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As announced last week, the NFDA has started to produce a series of information sheets regarding the EU referendum where we will look at the facts and analyse possible consequences of staying in or leaving the EU.
This week we will speak about trade, which represents one of the biggest topics of the debate. The main question is how would the UK’s import and export industries survive in the wake of Brexit?
When listening to the views of the ‘in’ camp in regards to free trade, the rhetoric is clear. The UK will not generate the same types of trade agreements that is currently privy to form outside of the EU.
The EU is a single market in which no tariffs are imposed between member states. According to the Office for National Statistics’ UK Trade Analysis (August 2015), seven of UK’s top trading partners are part of the EU. Moreover, as reported by Sky News, “More than 50 per cent of our exports go to EU countries”.
Those in favour of remaining in the EU, will also highlight the benefits that the UK receives from trade deals between the EU and other world powers. For instance, “The EU is currently negotiating with the US to create the world’s biggest free trade area” (BBC) something that Europhiles consider “highly beneficial for the UK”.
In a recent visit to the UK, American President Barack Obama stated that it could take a long time to get a new trade relationship with the UK in case of Brexit, adding that the first priority for the US would be to complete ongoing talks on a trade deal with the EU. The ability for the EU to be able to create such trade agreements is based on its consumer market and percentage of world GDP. The EU currently holds 23% of world GDP, whilst the UK has 3.5%.
In October 2015, US trade representative Michael Froman stated the UK would face the same tariffs and barriers as China, Brazil or India if it votes to leave. Thus, those looking to remain within the EU will state that leaving the EU will ensure Britain loses some of its negotiating power, especially considering that the US is the biggest export market after the EU (April 2016).
A further point often made by the remainers is the fact that trade with the EU would be pinned on existing regulations, which countries such as Norway still need to adhere to, even though they are not EU members. ‘If Britain were to join the ‘Norwegian club,’ comments The Economist, ‘it would remain bound by virtually all EU regulations, including the working-time directive and almost everything dreamed up in Brussels in the future.’ The real sticking point here is that the UK would no longer have any influence on what those regulations said or required – this is arguably more a loss of sovereignty than the current situation.
Finally, those wanting to remain in the EU point towards the expectation that the EU will want to make life hard for Britain when negotiating trade agreements in order to discourage further breakaways.
On the other side, those in favour of leaving the EU point towards this move as a sovereignty gain. The UK would be free to establish its own trade agreements, this would allow the UK to negotiate trade agreements freely with those countries outside of the EU, especially in emerging economies, at a pace that the UK wants. Eurosceptics are here quick to point to the EU’s known slow negotiations.
UKIP leader Nigel Farage, believes Britain could follow the lead of Norway, which has access to the single market but is not bound by EU laws on areas such as agriculture, justice and home affairs.
Eurosceptics argue that the vast majority of small and medium sized firms do not trade with the EU but are still restricted by a huge regulatory burden imposed from abroad and while the value of UK exports to the EU is growing, the percentage share of UK exports going to the EU is declining, as the UK increases its trade with other countries outside of the EU.
A study by the think-tank Open Europe, which wants to see the EU radically reformed, found that the worst-case “Brexit” scenario is that the UK economy loses 2.2 per cent of its total GDP by 2030 (by comparison, the recession of 2008-09 knocked about 6 per cent off UK GDP). However, it says that GDP could rise by 1.6 per cent if the UK was able to negotiate a free trade deal with Europe – i.e. to maintain the current trade set-up – and pursued “very ambitious deregulation”.
Pro-exit campaigners argue that it would be in the interests of other European countries to re-establish free trade with the UK. In 2015, the UK ranked third in Germany’s trading partners in Foreign Trade for exports, ninth for imports and second after the USA for Foreign Trade Balance (Exports – Imports).
Whilst former Iceland’s PM, Sigmundur Gunnlaugsson, refused to comment on whether the UK should leave or stay in the EU during a Telegraph interview, he did comment that “the UK is one of our [Iceland’s] most important trading partners and whatever [the UK decides] to do [Iceland] would like to have a free trade deal with [the UK], whether through the EEA or independently”.
In a statement made by French president, François Hollande (March 2016), he warned that if Britain left the EU, everyone in Europe would feel the consequences for the single market, trade and economic development. This is an argument often fostered by Brexiters, ‘they need us, more then we need them’.
On assessment of the two sides arguments in regards to trade in/outside of the EU, it would be illogical to suggest that a Brexit would result in ceased trade between the UK and the EU. It is highly probable that a favourable trade agreement would be negotiated providing commercial advantages for both sides.
However, time scales and costs of this trade agreement that are unclear, as well as the success to which the UK would be able to make trade agreements with other nations, such as America, India and China.
Exporters will face additional costs when trading with nations that the UK no longer has a free trade agreement with and will likely, have to continue to comply with the EU’s rules of origin regulations such as Norway and Switzerland.
As the CBI explains, the European Union remains a growing global market and will remain an important market for the UK. Moreover, 80% of British businesses that trade overseas do so with the EU (data provided by UKTI, Trade Statistics 2013). This is unlikely to change in the event of a leave win.
Whilst free trade is often assessed in terms of larger firms, when small businesses look to begin trading outside of the UK, the EU is often the first port of call for expansion. This is due to the free trade access granted by the Single Market. For small and micro businesses, the cost of tariffs, as well as bureaucratic processes, in a post EU landscape, may be too time consuming and burdensome to warrant expansion. Therefore, with these types of businesses trade with the EU may slow and decline. However, it can also be argued that EU ‘red-tape’ is already a burden that prevents some smaller businesses from trading beyond the nation state.
Ultimately British business (and Government) will continue to look to maximise new global opportunities whether inside the EU or outside. It is not an either/or choice. As one commentator at the FT stated ‘countries like Germany have successfully boosted trade with China as members of the EU – there is no reason the UK cannot do the same.’ Likewise, there is no reason the UK could not create trade links with countries such as China from outside of the EU.
The argument is perhaps less about what will be achieved then at what cost and when?
The EU undoubtedly offers a much larger market for other countries to trade with. The EU economy is currently worth £11.8 trillion with a 500-million-person market (CBI facts, November 2015), this does make the EU a priority for trade agreements which the UK alone cannot necessarily match.
Whilst the UK is undoubtedly a high provider of exports to many EU countries, there is concern that the EU would make a trade agreement difficult or costly for the UK following a Brexit, to deter other members from leaving and it must be considered how high on the agenda a one-to-one nation trade agreement would be for countries such as China and America? The point is not to say that trade agreements would not be met. They most certainly would but would the time lapse of these commencing be too detrimental for the UK to come back from? Only the reality of the event and time, would tell.
Next week we will look at what possible agreements the UK could form in case of Brexit.