Defying Gravity

How to Defy Gravity?

 

 

“I don’t want it – No – I can’t want it Anymore;

Something has changed within me, something is not the same

I’m through with playing by the rules of someone else’s game.

Too late for second-guessing, Too late to go back to sleep

It’s time to trust my instincts, Close my eyes and leap!

It’s time to try, Defying gravity

I think I’ll try, Defying gravity

And you can’t pull me down!”

  • Wicked the Musical – ‘Defying Gravity’

 

In a recent report called ‘Can Global Britain Defy Gravity?’[1], trade experts Samuel Lowe and Grant Lewis have explored some of the issues which will be faced by Britain post-Brexit.

The report is well worth a read, and we urge you to do so before you continue reading.

The key parts of the report are reproduced below:

“…where leavers and remainers disagree is on the potential benefits that FTAs with non-EU countries offer relative to the cost that would be paid by losing membership of the world’s largest and deepest, multi-country single market. The following paper attempts to analyse whether it is indeed possible to offset the costs of losing Single Market (and Customs Union) membership via FTAs with other countries. 

First, the costs of losing Single Market. Economic theory teaches us that leaving the world’s largest single market (and destination for nearly half the UK’s exports) can only be economically damaging for the UK. Brexiteers have tried to dismiss this by arguing that an FTA with the EU can easily be agreed, allowing trade to continue tariff-free, as it does currently.

Some argue that falling back onto a WTO relationship with the EU would be bearable (and, indeed, possibly better than no deal at all), due to average most favoured nation tariffs being low. However, this argument ignores the importance of the almost complete absence of non-tariff barriers within the Single Market. So while it is true to say that the UK would be starting from a position of regulatory equivalence to the EU, new compliance and safety checks and certification processes would need to be introduced as equivalence can no longer be assumed. These costs and delays, combined with rules of origin and customs checks will all begin to add up for UK goods exporters.

And for certain service providers, the newly-imposed restrictions, barriers and obstacles may prove insurmountable. The…Monique Ebell analysis, which estimates that while an FTA with the EU would mean that the estimated 58% drop in goods trade with the EU from leaving the Single Market would be limited to “only” a 35% drop, there would be no effect on services exports, reflecting the lack of coverage for services in typical FTAs. So, trade with the EU would drop by 45%, as opposed to the 59% drop estimated in a hard Brexit scenario. That would equate to a 22% drop overall in UK trade.

So, a FTA agreement with the EU would lower the costs of Brexit, but not by a great deal, not least thanks to the lack of provision for services.

As noted above, the long-run Treasury analysis of leaving the EU and moving to an FTA concluded that the UK economy would, by 2030, be 6.2ppts smaller than it would have been if it had remained in the EU. There is no way on earth that FTAs could make up that shortfall. So to be kind to the Global Britain backers, we have instead benchmarked it against the softest of Brexits, the EEA option, where the Treasury finds we would be 3.8% poorer than we would have been had we remained in the EU.”

 

So is there an answer? Can Britain defy gravity?

As the report states, geography is important. Deals with closer countries (even if they are small and not particularly wealthy) are almost guaranteed to be much more important than even deals with wealthy nations or blocs further away due to a myriad of factors – proximity, timezones, cultural similarities, similar regulatory, legal and business practices etc.

So we cannot defy gravity in that sense.

However, in terms of ‘defying gravity’ in an wider economic sense – i.e. making an economic success of Brexit, it could indeed be possible.

The first priority must be of course to reach an agreement with the European Union. We believe a high-quality deal will be agreed, and will probably kick in immediately after the UK’s exit, to ensure there is no major interruption.

Why?

Firstly, in addition to the obvious economic benefits to the EU of signing such a deal, Article 8 of the Lisbon Treaty states that:

“1. The Union shall develop a special relationship with neighbouring countries, aiming to establish an area of prosperity and good neighbourliness, founded on the values of the Union and characterised by close and peaceful relations based on cooperation.

 

  1. For the purposes of paragraph 1, the Union may conclude specific agreements with the countries concerned. These agreements may contain reciprocal rights and obligations as well as the possibility of undertaking activities jointly. Their implementation shall be the subject of periodic consultation.”[2]

Secondly, Chief Brexit negotiator Michel Barnier said in a speech on 22 March 2017:

“Brexit will have significant human, economic, financial, legal and political consequences.

