible dissemination.

After you read it, think this: If the one remaining supposed benefit of Brexit (trade with the world) is fantasy, what is the reason for still going ahead with it?

WHAT DOES BREXIT MEAN FOR THE UK’S TRADING RELATIONSHIPS?

Introduction

Membership of the EU governs the trading relationships that we have with the rest of the world. Since long before the evolution of the Single Market in the 1990s, members of the EU have also been members of the European Union Customs Union. The Customs Union has two elements. First, it ensures there are no customs checks on goods crossing internal EU borders. Second, it means that all of its members adopt a ‘Common External Tariff’, charging the same rates of import duties on goods which are imported from countries outside the EU. This rule is designed to avoid third country goods entering the market and circulating freely having avoided the tariff rules set by the Union as a whole. The Customs Union also means that EU member states negotiate trade agreements collectively, through the EU institutions, rather than negotiating their own bilateral trade agreements with third countries. The advantage of this arrangement is that the EU negotiates as a bloc of 500 million consumers, and can use access to this vast market as leverage to secure better trading terms than could be delivered by any individual member state.

How is EU trade with the rest of the world organised?

The UK is currently party to more than 50 Free Trade Agreements (FTAs). While the EU itself remains our largest trading partner (accounting for 44% of UK exports in 2014), EU trade deals with third countries cover significant UK trading partners, including Switzerland, South Korea, and Canada (under ratification), as well as several Commonwealth countries and important emerging markets like Vietnam and Colombia. These agreements give British businesses preferential access to foreign markets while allowing reciprocal access to our market (i.e. waiving all or most of the duties normally required under the Common External Tariff and removing some non-tariff barriers). There are negotiations in progress with a further 67 countries, including the US, Japan and India. In addition to FTAs, which primarily aim to reduce tariff barriers, the EU has a large number of other trade-related agreements that address specific non-tariff barriers. For example, Mutual Recognition Agreements (MRAs) with third countries allow goods to be inspected and declared in conformity with Single Market rules by approved bodies before they are exported to the EU. This saves time and expense as shipments do not need to be impounded and checked at the EU border. MRAs are in place with many countries which do not have a full FTA with the EU, including China, the US and Australia. Other types of agreement include sector-specific deals (for example covering aviation and airlines’ rights to fly between the EU and third countries), and Economic Partnership Agreements (EPAs), which grant preferential access to a number of developing economies – mainly former colonies of EU member states. When the UK leaves the EU, it will cease to be a party to these agreements. Only 15% of UK total trade is currently with countries that are neither members of the EU nor covered by an EU trade agreement which is either in force or under negotiation.

How is the government likely to proceed?

Our membership of the Customs Union is part and parcel of our membership of the EU; when we leave the EU we will leave the Customs Union. Given the consistency with which the Leave campaign argued for the freedom to strike our own trade deals, it seems unlikely that the government would seek to strike a deal with the EU which preserved our membership of the Customs Union, even if this was politically possible. At the time of writing, however, the government would not confirm one way or the other. Assuming that we leave the Customs Union when we leave the EU, the government will then presumably seek to strike an FTA with the EU, and to open trade talks with third countries as quickly as possible. Brexit Ministers have presented this as a relatively straightforward process. David Davis has asserted that within 2 years the UK will be able to negotiate a free trade area “massively larger than the EU”, including deals with China and the US. This scenario is almost certainly impossible. A number of unavoidable steps will need to be taken before the UK is in a position to strike its own trade deals, and these steps will take several years to complete. The reasons for this are explored below.

What needs to happen before the UK can negotiate its own trade deals?

The UK has traded as part of the EU for more than 40 years. As a consequence our laws are completely intertwined with the EU’s, we have virtually no trade negotiators of our own, and any potential trading partners are going to approach talks with a good deal of caution, at least in the short term. Each of the following steps needs to be completed before any new non-EU trade deal can be struck:

1. Confirmation that the UK will not seek to remain in the Customs Union Remaining in the Customs Union would avoid the need for an FTA with the EU, but would also prevent the UK from negotiating FTAs with other countries. Future trading partners will want confirmation that we are indeed free to negotiate our own trade deals before they commit to negotiations. To date, the government has not confirmed its position, and so prospective trade partners remain in the dark. It should be noted that leaving the Customs Union will impose significant extra burdens on British exporters (see below).

