In the previous post I said that, post Brexit, the UK would be unable or unwilling to defend the interests of its overseas territories. The EU has now placed Cayman Islands (and others) on a blacklist of tax havens, the “list of non-cooperative tax jursidictions”. This move required unanimity at the finance ministers’ meeting and, according to the Neue Zuericher Zeitung, the UK in the past had blocked such decisions.
Brexit has consequences for an eclectic collection of territories that are attached in different ways to the UK. They are mentioned in the Withdrawal Agreement, and they include
- Gibraltar (which took part in the Brexit referendum in the UK, and voted overwhelmingly to remain.)
- the Channel Islands and the Isle of Man
- the “Sovereign Base Areas” in Cyprus
- and finally the “UK Overseas Territories”, a diverse collection, mostly islands, scattered around the world: Anguilla, Bermuda, British Antarctic Territory, British Indian Ocean Territory, British Virgin Islands, Cayman Islands, Falkland Islands, Montserrat, Pitcairn, Saint Helena, Ascension and Tristan da Cunha, South Georgia and the South Sandwich Islands, and Turks and Caicos Islands.
Many of the UK Overseas Territories have benefited from the European Development Fund, but they will no longer have access to it after current commitments have been implemented. Some of these entities have tiny populations: Pitcairn, for instance, has a population of 50. Others, such as the Cayman Islands and Bermuda, are prosperous.
But when they have economies in a real sense, they are dependent on two main industries, financial services and tourism. Financial services are now the subject of growing international scrutiny. The UK territories are not independent sovereign countries and do not have a seat at the table in international negotiations., and the UK in the future may not be either as able or as willing to defend their interests. Of course, financial services in a tropical island may be seen as just a way of working from home, when the home is sunny and sweet. But they are in competition with other attractive but less remote locations, and the outlook must surely be rather gloomy, given the slow but steady shift in international governance, international tax policy, and public opinion.
As for tourism, the territories are dependent on air and sea links, the latter often involving cruise ships. Both these forms of transport at present benefit globally from a bizarre exemption from fuel taxation. This will surely change.
A possible trade agreement between the UK and the US has become a controversial issue in the UK elections. The Labour Party alleges that the UK’s National Health Service (NHS) is on the table in negotiations. (In Northern Ireland, at least, the NHS seems to be on the floor, and in general is delivering no more than average results in European terms. Nevertheless it is much prized in the UK) . For the Conservatives, a trade agreement with the US is a big priority after Brexit. The US Secretary of State, Mr Pompeo, had earlier said that this will also be a priority for the US. The then US National Security Advisor, Mr Bolton, suggested that there could be a series of partial agreements on individual sectors. But this was a bad idea for lots of reasons. Let’s take just three of them. Firstly, no US-UK agreement, even partial, can be finalized until the nature of the future UK- EU relationship is clear, and those negotiations have not yet begun. Secondly, the tendency is always in modern economies for sectors to become more and more interrelated, and so it’s harder and harder to treat them separately. Thirdly, statisticians will recognise the related question of ” degrees of freedom”: making a number of partial agreements ends up by putting an impossible burden of adjustment on the final sector to be negotiated.
The relative performance of the bigger EU countries in terms of GDP per capita has been interesting over the period 2006 to 2017 (i.e. from just before the financial crisis. ) If we look at the average for the EU-28 as a whole (100), only Germany has managed to increase its relative position, rising from 116 in 2006 to 124 in 2017. By contrast, Spain, France, Italy, and the United Kingdom, have seen a fall in their GDP per capita relative to the average. Actually, Spain and Italy have moved from an above-average position to a below-average position: in other words their per capita GDP in purchasing power parities is now below the average for the EU-28. The UK has seen a decline from 116 to 110 but it is still above the EU average.
It’s also interesting to look at some of the outsiders, not part of the EU. Switzerland, for instance was already in a very strong position in 2006, with income per capita at 150, i.e. 50 per cent above the average income in the EU-28. The US in 2006 was even better off at 155. However, between then and 2018, Switzerland did even better rising to 160 but the US fell back to 141. Finally, Japan which was at 110 in 2006, has fallen to 99, in other words below the average income in the EU, which is rather remarkable.