But the consequences of a no deal situation would be even more significant – for everyone:

More than four million citizens – UK citizens in the EU and EU citizens in the UK – confronted with extreme uncertainty concerning their rights and their future;

Supply problems in the United Kingdom, disrupting value chains;

The reintroduction of burdensome customs checks, inevitably slowing down trade and lengthening lorry queues in Dover;

Serious disruption in air traffic to and from the United Kingdom;

Suspension of the distribution of nuclear material to the United Kingdom, as it finds itself outside EURATOM overnight. I can multiply the examples.

The United Kingdom would be seriously affected by such a situation: two thirds of its trade is currently enabled – and protected – by the Single Market and the free-trade agreements of the European Union with more than 60 partner countries.

The Union, our Union, will also be affected, even if we continue to benefit from the Single Market at 27 and from our free-trade agreements.

The no-deal scenario is not our scenario.

We want a deal. We want to succeed by reaching a deal.

Succeed with the British, not against them.

There will be a free-trade agreement at the centre of this partnership, which we will negotiate with the United Kingdom in due course. At the outset of the negotiations, our standards and rules are perfectly integrated between the UK and the EU27.

To finish my speech, I would like to repeat here that our intention is to reach an agreement in the negotiations.”[3]

 

Thirdly, Professor Kalypso Nicolaïdis, Professor in International Relations at the University of Oxford has written that:

 

“The fundamentals [of the likely shape of the future Brexit deal] are arguably simple enough to be described in three short equations, each of which gives us a clue about an eventual Deal UK (Duk).

 

Equation 1: Vm > VDuk > Vnfm

 

This states that the general value of Deal UK (VDuk) cannot be greater than the value of EU membership (Vm), but that it could potentially be greater than the deals accorded to non-former members (Vnfm) such as Norway and Canada.

 

It would be absurd for Brussels to offer a deal more valuable than membership itself. This is not only about setting precedents. More fundamentally, like any club managing “commons” the EU must protect itself against freeriding. For most clubs, benefits can spill over to outsiders, and it is unfair for these outsiders to benefit without contributing. The UK cannot, therefore, get a better deal now than David Cameron was granted last February, and so the concessions sought on free movement will need to cost enough in other areas to highlight the value of membership.

 

But on the other hand, it is conceivable that Deal UK ought to be better than the deals granted to countries that have never been EU members. It would debase the status of EU membership to treat the UK worse than those who have never been equals around the EU table (who do not know “our” all grand strategies and “our” dirty little secrets). In fact, the UK will be negotiating – at least initially – while still a member.  And the marginal cost for the EU of undoing complex internal bargains that have included the UK in the last 42 years increases the plausibility of models like European Economic Area+ or Ukraine association agreement +.”[4]

Fourthly, as the UK – a significant net EU budget contributor is leaving, the EU will not want to damage the economies of other budget contributors by letting the UK drop back on to WTO rules, as that would damage European exports and supply chains.

 

Necessity

We can reasonably conclude therefore; that a combination of economic necessity (not least those oft-cited continental wine and car producers), our deep integration with the Reu27 and the spirit of the Lisbon Treaty articles which commit the Union to “free and fair trade” (especially with neighbouring countries) will mean a deal will be signed, on time.

As for the shape of this deal, we would like to firstly see the UK apply to rejoin The European Free Trade Association (EFTA) and then sign a hybrid deal with the EU based on elements of the precedents of Switzerland and Liechtenstein.

Since (among other factors) the population of the UK is greater than the combined population of all EFTA member states, we could argue for a slightly different model than those countries.

 

EEA-Lite?

A bespoke arrangement would be on the lines of the ‘EEA-Lite’ concept as outlined by Conservative MEP David Campbell Bannerman in his book ‘Time to jump’[5] in which the UK would remain a member of the EEA (European Economic Area) but with much greater emphasis on free movement of workers and not persons.

Dr Richard North has also outlined how the UK could use Liechtenstein’s model as a template for membership of the EEA but with enhanced control over who lives and works in the UK.

