1. Post Brexit, what is UK’s best bet for trade with EU? Meghnad Desai explains

Post Brexit, what is UK’s best bet for trade with EU? Meghnad Desai explains

For trade with the EU, working under the WTO framework seems to be the UK’s best bet at the moment

By: | Updated: July 18, 2016 6:49 AM
Brexit means Brexit. But the economic consequences of Brexit are unknown and subject to a variety of predictions. (Reuters) Brexit means Brexit. But the economic consequences of Brexit are unknown and subject to a variety of predictions. (Reuters)

The UK citizens were offered a binary choice of ‘Remain’ in or ‘Leave’ the European Union. They made the unexpected choice of Leave. The voting pattern was interesting. The UK has three regions—nations —with devolved assemblies. Scotland and Northern Ireland chose Remain. Wales chose Leave. It was England, undevolved but, by far, the largest and most populous nation which voted to Leave. Scotland had 2.68 million voters, Northern Ireland 790,000, Wales 1.63 million. The English voting numbers of 28 million made up the rest. The final result with a margin of 51.9/48.1 was thus very much determined by the margin of 53.4/46.6 in England despite Scotland’s 62/38 in favour of Remain.

It is the large and clear margin of 7% in the largest nation, England, which has made Brexit unavoidable and unrevisable—no second referendum, despite the fond wishes of Remainers. Brexit means Brexit. But the economic consequences of Brexit are unknown and subject to a variety of predictions.

The first is that exiting the EU is likely to be a long process. As of now, the UK is likely to remain in the EU for at least two and a half years at the minimum. The UK has to trigger Article 50 of the Treaty of the European Union (Lisbon Treaty) to initiate the process. As no one has previously done this, we are in unknown territory. The European Council, the assembly of heads of government, the European Commission which is the executive arm of the EU and the European Parliament will all take part in the negotiations. There is a two-year deadline after triggering Article 50 which can only be extended if there is a unanimous agreement among the remaining 27 members.

The exit negotiations involve deciding which of the cooperative arrangements—on border control, anti- terrorism, climate change, aviation, crime and policing—will be changed or kept the same. There will be the end of many privileges of being able to access the single market. The end of exit is total dissociation from the EU with freedom to control immigration from within the EU.

Many of the debates about the impact of the exit are hinged on the alternative arrangements which would be negotiated for the post-exit regime. There are three main strands to this. The UK could join the European Economic Area (EEA), of which Norway is a major member. The EEA enjoys free access to the EU single market, has to accept free movement of people, pay a contribution but not vote in any of the decisions which the EU may make which would be binding on the EEA members. This is exit with back-door entry.

The other arrangement is European Free Trade Area (EFTA). Switzerland is a leading member. This allows free access to the single market but with national control over immigration. This is closer to what the referendum decision was about, but not complete withdrawal. The last alternative is to break away completely and trade with EU on the basis of WTO as everyone else does. This allows complete control over immigration as the UK has over non-EU migration even today. With the WTO arrangement, the UK is like any other country as far as the EU is concerned.

The costs of these alternatives are difficult to estimate. This is because all one has is past data. The future may be like the past, but we need to allow for predictable changes both within the UK and in the EU and/or the global economy.

The real variable which may shape policy is the time lag involved in negotiating before we can be certain of the post-exit UK. The EEA or EFTA negotiations have to be conducted with the EU after exit negotiations are done. This also involves the unanimous agreement of all 27 members. This may take two or even more years, since there is no reason why the EU members should be kind to the UK. In getting full access to the single market without membership, the UK is asking for a cut-price bargain. There may be harsher conditions imposed, especially about migrations. Member-countries, especially from Eastern Europe, may want concessions for their own citizens to be allowed.

In many ways, the WTO option is the best in terms of time delay. Those negotiations are not with the EU, but with the WTO. They can be held in parallel with the exit negotiations. Thus, we could be clear about the shape of the Brexit at the same time as the exit negotiations are concluded. The economic impact would be easier to calculate as the UK will join the majority of the nations in the world.

Brexit is a gamble. But it is remarkable in showing that when people want a change, they will not be discouraged by the prospect of economic loss. It also shows the power of the voters over the wishes of their representatives.

The author is a prominent economist and Labour peer

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