Brexit: Exit from the EU to an FTA
View(s):Brexit is “Britain’s exit” from the European Union (EU). On June 23, 2016 the majority of British people voted for Brexit. Britain is now packing its suitcase to leave the EU. The departure date is fixed as March 29, 2019. However this departure too is a gradual process allowing for a smooth transition which is due to complete by December 31, 2020.
On January 17, the UK Prime Minister Theresa May presented the exit plan. Although everyone calls it “Brexit”, it is actually the UK that is getting ready to exit. Many are using the two terms interchangeably, but Britain comprises England, Wales and Scotland, while the UK includes Northern Ireland as well. This is a source of another dilemma in Brexit.
It seems that an exit is more problematic than an entry. Today we try to look at some of the economic issues of integration and disintegration. At the same time, we will also look at the specific issue of Northern Ireland.
Exit plan
There were two important points in the speech of the UK Prime Minister which I like to pinpoint: The first is that she wanted Britain to be more outward-looking than ever before; this means that Britain is ambitiously looking forward to become “global”, going beyond the borders of Europe. The second is that Britain is looking forward to enter into a Free Trade Agreement (FTA) with EU; this means that Britain does not want to lose the benefits of free trade with EU members even after leaving the EU.
The underlying economics of the two points are very clear. Britain is better off being integrated with the rest of the world including EU rather than being in isolation.
It is easy to grasp the meaning of the first point. Britain was so far integrated more with EU than with other countries in the world. After leaving the EU, Britain which is already one of the most diverse and multi-cultural countries in Europe is looking forward to integrate with or open to the world rather than to Europe.
The second point – going back to the EU with a proposal for FTA, requires little more details to understand the meaning.
Levels of integration
There are different levels of integration. The FTA is the most basic form of integration under which cross-border trade in goods and services is free from tariffs and other trade barriers. The second level is known as Customs Union under which the member countries should have common trade barriers to non-member countries. The EU established its Customs Union in 1968.
The third level of integration is a Common Market or Single Market. This level of integration requires the free movement of goods, services, capital and, people. There are two types of rules and regulations: The first type is cross-border barriers between the member countries which have to be removed. The second type is the inconsistent rules and regulations that are applied internally within member countries, which have to be harmonised. The EU as a Single Market was established in 1992.
There are even higher levels of integration such as the one which applies to Euro Zone; it is an Economic and Monetary Union under which member countries require to have harmonised or surrendered macroeconomic policies as well. The Euro was launched as the single currency of the Euro Zone in 1999, while its notes and coins were introduced in 2002. However, the UK did not become a member of the Euro Zone. Out of the 28 member countries of the EU, 19 belong to the Euro Zone.
From single market to FTA
(AFP) -Britain's Prime Minister Theresa May speaks during Prime Minister's Questions (PMQs) in the House of Commons in London on May 16,. Britain will produce a dossier spelling out its Brexit strategy in the coming weeks, the government said.
It is now clear that where Britain comes from and where it wants to go: It was a member of the EU Common Market where goods, services, capital and, people are allowed to move freely across the borders. In fact, the people’s vote for Brexit was more political than economic. Free movement of people had created an influx of immigrants causing Britain to lose its English authenticity.
However, it is not a wise thing to lose everything due to Brexit. Therefore, according to Prime Minister Theresa May, Britain will “…pursue a bold and ambitious Free Trade Agreement with the European Union.” This means, even after leaving the EU, Britain is committed not to sabotage its free trade in goods and services with EU.
Economics of EU
The European Union economy which is home to over 510 million people is as big as the US which has over 320 million people. The EU is a US$16 trillion economy whereas the US is $18 trillion economy. The UK is a strong economy in the EU which accounts for more than 15 per cent of the entire EU economy.
What is even more important is that the EU is stronger than the US in terms of export growth and the resulting healthy trade balance lies mainly in its strong economies.
As a region, export of goods and services from the EU is about 43 per cent of its GDP. Compared with that, the US has a persistent trade deficit, while its exports account for about 12 per cent of GDP.
A striking feature of EU trade is that their trade within the EU is greater than that with the countries outside the EU. About two-thirds of EU exports are traded within the EU itself. Therefore, it is obvious that the UK does not want to fall down from the economic prosperity that it enjoys by being in the EU. That is why at least an FTA with the EU is important for the UK.
Brexit dilemma
The biggest Brexit problem is not any of the above, but the Ireland border which is also the UK’s physical boundary with the EU. While Ireland (Republic of Ireland) is an independent sovereign state and a member country of not only the EU but also the Euro Zone; everything there however looks more European than English.
Northern Ireland which looks more English than European, is part of the UK; therefore, Northern Ireland together with Britain has to break away from the EU.
Because both Ireland and the UK were members of the EU, the land border between Ireland and Northern Ireland was irrelevant; there was free movement of goods, services, capital and people. After the breakup of the UK from the EU, this border will have to be controlled with check points. This is a difficult choice since Ireland is the major trading partner of Northern Ireland.
Nevertheless, as the UK Prime Minister emphasized, the UK will be pursuing a bold and ambitious FTA with the EU. This means that the border between Ireland and Northern Ireland (or in other words, between the EU and the UK) has to be open for free trade but closed for free movement of people.
Prime Minister May emphasized that “…family ties and bonds of affection that unite our two countries (Ireland and the UK) mean that there will always be a special relationship between us.” What she proposed is the maintenance of the Common Travel Area (CTA) between the two countries ensuring their special relationship, while safeguarding the integrity of the UK’s immigration system. This also looks little tricky because opening a CTA with Ireland means that the UK is open for the EU through Ireland.
Impact on Sri Lanka
While the EU is Sri Lanka’s major export market which accommodates about 30 per cent of total exports, one-third of that is destined to the UK. However since the UK is not planning to reverse its free trade policy, there are no significant direct implications for Sri Lanka’s export trade. If Sri Lanka is going to lose any EU concessions that were applied to the UK as well, there will be a need for re-negotiation.
One important indication in the Prime Minister’s Brexit Plan is to enhance the UK’s global economy beyond the EU which would improve its economic ties with other countries. In a transition process of UK as such, the countries that are prepared to hold it will move ahead.
(The writer is Economics Professor at the Colombo University and can be reached at sirimal@econ.cmb.ac.lk)