The Trade Implications of Brexit....

HAMISH_MCTAVISH

There has been a lot of uninformed nonsense flying around (from both sides) about the implications of Brexit on Trade between the UK and the EU.

I will try to summarise the main topics below and hopefully this will illustrate exactly why what is going on just now is far from simple to achieve.

This is too long for a single post so I've split the three topics into 3 posts for easier discussion.

1) The timing of Article 50

Theresa May has a problem with this one....

It has been widely reported that the Civil Service have been blunt with the Government that recruitment of enough qualified and experienced negotiators to commence exit negotiations (let alone subsequent trade talks) will take at least 18 months.

But the political imperative is to start the 2 year countdown clock ticking in early 2017 so that the negotiations can be concluded long enough before the 2020 general election to stabilise the country before the election campaign begins.

The Tories may well be complacent about the threat of Labour today given it's internal warring.... But there are no guarantees the Labour Party of 2020 will be equally distracted and ineffective.

So there seems little choice but to start negotiations before we're properly prepared or as ready as we could be for them if they had a bit more time.

This does not bode well for the outcome.

HAMISH_MCTAVISH

2) The Single Market

Brexiteers in particular, although to be fair perhaps also much of the public in general, seem to have a decidedly out of touch view of what modern Trade actually does.

Trade is no longer simply about selling goods produced in Britain to Europe or vice versa.

The UK has for many decades now courted absolutely huge amounts of inwards investment based on positioning itself as a launch pad for global business into the EU single market.

Foreign companies have invested Billions of pounds, creating hundreds of thousands of jobs, in placing their EU manufacturing facilities or HQ's in the UK precisely because it was within the single market and within the EU Customs Union.

The access afforded to these companies from being within the single market is far greater than the access afforded by a simple free trade deal and cannot be easily replicated if the UK leaves the single market.

These businesses often have highly complex supply chains stretching across the entire EU, with for example parts made in Spain being assembled into engines in Holland and manufactured into cars in the UK before the cars are then exported and sold in Germany.

No wonder then that the Japanese Government released an unprecedented intervention with a warning to the UK Government that this trade is at risk following Brexit.

To quote the Japanese Government Report verbatim...

"Japanese businesses with their European headquarters in the UK may decide to transfer their head-office function to Continental Europe if EU laws cease to be applicable in the UK after its withdrawal,".

"In light of the fact that a number of Japanese businesses, invited by the Government in some cases, have invested actively to the UK, which was seen to be a gateway to Europe, and have established value-chains across Europe, we strongly request that the UK will consider this fact seriously and respond in a responsible manner to minimise any harmful effects on these businesses."

http://news.sky.com/story/japans-unprecedented-warning-to-uk-over-brexit-10564585

Now these are not threats or doom-mongering from the Remain Campaign - this is a Sovereign Government raising explicit concerns on behalf of it's job creating businesses which invested Billions in the UK based on a set of circumstances that may no longer exist in the future.

Almost 50% of Japan's investment in the EU has come to the UK.

And with their supply chains stretching across multiple EU countries, the confusion of Brexit affects not only trade of these products within the EU but also of onwards exports to non-EU countries.

Again, to quote the Japanese report....

"Brexit would make such products unable to meet the rules of origin as EU products, which means that Japanese companies operating in the EU would not be able to enjoy the benefit of the Free Trade Areas concluded by the EU," .

http://news.sky.com/story/japans-unprecedented-warning-to-uk-over-brexit-10564585

The stakes here are truly enormous - not just for these businesses, but also for the British workers they employ.

And when the Japanese government makes such a warning in public, you can be sure many other governments are raising the same concerns in private.

No wonder then that Theresa May quickly slapped down Davis and Fox when they talked about leaving the single market or customs union - stating that was not government policy.

Single Market Membership requires Freedom of Movement and the EU is not likely to compromise meaningfully on that topic.

We may get a minor fudge but this will not keep the Brexiteers happy.

If we leave the Single Market, or agree only a transitional arrangement, then the long term economic hit to the UK will likely be significant.