2. Agreement with the EU on opening talks Members of the EU Customs Union are not able to enter into their own discussions with third countries about bilateral trade agreements. Technically, the other 27 members of the EU will need to agree to the UK opening informal talks. While this is unlikely to be a stumbling block to the opening of discussions, the UK will not be able to conclude any agreement with a third country while it remains part of the Customs Union.

3. Clarity about the UK relationship with the EU 2 Any third country considering whether to enter into a new trade deal with the UK will most likely want to wait until there is clarity about the UK’s trading relationship with the EU. If the UK decides to seek to retain its membership of the Single Market (either in total through membership of the European Economic Area (EEA), or through a bespoke agreement for specific sectors), then third countries would most likely want to see the terms of any deal, including arrangements for onward re-export of goods to the EU, before developing their own position. Similarly, if we leave the Single Market and negotiate an FTA with the EU, then the nature of this FTA will materially change the calculations that any third country makes about signing a bilateral deal with the UK. Potential trading partners are therefore likely to choose to wait and see what emerges from these talks before committing to negotiations. This question is also vital for foreign investors because onward access to the rest of the European market is one of the central attractions for any business looking to invest in the UK. If we are going to be outside the Single Market, the value of preferential access to the UK’s market to a prospective investor will be diminished.

4. UK ‘schedules of commitments’ to be agreed at the World Trade Organisation The last step which the UK will need to take before it can open meaningful negotiations with third countries is to establish ‘schedules of commitments’ at the World Trade Organisation (WTO). These set out the default duties that will apply to imports into the UK of goods and services. The UK is a WTO member, but as a member of the EU we have been part of the EU’s Common External Tariff for 40 years. In order to trade independently we will need to notify the rest of the world of our maximum import tariffs for merchandise, and other commitments for services, for every category of goods and services. These ‘most favoured nation’ (MFN) terms apply to any country with which we don’t have a bespoke trade agreement of a kind permitted under WTO rules. Until the point at which the UK leaves the EU Customs Union it will be bound by the Common External Tariff and cannot establish its own commitments at the WTO. Once we are free to do so at the end of the article 50 talks, the UK may attempt to expedite the WTO process by simply replicating the existing EU schedule of commitments, rather than starting with a blank sheet of paper. 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. Even if the UK can agree its terms with the other WTO members, there may be domestic roadblocks to overcome. Freed from the Common External Tariff, various UK interest groups may want to challenge the UK’s existing MFN rates. For example, there may be sectors where the EU currently charges a zero tariff on imports where protectionist interests in the UK may want to increase the tariff. Or there may be sectors where the EU currently applies relatively high tariffs, for example on food products, where businesses and consumer groups in the UK may want to make imports cheaper. For example, Tate and Lyle have made it clear that they want to see lower import duties on cane sugar. The whole question of tariffs on agricultural imports will be connected to decisions on the new agricultural policy which the UK government will have to take in partnership with the Scottish, Northern Irish and Welsh administrations. Tariffs on beef, for example, which are currently very high, will both be highly contentious domestically and of significant interest to many EU and third countries who will want to see them lowered.

Agreeing an FTA with the EU

If the UK leaves the Customs Union and does not attempt to re-join the EEA, then a UKEU FTA is the next logical step. An FTA would seek to abolish or minimise tariff barriers, ease non-tariff barriers, and provide whatever preferential access proved negotiable to some areas of the Single Market. It should be noted that it is not possible to pick off individual member states and sign FTAs (for example with Germany, our biggest trading partner). As members of the EU Customs Union they are prohibited from signing bilateral deals. Some MPs who favour a quick unilateral Brexit have suggested that we could avoid the need to sign an FTA by simply dropping our own tariffs on imports from the EU to zero, and challenge the EU to reciprocate. This would not work, for three reasons:

– First, in the absence of a comprehensive FTA the EU is legally obliged under WTO rules to apply the Common External Tariff to the UK, resulting in immediate tariffs on goods ranging from 10% in the case of cars, to 12% for clothes, 21% for beer and spirits, and 29% for chocolate and other confectionary.

– Secondly, WTO ‘most favoured nation’ rules dictate that if we drop tariffs on EU imports to zero we will be obliged to do the same for every other country in the world. That would at a stroke undermine any prospect of securing favourable FTAs with third countries, as we would already have unilaterally removed our tariffs and would find countries unwilling to offer reciprocal tariff reductions – we would have squandered our negotiating capital.

– Finally, such a move would do nothing to address the non-tariff barriers which are harmonised for countries inside the Single Market, or the right to provide services, which will become a far more significant concern for British businesses once we leave the EU.

