The UK took the plunge into the unknown and is dragging everyone along with it. Just as the EU and global markets were slowly getting back on track after years of recession, economic chaos this time has arrived via popular vote, writes Nelly Stratieva.
Nelly Stratieva is an executive editor at Lexxion publishing. The views expressed here are in her personal capacity.
Despite the clear messages by leading economic, financial, political and security experts from around the world that leaving the EU would be a bad idea, UK voters still chose to do so.
The dramatic, far-reaching consequences are just starting to become obvious. How will it affect the agreements currently in negotiations, such as the Transatlantic Trade and Investment Partnership (TTIP) and negotiations with strategic Asian countries?
First, the basics: common commercial policy is an exclusive Community competence. This means that the Commission negotiates on behalf of the entire EU trade deals with third countries and then the terms of the agreement are applied uniformly to member states. Trade deals profoundly affect tariffs and non-tariff barriers, import and export duties, customs procedures, product standards, services, intellectual property rights, foreign direct investment between the EU (including the UK) and the rest of the world.
The EU has 52 trade agreements internationally, which will not apply to the UK now, and new trade agreements take an average of three to ten years to be concluded. How many years of belt-tightening can British people and businesses take? The UK is hoping to get the same access to the single market as Norway or Switzerland but with a soured relationship with EU countries, how realistic is a good-will EU-UK deal?
US companies are the largest investors in the UK, aside from the EU. But they have largely chosen to locate there because Britain was a linguistically/culturally convenient base to access the much larger EU single market and tap into the brightest European employees.
What is the UK a gateway to after it severs ties with the EU?
Let’s set aside UK’s self-inflicted problems and consider the impact of the Brexit on EU’s currently negotiated trade agreements. For the past 3 years, the EU has been working on a major update of its trade relationship with the US – the TTIP, due to be concluded by the end of 2016. As the UK becomes a non-EU state, the TTIP will not apply to it. But will the TTIP be signed at all now?
With a major EU member state dropping out and the looming uncertainty about the future of the EU as a political organisation and single economy, TTIP will most likely not be finalised any time soon. Data transfers, which are at the heart of the business models of many leading US companies located in the UK but operating EU-wide, are regulated under EU law (most notably the new General Data Protection Regulation) and soon by the umbrella EU-US Privacy Shield, set to be signed this year. How will the UK regulate data transfers to the US outside the EU regulatory framework? Will it even matter when US companies lose their UK subsidiaries’ access to the EU market?
EU’s trade interests on the other side of the world – in robustly growing Southeast Asia – are also going to suffer the aftershocks of Brexit. The Association of Southeast Asian Nations (ASEAN) is undergoing its own process of regional economic integration and building an internal market – the ASEAN Economic Community. The region as a whole is EU’s third largest trading partner after US and China and one of the few parts of the world that are experiencing strong economic growth in previous years.
EU companies face strong competition for the lucrative ASEAN market from US, Chinese and Japanese companies. TPP, a mega-regional trade deal between 12 countries, most importantly key ASEAN countries, the US, Australia, Canada, Japan and Mexico, was signed in 2016. The members of the agreement represent over one third of the global economy. The EU is not party to it.
Another mega-regional trade agreement is in the making – the Regional Comprehensive Economic Partnership (RCEP), which includes China, India and all ten ASEAN member states and represents over 40% of world trade. The EU is also not a party to that deal.
Instead, the EU has been following its own strategy for economic engagement with ASEAN. The negotiation of EU agreements with ASEAN countries and the sharing of regional integration experience have been crucial to this strategy. FTA talks between EU and ASEAN member states (Malaysia, Philippines, Thailand and soon Indonesia) are experiencing a revival as the EU pushes to close the competitive gap with international competitors.
The EU’s ace in the hole has always been access to its single market – the largest in the world. Now that single market got significantly smaller. More importantly though, the credibility of the EU as a reliable, steady trade partner will rightfully be questioned by Asian countries. Trade agreements are a long-term commitment and at the moment the EU cannot even guarantee its own existence in the next ten years. The strong negotiating position of the EU as a bloc – the reason why it was able to cut a better deal from external partners – has been undermined by the negative UK referendum.
At the end of the day, both the EU and the UK will lose trade influence now – the unfortunate result from anti-establishment sentiments and half-truths overriding rational arguments. On a positive note, the EU needed a strong shock to overcome its existential crisis of recent years.
Apparently, a global financial recession, Greek debt crisis, a conflict with Russia over Crimea and an unprecedented migration crisis were not enough. Let’s hope Brexit finally clears the way for a stronger EU and that the EU’s strategic trade relations don’t suffer a fatal blow in the meantime.