They say seven days is a long time in politics, which must mean that the 27 days since the referendum vote are an age. We have seen a new Prime Minister in No10 who has orchestrated a ruthless reshuffle of the cabinet, a coup within Labour to oust Jeremy Corbyn and, with an international outlook, shocking events in Nice and Turkey, respectively. In this volatile domestic and international climate, it is now up to Theresa May, David Davis, Boris Johnson and co to form new trading relationships with the rest of the world and – although things may, and probably will, change entirely over the next 27 days – this is how promising the options on the table look currently.
The European Union
Despite opting to leave the bloc, it is integral that a new relationship is developed between the UK and the EU; after all, EU countries amount to 50% of UK exports and, crucially, in surveys, 75% of international investors have said access to the single market is the key reason they are here. However, following Brexit, the EU has made it explicitly clear that free trade does not come without the free movement of people but, David Davis, ‘Brexit Minister’ in May’s all-new cabinet, believes he can defy the odds.
“Everybody is taking starting positions. Of course they are talking tough. If I was negotiating to buy your house or your car my first offer wouldn’t be my final one, would it?”
“Post-Brexit, a UK-German deal would include free access for their cars and industrial goods, in exchange for a deal on everything else.”
“Similar deals would be reached with other key EU nations. France would want to protect £3 billion of food and wine exports. Italy, its £1 billion fashion exports. Poland, its £3 billion manufacturing exports.”
Beyond the obvious, the fact that EU countries cannot unilaterally negotiate trade deals with non-EU member states (one issue facing us prior to our notification of Article 50), it is highly unlikely that any such deal could be negotiated without, in some sense, allowing the free movement of people. Despite this, Davis’s stance appears to be very much against the free movement of people, suggesting that new EU migrants who head for Britain could be sent home to avoid a spike in immigration ahead of a withdrawal from the bloc, a statement which has been condemned by those including Labour’s Andy Burnham and Stephen Gethins, the SNP’s Europe spokesperson.
“It is shameful that, instead of trying to offer any sort of reassurance for EU nationals living and working in the UK, the Tories are content to use EU nationals as bargaining chips in their Brexit negotiations”
Although such limits may be possible for others with economic ties to the EU, there are key differences between these countries and the UK. Liechtenstein, for example, has a population of a mere 37,000, such barriers on free movement do not threaten the integrity of the EU. Furthermore, Canada, unlike the UK, only sells 8% of its exports to the EU and is on the other side of the Atlantic Ocean.
It is vital that the UK negotiates a favourable deal with the EU (particularly with regards to the UK’s services sector), especially in light of the recent downgrades in economic forecasts by the IMF; they have cut anticipated UK economic growth by 0.2% this year and 0.9% next year. Given that the UK has very few negotiators and, to exacerbate matters further, any negotiators it does acquire will need to know the EU both inside and out for the UK not to be on the back foot when it faces the top dog at the table (the world’s biggest trading bloc with a common market and multiple trade deals with countries across the world), May, Davis and co may have to abandon their stance on the free movement of people if they hope to have a relationship that is beneficial for the domestic economy.
One bit of promise as far as trade deals are concerned is Australia’s eagerness to negotiate a free trade deal with the UK. Malcolm Turnbull, Australian prime minister, has expressed his desire to create a trading relationship between the two countries as a matter of urgency.
It is clear to see the reasons behind this enthusiasm, the UK is the second largest provider of FDI to the Aussies, only behind the United States in this regard, and it would be an opportunity for Australia to become closer to the EU economically, their second largest trading partner (worth $83 billion), second only to trade with China (at $160 billion) in 2013-14.
“We need to get moving on that quickly … Australia has been a great beneficiary of free trade and open markets and so has the United Kingdom.”
However, the importance of such a deal is up for debate. As of May 2016, Australia was the 21st largest export market and 20th largest of import provider for the UK. There may also be opposition from within Australia to such a deal, Australian Republican Movement Chair, Peter FitzSimons, has already expressed concerns:
“With the British people voting to leave the European Union, what benefit is there to Australian business in continuing to have the British Monarch as our Head of State?”
“Australia’s economic interests are best served by an Australian Head of State, promoting Australian exports in growing markets. Britain is turning its back on Europe, but modern Australia must embrace it.”
If such a view gains support amongst the population, Australia may have to revoke their position or, much more likely, may have to take a harder line which, with the onus on the UK to create trading relationships and, once again, the UK’s lack of skilled negotiators, the deal may be far from what the UK has in mind.
The United States
One trade deal that would carry serious weight in showing the UK’s intent on remaining a global economic influence would be to create a trade deal with the UK’s 3rd largest import market and largest export partner, the United States.
The Obama administration has backed away from its initial warning that the UK would be at the ‘back of the queue’, beginning preliminary discussions regarding how they might be able to pursue a trade agreement between the two countries, speaking with Sajid Javid and Mark Price, the UK’s outgoing business and trade secretaries. Daniel Mullaney, the chief US negotiator, has highlighted the importance of such an agreement, noting that the UK account for 25% of US exports to the EU market.
However, such talks are likely to be a lengthy process (especially if NAFTA and TTIP negotiations are anything to go by), as John Kerry, Secretary of State, has pointed out. Whilst he appreciates that “you can begin to pencil things in, you can’t ink them in”, such a statement suggests ‘proper negotiations’ won’t be underway until the UK has withdrawn from the EU.