Any agreement on the UK’s future relationship with the EU will take time to negotiate. Trade Commissioner Cecilia Malmström has said that trade negotiations will be treated as separate from the article 50 process. The logic of this is that we will have to wait for 2 years for the end of the article 50 process and actually leave the EU before there can be a formal FTA negotiation; though in practice, and with EU goodwill, these discussions may be able to run in parallel to some degree. Once talks do begin we can expect them to last for several years. It is sometimes suggested that the EU’s Comprehensive Economic and Trade Agreement with Canada (CETA) offers a model that the UK might follow. There are at least four reasons to question this:

– First, the sheer time it would take. The Canada-EU negotiation was launched in 2007. Nine years later, the agreement has still to take effect.

– Second, CETA grants only limited freedom of services, with hundreds of pages devoted to Canadian and EU ‘carve outs’ from general liberalisation commitments. Yet the UK is heavily dependent on service exports – and especially financial services.

– Third, it would introduce all sorts of new red tape on British businesses, from ‘rules of origin’ requirements to intrusive customs checks (see below).

– Fourth, the tariff reductions it achieves are limited. Under CETA, Canadian exporters will face tariffs and other restrictions on scores of food and farm products. It will still face EU quotas on beef, for example, the elimination of which had been Canada’s single biggest negotiating objective.

An FTA would have to be agreed by all 27 member states, and it is extremely unlikely that every single country will give the UK an easy ride in the negotiations. While Leave campaigners have claimed that the UK is in a commanding position due to its overall trade deficit with the EU (in other words “they need us more than we need them”), in reality much of this trade deficit is accounted for by Germany. Many other member states buy more from the UK than they sell to us. The balance of negotiating leverage would be dictated by the fact that we represent only some 17% of total EU trade, while they represent about 44% of ours. Another time-consuming aspect of an FTA is the negotiations that will have to take place with domestic UK stakeholders, who will have diverse and often conflicting views and needs.

Finally, it is important to note that an EU FTA has to be ratified by the Westminster parliament, and more significantly by the parliaments of all 27 EU member states and by the European Parliament. This introduces further significant scope for delay. For all of these reasons it is probable that an EU FTA will take several years to put in place post-Brexit, stretching the time horizon for a new deal well into the 2020s, and introducing a protracted period of uncertainty for business. In the meantime, unless there is some interim arrangement for tariff-free access, the UK will need to impose tariffs on imports from the EU, for the reasons set out above. To do otherwise would squander any chance of negotiating meaningful FTAs with other countries, and would hamstring our own talks with the EU. This will raise the cost of imports from the EU, which will be borne by British consumers. According to some studies, the impact on UK food prices alone could be as much as 8%. It may be tempting to imagine that there is a way around these problems by putting in place a simple, ‘quick and dirty’ FTA covering essential sectors and leaving others for future negotiations. But this is not possible: the WTO rules require any FTA to be ‘comprehensive’, covering “substantially all” the trade between the transacting parties. It the deal failed to meet this threshold it would be ruled illegal and both EU and UK would revert to their MFN tariffs.

What are the pros and cons of leaving the EU Customs Union and signing an FTA with the EU?

Once the various obstacles explored here are overcome, the UK would have the ability to negotiate new trade deals with third countries which would not otherwise have been available as a member of the EU, and without having to balance our negotiating asks with those of other EU countries. However, the freedom which this implies is less than it might seem:

– On leaving the Customs Union, we will immediately lose access to FTAs which give UK business preferential access to more than 50 markets. Open Europe estimate that these trade deals mean that an additional 14% of UK trade on top of our trade with the EU takes place on preferential terms.

– We will also lose MRAs with 3rd countries (including major trading partners like the US) which allow products to be imported having been certified as being in conformity with EU rules and regulations. Assuming we leave the Single Market and continue to maintain similar regulatory frameworks, these agreements will need to be renegotiated in order to avoid the creation of non-tariff barriers for importers.

– Outside the Customs Union, all goods exported to and imported from the EU will need to be declared to the customs authorities. This will introduce delays, extra paperwork and costs for British businesses, including customs checks, value declarations, inspection certification, and advance cargo declarations. It will also make continental businesses less willing to include UK-produced goods in their supply chains.