GDP per capita in PPS
Index (EU28 = 100)
Data from 1st of December 2018. (Source Eurostat)
In 2006 the euro area (18 countries) was above the average for the EU as a whole, at 109, and the UK higher again at 116. However by 2018 the positions had reversed. The euro-area had fallen to 106 while the UK had fallen further to 105. In other words, people in the UK used to be better off than people in the eurozone. And now they’re worse off. Maybe if the UK had joined the euro, it might have done better.
If the UK leaves the European Union, it may not be forever. A change of government, and a change of heart, and, perhaps, economic realities in the UK, may after some years cause opinion to shift and the UK to reapply for membership. In such a situation, however, there won’t be much enthusiasm on the EU side for all the opt-outs that the UK had secured in the past, whether for budget rebates , abstaining from the Schengen agreement, or for staying out of the euro.
In anticipation of Brexit, the United States has outlined its objectives for a trade agreement with the UK. Among other things, it wants to see access for its agriculture to the UK market. But US agriculture includes products such as chlorinated chicken, banned in the EU. Will the UK let these chickens in, if it “takes back control” and can make its own trade agreements?
For the US, the EU ban on chlorinated chicken is seen as a protectionist measure rather than a health protection measure. The US ambassador to the UK in an angry article in the British newspaper “Daily Telegraph” has attacked the EU approach : “Inflammatory and misleading terms like ‘chlorinated chicken’ and ‘hormone beef’ are deployed to cast American farming in the worst possible light…..It is time the myths are called out for what they really are: a smear campaign from people with their own protectionist agenda.” Even a moderate US journal such as “The Atlantic” states that “The European Union banned antimicrobial baths in 1997. That ban created a protected market for European and British chicken producers.”
In fact, the picture is a good deal more nuanced. In production terms, the EU is self-sufficient in poultry meat: from 2009 onwards production has always exceeded consumption. But the EU imports lots of chicken from other parts of the world, and exports a lot also. It imports chicken from Brazil, Thailand, the Ukraine, among others, to a total of 786 thousand tonnes in 2018, which is about 5.3 per cent of EU production, and it exports chicken to Ukraine, Philippines, Ghana, China (Hong Kong) and others, to a total of 12 per cent of EU production.
Looking at these other countries, the UN trade statistics tell us that the EU and the US are both selling them chicken in increasing amounts. Quite frequently, the EU is selling more. The EU outsold the US in Ghana (2015-2017), Japan (2014-2016), South Africa and Ukraine (2014-2017). Only in Hong Kong and the Philippines is the EU clearly behind the US, with sales at 56 per cent and 69 per cent of the US total in 2017. It’s also interesting that the EU chicken sometimes does quite well in price terms also, with the average price per kilo higher than that for the US product in the Hong Kong, Japanese, and South African markets in 2016 and 2017.
So, in third countries, where the EU and US are head-to-head, the EU chicken seems rather competitive. Which means that if the EU really were protectionist, it wouldn’t need to be.
First of all, Brexit doesn’t just mean that the UK is leaving the EU. It also means that the UK is leaving all the trade agreements that the EU made when the UK was a member, and we can assume that the UK had things to say all through those negotiations. For the partners, it’s also difficult. To understand why, think about how trade deals are negotiated. Lots of detail, industry after industry, commodity after commodity, the tariffs, the quotas, and the non-tariff measures. Tariffs are essentially taxes on the imports, and non-tariff measures are things such as technical regulations that can be used to block imports, or else impose painful testing on the imports to make sure that they conform to the rules. For the EU and its negotiating partners, a balance has to be struck, a balance between hope and fear: hope that they’ll be able to export more, fear that there’ll be more competitive imports from the other side. The important point to remember is that these agreements were based on hundreds of detailed calculations of costs and benefits, and the assumptions made on both sides were that the EU included the UK. Brexit has damaged the UK’s reputation for keeping agreements, and it has, in particular, undermined the logic of all the trade agreements that the EU has made up to now. This means that, even before the UK negotiates any new trade agreements with other parts of the world, there may already be negative perceptions of the UK on the other side.