Most businesses will not leave overnight - the investment is now sunk - but future investment cycles will be moved into the EU to avoid these issues.

So the Nissan cars made in Sunderland today will still be made there tomorrow - but once the model becomes obsolete and investment in a new production line is required - that investment goes to plants in the EU single market. And then the UK wakes up one day a decade from now to news another car factory has closed.

And finally of course, there is the matter of services, the UK runs a Services export surplus with the EU - we sell more to them than they sell to us - and as services make up around 70% of the UK economy this is highly significant.

The tax revenue generated for the UK by services trading with the EU is not something the Government can afford to lose - and no EU free trade agreement in history has included services - only single market membership achieves that.

Balancing these competing interests will be a political nightmare.

I don't envy our PM in trying to deal with it.

HAMISH_MCTAVISH

3) The Customs Union

By comparison to the single market the Customs Union is actually a simpler problem to quantify - but not to solve.

Any goods currently imported into the UK from outside the EU have to meet UK/EU regulations and also have the EU wide tariffs applied to them.

As the EU has trade agreements with 50+ countries which the UK is party to this results in preferential treatment for imports of these products by comparison with WTO rules.

In many cases products are sent to the UK as the entry point for the EU and then UK companies onwards distribute creating economic activity here, or add value before reselling in the EU.

Goods that have been imported to the UK do not then face additional customs complications moving into Europe. The EU border is set at the point of import into the UK.

However if we leave the Customs Union it institutes a hard border for paperwork, red-tape, and customs inspections of goods between the UK and EU.

The costs to business - and consumers - of this would be enormous.

So while staying in the customs union would seem the obvious choice - the problem is the rules say membership of the customs union means you cannot negotiate your own trade deals elsewhere - you must rely on the deals the EU has in place.

So continuing membership of the customs union would make Liam Fox's entire trade department redundant. (No wonder he's so desperate to leave it)

The feedback from British Business to the government so far has been almost universally in favour of remaining in the Customs Union - no doubt that was behind Liam Fox's bizarre rant this week about British Business being "too lazy and fat".

Again - the competing interests here are massive - and the potential for a catastrophic error of judgement is high.

HAMISH_MCTAVISH

So while Brexit may mean Brexit - there's a reason nobody knows what Brexit actually means - undoing decades worth of investment and trading arrangements is fiendishly complicated - and the risks of getting it wrong are huge.


Interesting times.....

Fella

HAMISH_MCTAVISH wrote: »

Now these are not threats or doom-mongering from the Remain Campaign - this is a Sovereign Government raising explicit concerns

To be fair though almost every sovereign govt in sight has raised concerns about the UK quitting the EU. However in 100% of those cases those concerns are based on their own fortunes, not ours. And the same goes for many institutions (IMF etc) & many companies.

The USA feels it's in a stronger position if the UK is in the EU so you get Obama sticking his oar in saying how we'd be mad to leave. And so on and so on.

It may very well be that some of the warnings are well-founded but when they're drowned out by the self-interest based warnings of a zillion others you can't really blame people for having a jaded view of them.

HAMISH_MCTAVISH

Fella wrote: »

It may very well be that some of the warnings are well-founded but when they're drowned out by the self-interest based warnings of a zillion others you can't really blame people for having a jaded view of them.

Maybe...

But the problem with that argument is the self interest of many of these companies also happens to be aligned with the self interest of the British people.

We want them to invest, to create jobs, and to increase economic activity. And then we accuse them of 'self interest' or 'bias' when they point out the things we've voted for make that less likely.

It seems to me such arguments are a deflection from the very real concerns of the job creating industries that have invested Billions in the UK because we were in the single market.

If we now leave the single market we hardly have a right to complain if they move elsewhere over time to stay within it.

Conservative MP and chair of the Treasury committee Andrew Tyrie made a good point this week....

Mr Tyrie said the referendum's "pernicious legacy" was to add to a "deep distrust in politics".