Another factor obstructing the way to a speedy negotiation process is, as Kerry has reinforced, are the TTIP negotiations. Kerry has even gone so far as to say that TTIP had become more important in the light of the UK’s exit from the EU, given it would create a vast market. It is naïve, even despite the importance of the UK in the bloc, to think that the USA would allow talks to combine the world’s two largest trading blocs to stagnate whilst a UK-USA relationship was discussed.
“This remains a high priority for President Obama and for our administration”
It isn’t out of the question, however, that negotiating TTIP may, temporarily, become of secondary importance to a UK-US trade deal. The TTIP may be put on hold due to both Brexit, with EU diplomats warning that the deal’s prospects are now more uncertain than ever, and the upcoming German and French leadership elections in 2017, as well as the US election in November.
Another potential threat is public opposition. If this remains strong, with concerns over the services sector (where talks have faltered), the regulatory differences in food and farming as well as, more generally, the talk’s secretive nature, then the US opt to turn their attention to the UK. I wouldn’t hold my breath though, the USA’s previous shows that they’re not ones to rush into such a deal. Perhaps an agreement solidifying the special relationship could be hammered into place, but this will only happen if US-EU talks wane.
It appears to be the same story in Canada. Although Liam Fox told the Sunday Times that Britain had opened “very fruitful” trade talks, the office of Canadian Trade Minister Chrystia Freeland said her focus was the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU.
Whilst, this spanner in the works may mean that a trade deal between Canada and the UK is off the cards for the foreseeable future, negotiations may never need take place at all. Theresa May recently affirmed to Freeland that the UK will push EU approval of CETA which Sam Fowles, a post-graduate law student at Queen Mary University, has noticed could lead to the UK being tied to the agreement for up to 20 years:
“Art. 30.8(4) of CETA provides that, in the event the Agreement is provisionally applied but not ultimately ratified and the provisional application is terminated then claims may be made in relation to the period in which provisional application was effective up to three years after the termination of provisional application.
As Art. 1.3(2) of CETA provides, the Agreement (including provisional application) will cease to take effect in the UK when the EU treaties cease to take effect (i.e. two years after the issue of a withdrawal notice or on the conclusion of a withdrawal agreement as per Art. 50 TEU). Thus the UK will be subject to Chapter 8 […] for three years after it withdraws from the EU if CETA is provisionally applied before that date.”
“If the UK does not withdraw from the EU until after CETA has been ratified then Art. 30.9(2) of CETA will apply. This provides that Chapter 8 will apply for 20 years after the date at which the Agreement is terminated in respect of all investments made while it was in effect. As such, in this case, the UK will be subject to Chapter 8 for 20 years after it officially leaves the EU.”
Another country that May and co will be eager to establish a trade deal with, potentially even more so than the USA, is with China. The London School of Economics note how such a deal appears to be a match made in heaven, with China seeking expertise in services and high-tech industry whilst Britain need to maintain strong investment inflows due to its gargantuan current account deficit, something China’s huge level of FDI outflows could provide.
As well as quashing (at least some) of the protests that Brexit will make the UK globally isolated and insignificant; creating, or at least pushing for, a FTA with China may benefit the UK’s negotiations with the EU greatly, with the UK becoming a gateway to over a billion Chinese customers for EU businesses.
There are a concerns, however. Despite the obvious benefits to the Chinese with the current turbulence in their economy (which will lead them to be equally keen on such a deal), without the world’s biggest trading bloc behind them, the UK will have far fewer cards in negotiations which may lead to a less favourable deal from our side of the table.
According to CapX, a British news website founded by the Centre for Policy Studies, further economic issues with a serious trade agreement with China include the need to tackle the distortions caused by its state sector, its subsidisation and its artificial increase in the costs of its rivals
The UK may have less manoeuvrability in condemning China’s curbing of human rights also. In the past few years, China has, among other things, ordered a severe crackdown on human rights lawyers (hardly progressive considering some of the appalling working and living conditions in China) and attempted to limit free speech by detaining dissidents, bloggers and journalists. As the Conservative Party’s human rights commission recently emphasised in a statement accompanying a report released by MPs last month, this is, quite plainly, unacceptable:
“In light of [Xi’s crackdown], we believe it is time for the UK government to rethink its approach to China, to speak out publicly and consistently on human rights, and consider ways it can more effectively promote and protect basic rights that are being gravely violated in mainland China and in Hong Kong”
Our lacklustre attempts at denouncing such actions have had little impact to date, therefore the establishment of a FTA would likely lead to the UK becoming even quieter about such issues as economic self-interest prevails. Economically, a FTA with the Chinese would be the dream all Brexiters were dreaming of, but ethically, it could be a disaster.
Other boxes still unopened
- Business Secretary Sajid Javid has begun preliminary trade talks with India during a series of discussions in Delhi.
- George Osborne has gone to Singapore to ‘drum up post-Brexit trade’
- Liam Fox has said that the UK already has ten trade deals lined up with economic powerhouses around the world
What’s in our box? Should the UK have said ‘No Deal’ to the EU?
There are promising signs, the UK is out of the traps and ready to take on the world, with scope for deals with the USA, China and maybe even the EU. Worryingly, however, the sheer time it takes to smoothen out the fine details of trade deals, accompanied by countries’ reluctance to prioritise UK trading arrangements over those with the EU, will mean any such benefits of these deals may not be felt for over a decade. It is quite plausible to assume that the UK will have little bargaining power in many of these negotiations which will lead to the UK getting a raw deal. Only time will tell; perhaps Brexit will be a disaster, but perhaps this is the point where the UK ceases to be a key figure in the EU, but a key figure in the world.