He writes:

“…whatever the EU might declare in terms of freedom of movement being “non-negotiable” for EU Member States, it is undeniable that it is negotiable within the framework of the EEA Agreement, as it applies to Efta states.

To that extent, the UK can have some of its cake and eat it. The “Liechtenstein solution” potentially gives our negotiators far more flexibility than at first imagined. We accept the EEA acquis as it stands, but negotiate “sectoral adaptations” that bring the Agreement into line with UK needs. This should help us reach an amicable settlement with the EU, while keeping us in the Single Market.”[6]

An EEA-lite agreement, coupled with a UK-EU memorandum of understanding on customs co-operation (building on and reaffirming the rights and duties of both parties under the recently ratified WTO Trade Facilitation Agreement[7]) would solve many of the currently problems faced by UK Brexit negotiators.

The UK would still be in the Single Market (important for financial services), would no longer be subject to the ECJ (instead we would use the EFTA court to resolve disputes), we would make a financial saving (although how much of one would depend on how much we want to take part in European Programmes) and we could have greater control on who comes to live and work in the UK.

As an EFTA/EEA member we would no longer be bound by the following EU policies:

  • Common Agriculture and Fisheries Policies;
  • Customs Union;
  • Common Trade Policy (can make our own trade deals);
  • Common Foreign and Security Policy;
  • Justice and Home Affairs;
  • Monetary Union (EMU).

 

Yes, we would have less influence over European rules and regulations (with input but no MEPs or final vote) – but outside the EU we would be an independent actor.

No longer constrained by the EU’s common foreign and security policy; we could use our regained influence and votes on global bodies like the World Trade Organisation[8], ISO and UNECE to shape international norms and standards which increasingly shape European rules.  See this link for more details: https://www.unece.org/trade/wp6/welcome.html

 

What about the rest of the world?

Unlike the EU, EFTA has a unique ‘two-track’ trade deal system. This is described in a briefing note by the European Parliament which reported that:

“Because EFTA is a free trade area not requiring the harmonisation of member countries’ external trade policies, EFTA members are free to decide their own trade policies towards third countries. They have therefore signed bilateral FTAs with a number of third countries. The Iceland-China FTA, China’s first with a European country, is one noteworthy example. Norway has signed two bilateral FTAs (with the Faroe Islands and Greenland), while Switzerland, which has been in a customs union with Liechtenstein since 1923, has concluded bilateral FTAs with three countries – China, Japan, and the Faroe Islands. For the most part, EFTA has been able to speak with one voice whilst allowing its individual members to decide their own bilateral policies.

The scope of EFTA FTAs has widened, incorporating new areas added to the multilateral trading system in the WTO Uruguay Round. FTAs include provisions on rules of origin; liberalisation of trade in services; dispute settlement and arbitration; rules of competition; protection of intellectual property rights; trade facilitation principles; sanitary and phytosanitary measures; access to public procurement markets; and state aid (subsidies)

EFTA’s members see the association as a platform for pursuing FTAs, where they can speak with one voice. However, because EFTA is not a customs union and its members are not bound by a common tariff system, each EFTA country can decide its own trade policies. As a result, EFTA members have also concluded bilateral FTAs outside EFTA’s framework with major economies such as China and Japan.”[9]

To summarize the above, EFTA’s negotiators work to negotiate trade deals for the bloc as a whole, while allowing member states to negotiate their own bespoke trade deals.

An example of this is that all of EFTA has a trade deal with Hong Kong, but EFTA member Switzerland has a separate trade deal with China.

EFTA has many experienced trade experts and negotiators on the payroll, while the UK hasn’t had to negotiate its own trade deals for decades and is now currently scrambling to recruit sufficient personnel. Britain could become part of the EFTA trade network and still sign her own separate deals when we have re-established the necessary negotiating teams; a win-win situation for the UK.

If the UK were to be accepted back into EFTA then, we would have to apply to take part in EFTA’s extensive free trade portfolio of 27 free trade agreements (covering 38 countries).

What would facilitate this process is that several of the EFTA-third country FTAs have built-in accession systems.