"Politicians cannot afford to allow this to get any worse," he said, saying the government had to be frank about the "trade-offs" involved with Brexit - "and the fact that many of the promises made by the Leave side are manifestly unfulfillable"

http://www.bbc.co.uk/news/uk-politics-37252843

Rinoa

Trade with the EU is already shrinking rapidly as a share of Britain’s global commerce and could fall to below one-third of the UK’s overseas market in the coming decades, according to an economic analysis.
Relatively slow economic growth in the EU combined with strong demand for British goods and services elsewhere in the world means that the UK’s biggest trading partner is declining in importance.
The figures will give politicians more hope that it is possible to open up the UK further to trade with the rest of the world.
“Over 60pc of UK goods exports went to the EU in the late 1990s but this has fallen to around 45pc,” said Adam Slater at Oxford Economics (OE).
“Based on our findings and OE forecasts of long-term growth in the EU and the world, the EU share of UK goods exports could fall to 37pc by 2035 and around 30pc by 2050 – back to its 1960 level.”

http://www.telegraph.co.uk/business/2016/09/10/eu-shrinks-in-importance-to-uk-exporters-as-rest-of-world-buys-i/

Question 1: If the EU and single market are so wonderful, why do an ever increasing share of our exports go to the rest of the world where we have zero trade agreements in force?

Question 2: If being in the single market and EU customs union is so vital to accessing the EU market, how do the US export twice as much to the EU as we do?

HAMISH_MCTAVISH

Rinoa wrote: »

Question 1: If the EU and single market are so wonderful, why do an ever increasing share of our exports go to the rest of the world where we have zero trade agreements in force?

If the EU and the single market are so bad for our ability to trade, why is our trade to the rest of the World increasing so much?

Seems like being in the single market has given us the best of both worlds.

And just to correct you - we don't have zero trade agreements in force.

We are part of the EU's trade agreements with 50+ countries - and these trade agreements are no doubt behind a lot of the growth in trade.

Question 2: If being in the single market and EU customs union is so vital to accessing the EU market, how do the US export twice as much to the EU as we do?

The USA's economy is 6 times the size of the UK's but they only export twice as much to the EU as we do?

I think you've answered your own question.....;)

Rinoa

HAMISH_MCTAVISH wrote: »

If the EU and the single market are so bad for our ability to trade, why is our trade to the rest of the World increasing so much?

Seems like being in the single market has given us the best of both worlds.

And just to correct you - we don't have zero trade agreements in force.

We are part of the EU's trade agreements with 50+ countries.

Some of the 50 'countries' you mention: Isle of Man, Faroe Islands, Guernsey, Jersey, Albania, Liechtenstein, Morocco, San Marino, Andora etc. :rotfl:

No US,China, Canada, Australia, India, Brazil, Argentina etc. Probably 99% of our exports go to countries we have no trade agreement with - how much could we sell to them after we negotiate trade deals?

HAMISH_MCTAVISH wrote: »

The USA's economy is 6 times the size of the UK's but they only export twice as much to the EU as we do?

I think you've answered your own question.....;)

Doesn't work like that though, we're on the EU's doorstep with all the so called advantages of EU membership, customs union, single market. Plus we have all the Japanese countries acting as Trojan horses selling to the EU, and yet the US find it easy to sell twice as much.

The single market is vastly overrated. I doubt we'll stay in it.

michaels

UK car production has been moved to Turkey. That hardly fits with Hamish's contention that cars need to be built in the EU to serve that market.

HAMISH_MCTAVISH

Rinoa wrote: »

Some of the 50 'countries' you mention: Isle of Man, Faroe Islands, Guernsey, Jersey, Albania, Liechtenstein, Morocco, San Marino, Andora etc.

And Switzerland, Israel, Peru, Chile, Jordan, Egypt, South Africa, etc.

The single market is vastly overrated. I doubt we'll stay in it.

Thats exactly the sort of naive, old-fashioned and frankly a bit ignorant view of trade discussed in the opening posts.

A view of trade dependent on single-country produced goods, that completely ignores the modern reality of Services exports, non tariff barriers, supply chains, country of origin regulations, etc.

You can continue to be misinformed if you wish.

Our PM and Chancellor are unlikely to agree with you.