– If we sign an FTA with the EU, or seek to adopt a Norway-style relationship, then British exporters will also have to comply with complex ‘rules of origin’. These rules require UK exporters to obtain proof of origin certificates from their national customs authorities to guarantee that the product (or an agreed percentage of the product) originates in the UK. Under an FTA, goods have to be shown to come from the country in question in order to benefit from the preferential tariffs agreed under the FTA, and to prevent third country imports from being passed off as domestic products. These rules are not applied to countries inside the EU Customs Union. The economic impact of rules of origin has been estimated to increase trade costs by between 4% and 15%. The impact would be particularly pronounced on companies with highly integrated cross-border supply chains like the British aerospace and automobile industries.

– Leaving the EU Customs Union will require the introduction of new customs controls (a “hard border”) between Northern Ireland and the Republic, in order to prevent goods from crossing the border in contravention of customs checks.

– Perhaps most importantly, the FTAs that the UK manages to negotiate once outside the EU will lack an advantage that the UK had as a member of the EU. Negotiating as part of a market of 500 million consumers gave us far greater leverage than we will ever have as a market of 65 million consumers. This is simply matter of arithmetic: third countries will find our market relatively less appealing and so will make fewer concessions in negotiations than they would do if we offered a larger market for their products. It is highly unlikely that we would be able to negotiate equivalent access to that which we currently enjoy as a member of the EU, let alone to improve on it.

Sequencing issues and the ‘WTO Option’

The process of arriving at an FTA with the EU is, as we have set out above, not straightforward. The 2-year time window provide by the Article 50 process is completely inadequate for the scale of the task, and unless the deadline can be extended or an interim arrangement can be put in place it seems inevitable that there will be a hiatus between the point at which we formally leave the EU and the point at which an EU FTA comes into force. It may be that a temporary interim arrangement which prolongs our membership of the Single Market and/or Customs Union could be sought, pending the conclusion of a comprehensive FTA. It is not clear whether such a deal would be politically achievable or legally compatible with article 50. Even if it was, there is still the danger that talks would collapse, or that the terms of any agreement would fail to be agreed by the EU-27. Any of these scenarios would see the UK leave the EU without any form of agreement in place. In these circumstances the UK would have to rely solely on to its basic schedule of commitments as agreed in the WTO (see above). This is fraught with dangers: we would 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.

The conclusion is that there is no viable ‘WTO only’ solution. An interim trade deal therefore has to be in place at the point at which the 2-year Article 50 time limit expires.

For the reasons set out above and in Brexit Challenge #1, we believe that an interim deal based on the EEA / Norway approach, which would preserve our membership of the Single Market while allowing us to strike our own trade deals outside the EU Customs Union, would be the least bad option. Even the ‘Norway option’ carries serious downsides though: a major loss of sovereignty as we are cut out of the setting of Single Market rules, coupled with the introduction of new bureaucratic burdens for British exporters who will have to comply with complex ‘rules of origin’ to show where every element of their products was manufactured. However, there are no obviously better choices on offer.

The questions that need to be answered 1. Is it government policy that the UK will leave the EU Customs Union? 2. Is it the government’s intention to seek membership of the Single Market?  3. Will the government come clean about the increase in red tape which awaits exporters who want to continue selling their goods into the EU post-Brexit? 4. How will the UK negotiate new WTO schedules of commitments in a reasonable timescale, given that this will require consensus of all WTO members, some of whom are likely to object? 5. How long does the government expect it will take to negotiate a Free Trade Agreement with the EU? Does it believe it can be achieved in the 2-year time frame of the article 50 negotiations? 6. What is the government’s plan to prevent a highly damaging hiatus between the end of the article 50 process and the commencement of an EU FTA? 7. What will the government do to protect UK interests against the risk that ratification of the EU FTA is blocked by EU Member States? 8. Will the government confirm its determination to avoid the so-called ‘WTO option’, given its unworkability and the Treasury’s estimate that it would reduce GDP by some 7.5%? 9. How will the government address the fact that third countries cannot enter into meaningful negotiations with the UK until the UK’s future relationship with the EU is clear and its WTO schedule of concessions agreed? What will happen to UK export markets during the hiatus in between? 10.What is the government’s estimate of the increase in food prices that would result from applying EU tariff levels to imports from the EU and losing access to preferential food imports under EU agreements with third countries? 11. Does the government intend to pursue an interim agreement which preserves the UK’s access to the Single Market while a comprehensive FTA is negotiated? 12.How many external trade negotiators and consultants does the government intend to recruit over the next two years, and at what projected cost?

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reproduced by @iGlinavos