Although the UK has managed to negotiate what are called trade continuity agreements with Switzerland, Chile, Israel, Eastern and Southern Africa, the Palestinian Authority and the Faroe Islands, it is a long way from replacing all the existing EU agreements, and even farther from more ambitious ones. Most recently, Japan was reported as being upset over the UK’s implied criticism of them for being slow in this regard. There was a suggestion that the UK saw it as a simple matter of “cutting and pasting” the existing EU-Japan agreement. (In fact “cutting and pasting” has been the general UK approach to all trade negotiations since they lack the human resources to renegotiate in detail).
As we have seen above, reaching a trade agreement requires the fine balancing of a lot of detailed considerations. For a third country, the calculations involved in reaching a deal with the UK cannot be the same as those that were involved in the negotiations with the EU. Those in the UK who supported Brexit tended to minimise the difficulties of replacing the EU’s trade agreements, and they have pointed to the possibilities of better agreements as a result of Brexit. But no such better agreements are yet in the pipeline.
A further issue is that of the UK’s future trade relations with the EU. To date there is only the “Political Declaration” which outlines in very general terms the priorities for the future. In the section on “Goods”, paragraph 20 states that “The Parties envisage having a trading relationship on goods that is as close as possible, with a view to facilitating the ease of legitimate trade”, paragraph 22 says ” the Parties envisage comprehensive arrangements that will create a free trade area…”, and paragraph 23 says “The economic partnership should ensure no tariffs, fees, charges or quantitative restrictions across all sectors”. Similarly, under “Services”, paragraph 29 states that “The Parties should conclude ambitious, comprehensive and balanced arrangements on trade in services and investment in services and non-services sector.” All these statements are positive, but none of them are commitments. The precise nature of the agreement that will be negotiated is not yet known. Third countries considering a trade agreement with the UK will wait until there is clarity.
Finally, consider the question of relative weights in negotiations. When the EU negotiates with most countries, it is usually the stronger partner because of its market size and economic clout. But if the UK is on its own, it is not necessarily in as strong a negotiating position. This is particularly so with regard to a proposed UK-US agreement.
Brexit is not yet as viciously divisive an issue within the UK Labour Party as it is within the UK Conservative Party. But opinion is at least as diverse. The lack of clarity in the thinking of the party’s leader, Jeremy Corbyn, is not helping. In an interview the other day, he said that, if elected, a Labour Government would seek “a better deal” and would look to negotiate “a customs union” with the EU. Now, remember that there is an EU customs union, of which Turkey is also a member. For now, the UK is a member. Use of the term “a customs union”, and many Labour speakers employ it, suggests that something other than the existing customs union is envisaged. But this is logically impossible unless the existing one is to be abandoned by the EU. A customs union implies a common external tariff. Is Corbyn suggesting that this be different from the existing one? If not, why can’t he say that the UK would want to stay in the EU customs union. Or does he envisage a new arrangement whereby the UK and the EU would agree a new common external tariff, incidentally requiring renegotiation of all EU trade agreements with the rest of the world?
Mr Corbyn is also concerned about the State Aids rules of the EU. He says that he would be concerned if they interfered with a Labour government taking measures to encourage industry. With some exceptions, state aid rules come into play if a government gives a benefit to a firm in its own country that it denies to others. After Brexit, if a UK firm wants to trade with the EU and has had unfair benefits from the UK government, it will come up against the State Aid rules either immediately as part of whatever agreement is ultimately reached between the EU, or else later on at WTO level.
Corbyn’s position on the EU needs to be more carefully developed. At the moment, it looks a bit as though he shares the Tory Brexiteers’ delusions that the UK can negotiate with the EU as an equal partner, if not a superior one, and that exiting the EU will mean that the UK is free to do whatever it likes.