Brexit - what next for the UK?
28 July 2017
Brexit negotiations are, in every sense, provoking anxiety in individuals and businesses.
Many are asking ‘how will my job be affected?’ ‘How many jobs will be impacted?’ ‘Will we see an exodus of talent?’ ‘Will we need visas to visit the European Union?’ Will our tax structures change?’ And quite rightly so. These are all valid concerns in the current climate.
Equally important questions include how Britain’s legal system, democratic institutions and law-making processes will change? And how will UK citizens working in the EU, and EU citizens working here, fare?
There are simply too many unknowns, but chief among these concerns is the UK’s uncertain economic condition and trading status with the EU.
Although all major financial institutions, and most large multinationals, have contingency plans in place to bolster their European operations and secure market access, their success depends on the eventual form and shape of any emerging Brexit deal.
There are four possible scenarios offering a platform upon which negotiations can be pursued:
The Norwegian model, or ‘soft-Brexit’ would see the UK join the European Economic Area and gain access to the Single European Market, freeing it from EU rules on agriculture and fisheries. This would facilitate the free movement of goods, services, capital and people within a system that ensures competition is not distorted and rules are respected. This would also mean that the UK accepts a number of EU rules while having no say in policy-making
The Swiss model would make the UK independent of the EU and allow the negotiation of new trade treaties on a sector-by-sector basis. This would demand numerous bilateral trade arrangements, each taking several years to negotiate. Such a move would make the UK a mere observer of EU regulation, requiring fewer EU rules than the Norwegian model.
- The Turkish model would allow the UK to enter into a Customs Union with the EU, offering access to the free market in manufactured goods and a common external tariff system. However, Article 8 of the Customs Union Agreement gives the EU influence over local law.
- The Unilateral model, or hard-Brexit option, would result in the UK relying on its membership of the World Trade Organisation and trading accordingly. This means the UK would lose tariff-free access to its largest export destination, the Pan-European market, while becoming more exposed to low-cost competition.
Any one of these choices paints a stark picture for the future of the UK economy, but the fact remains that a decision must be made, and the sooner the better given the need to establish a firm position on UK-European trade.
Still not convinced? Then consider the following:
- The EU is by far the UK's largest trading partner. In 2016, UK exports to the EU were £241 billion (44% of all UK exports). UK imports from the EU were £312 billion (53% of all UK imports)
- Over £4 billion worth of exports are sold by the UK to EU countries each week
- The UK has a Foreign Direct Investment (FDI) stock of over £1 trillion, about half of which is from other members of the EU. Part of the UK’s attractiveness for foreign investors is that it brings easy access to the EU’s Single Market
- The UK’s financial services industry is the largest recipient of FDI
- In 2016 UK had a trade deficit of £71 billion with the EU. A surplus of £24 billion on trade in services was outweighed by a deficit of £96 billion on trade in goods
- Services accounted for 40% of the UK’s exports to the EU in 2016. Financial services and other business services are important categories of services exports to the EU.
The evidence is undeniable. The UK ideally needs to secure an amicable, soft-Brexit.
Cooperation remains profoundly important for both the EU and UK. We are all facing grand challenges, including climate change, a depletion of the world’s natural resources, ageing societies, workforce digitalisation, and social inequalities. These can only be addressed through coordinated and collaborative efforts.
We must find a way to re-model the UK's relationship with the EU and secure a more positive footing. Whichever new framework finally emerges, it must recognise that economics and politics are never neatly aligned, but ultimately economics must take precedence.
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