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SEPTEMBER 21, 2016
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In this issue of IntelDigest, we focus on an update of “Brexit.” The separation of Britain from the apparatus of the European Union is a major development, affecting world economies outside the geographical boundaries of Europe.
For economic and political reasons, the United Kingdom and the European Union will want to maintain close ties. The U.K. is still a major European power, and a major trading partner of most of the countries in the European Union. Approximately 44% of U.K. exports go to members of the E.U., and 53% of its imports come from the European Union.
There are three existing frameworks for relations between the European Union and non-E.U. neighbors, referred to as the “Norwegian” model, the “Swiss” model, and a more open free trade agreement. All of these are on the table as the United Kingdom negotiates its withdrawal from the Union, while at the same time establishing a framework going forward. The final resolution may be a different framework entirely, reflecting the special standing of the U.K. in Europe.
The Norwegian Model
Under the Norwegian model, Britain could preserve its membership in the European Economic Area, which allows the free movement of goods, services, people and capital within the E.U. single market. The U.K. would have to join Norway, Iceland, Switzerland and Liechtenstein in the European Free Trade Association (EFTA). Such an arrangement would offer many of the advantages of E.U. membership without requiring the United Kingdom to participate in the E.U. Common Agriculture and Fisheries policies, or prohibiting it from signing free trade agreements with outside countries.
Adopting the Norwegian model could be the most expedient and least disruptive action. It is unlikely that it would result in any punitive tariffs between the parties, and many services, including financial services, could continue unabated. This “soft landing” would also ease concerns in Scotland and Northern Ireland, where the majority voted to have the U.K. “remain” in the European Union.
However, there are negative factors. One sticking point … at least for those who voted to “leave” because of immigration concerns … is that this resolution would require Britain to continue to accept E.U. workers. In addition, EFTA member states are required to contribute to certain parts of the E.U. budget, without having a say on E.U. policy. Being forced to accept rules that it cannot influence while contributing to a budget that it can’t reform … these were reasons for the Brexit vote in the first place.
The Swiss Model
Switzerland is not a member of the European Union, but it has over 100 bilateral agreements with the E.U. and its member states, so it has ready access to the E.U. single market. These agreements have been negotiated over decades.
But, this access comes with a trade-off … Switzerland must accept E.U. workers. This is a hot issue. The Swiss public voted in a 2014 referendum to limit immigration from the European Union. The vote specified that the Swiss government must implement the changes by February, 2017.
The Swiss parliament is now trying to prepare legislation that would honor the referendum results without violating the E.U. deal. The proposed laws would give priority to hiring Swiss citizens for jobs in Switzerland, but impose no rigid limits on immigration. However, there is stiff opposition in parliament. And, the European Union is adamantly against such quotas.
The European Union will likely strike a hard bargain with Switzerland on these points, so as not to encourage such concessions in its upcoming negotiations on the U.K. withdrawal.
Free Trade Agreement
A free trade agreement with the European Union would address many of the issues central to the Brexit campaign, giving the United Kingdom full control of its immigration policy and greater control of its foreign policy, eliminating its financial contributions to E.U. structures, and restoring full parliamentary sovereignty.
However, negotiating free trade agreements tends to be a lengthy undertaking, often taking 5-10 years to come to fruition. In the meantime, trade between the European Union and United Kingdom could suffer … both parties would likely introduce tariffs during any interlude between the U.K. withdrawal and adoption of new agreements.
Also, free trade agreements are easier to negotiate for goods than they are for services. And services comprise a significant percentage of the British economy.
The Migration Issue
The free movement of people within the European Union has become a hot issue across the Continent, and anti-immigration parties in several E.U. member states continue to lobby for Withdrawal Referenda in their homelands. This will likely make the European Union wary of granting the United Kingdom access to the single market, while allowing the U.K. to reject E.U. workers. This would set a provocative precedent for other members.
The Brexit Agreement
Finding a balance between migration policies and market access will be the priority for the European Union in negotiating the Brexit. Because of the size, relevance, and importance of the United Kingdom in Europe, the resulting settlement will most likely be unique.
The settlement will be shaped by national economic interests on each side of the negotiating table. France and Germany hope to attract financial services operations relocating to the Continent from London. The Swedish government recently warned that the U.K. suggestion to entice investors by reducing corporate taxes could complicate its negotiations with the E.U.
On the other hand, countries with strong economic links to the United Kingdom, such as Ireland, will advocate for the broadest possible deal with London.
Negotiations will probably far exceed the two-year period established by E.U. rules. But, the resulting agreement will probably reflect the “special status” that Britain has retained for generations.