Take for example the EFTA-Hong Kong Kong agreement, which states:

“ARTICLE 11.6 – Accession

  1. Any State becoming a Member of the European Free Trade Association may accede to this Agreement, provided that the Joint Committee approves its accession on terms and conditions to be agreed upon by the Parties. The instrument of accession shall be deposited with the Depositary.
  2. In relation to an acceding State, this Agreement shall enter into force on the first day of the third month following the deposit of its instrument of accession, or the approval of the terms of accession by the existing Parties, whichever is later.”

We believe that most of the states that EFTA has signed FTAs with would agree to our participation, and we could also find that many of the countries we currently have preferential trade relationships via the EU may also wish to ‘grandfather’ deals to carry on ‘business as usual’ with the UK.

We should contact these third countries immediately, requesting interim agreements (perhaps based on agreements in the form of an exchange of letters or Memoranda of understanding) which would serve as bridging agreements until proper UK-third country FTAs can be signed.

These interim agreements may also draw upon Article 24 of the WTO’s General Agreement on Tariffs and Trade.[10]

This scenario, in which we have grandfathered EU-third country trade deals on the one hand, and participate in EFTA trade deals on the other would make the UK in EFTA a world-leading Free Trade nexus. Add to that, the benefits a potential US-UK trade agreement (which we should analyse extensively before signing!) and we could see an economic boom.

Final thoughts

On paper however, even if the UK retained EEA access, signed a UK-EU customs co-operation document to further facilitate cross-border trade, grandfathered many EU-third country FTAs and took part in the EFTA FTA portfolio and signed a reasonable UK-USA FTA we could still see a smaller UK economy by 2030.

To avert this, we would need to call up other expertise beyond that of trade negotiators – the nation needs a PR strategy. Key phrases like “the UK is becoming a world-leading Free Trade hub” should be repeated by Ministers at all available opportunities, mentioned in articles for the foreign press and repeated time and again to business leaders worldwide.

Wherever possible, the government should make it clear that the UK is the place to do business.

Humans as a species believe in the power of narrative and get caught up in it.

If headlines after Brexit read “Britain goes it alone” or “UK gets 2nd class deal with EU” then foreign investment will slow down. People will be less inclined to come and work here. Companies will hesitate before opening branches in the UK. UK residents will feel hesitant and try not to spend money, meaning there will be a drop in sales and Government tax revenues.

However, if the headlines after Brexit read “UK re-joins EFTA – Trade to be super-charged” “Britain is booming” “The UK: a world-leading free trade hub” then people will want to come and work here – companies will want to invest here and open branches, investors will see UK bonds and shares in UK companies as sound and reliable prospects. UK residents will feel confident and so will buy goods.

We need a ‘Saatchi & Saatchi’ Brexit.

In summary then, while the initial report we cited at the beginning of the article is correct, with the correct diplomacy and PR, we could avert damage to our economy if HMG is willing to use a little imagination and apply to rejoin the trading bloc that the UK helped to create in the first place – EFTA.

___________________________________________________________________________

“Glinda, come with me. Think of what we could do, together.

Unlimited. Together we’re unlimited – Together we’ll be the greatest team there’s ever been;

Glinda –

Dreams, the way we planned ’em

If we work in tandem:

With you and I, Defying gravity.”

  • Wicked the Musical – ‘Defying Gravity’

 

 

[1] https://medium.com/@SamuelMarcLowe/can-global-britain-defy-gravity-18df4e9f4f7f

[2] http://www.lisbon-treaty.org/wcm/the-lisbon-treaty/treaty-on-european-union-and-comments/title-1-common-provisions/6-article-8.html

[3] http://europa.eu/rapid/press-release_SPEECH-17-723_en.htm

[4] http://ukandeu.ac.uk/a-logical-approach-to-predicting-a-brexit-deal/

[5] http://www.timetojump.org/

[6] http://eureferendum.com/blogview.aspx?blogno=86122

[7] https://www.wto.org/english/tratop_e/tradfa_e/tradfa_e.htm

[8] https://www.wto.org/english/thewto_e/countries_e/european_communities_e.htm

[9] http://www.europarl.europa.eu/RegData/etudes/BRIE/2016/580918/EPRS_BRI(2016)580918_EN.pdf

[10] https://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_09_e.htm#article24A5c

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