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Progress and Economic Realism in UK-EU Relations

Publication Date: 16 Dec 2017 - By Market M. By Market M.
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Macro Multi Asset UK EU

The architects of the Leave vote in 2016’s Brexit referendum will no doubt have been encouraged when EU leaders agreed to move to phase two of the ongoing transitional period on December 15th. The EU 27 summit will review the conduct of UK-EU negotiations expressed satisfaction that sufficient progress has been made in each of the priority areas.

This consists of the protection of EU citizens’ rights, the divorce bill,  and the Northern Irish/Ireland border issue – although the latter may still prove problematic in future phase three talks on trade. It was always assumed that phase one was the least difficult hurdle and EU Council President Donald Tusk warns that tough negotiations lie ahead.

The UK is unravelling 43 years of EU membership, effectively making it ‘EU accession in reverse’. Westminster has to state what kind of relationship it wants and this remains unclear, except that Parliament wants more say in any future trade relationship. This is acting as a break on the aspirations of more ardent Brexiteers.

Future Trade

Eurosceptics on both sides of the political spectrum have failed to judge the impact of Brexit on future trade with the EU27, the UK’s biggest partner. There is still an amateurish belief that the outside world is itching to get into cosy trade arrangements with a new-look ‘global Britain’. Many old trading partners such as Australia and New Zealand previously felt their special trade links with the ‘mother’ country were unceremoniously ditched 43 years ago when the UK joined the European Economic Community (the forerunner of the EU), leaving them scrambling for new markets nearer home.

But having successfully opened up trade in Asia and the Americas, these nations are now in a stronger position for any future bilateral negotiations with Britain and will no doubt have a menu of tough conditions for renewing increased trade. The difficult quid-pro-quo discussions in November between Theresa May and the Indian Prime Minister, Narendra Modi, also provide a taste of what’s to come. While keen to expand commercial links, Modi used the meetings with May in New Delhi to trigger demands for more immigration visa quotas and for Britain to re-introduce the right of Indian students to work in the UK after graduation.

Other potential trading partners such as the United States have more relaxed regulations than in the UK in the sale of agricultural products. Indications are that they will raise objections to any deal with Britain if UK trade authorities boycott any American produce. The Cabinet Minister for the Environment, Michael Gove has already made it clear that Britain is not about to reduce its foods standards policy to accept US chlorinated chicken products and GM crops that are banned under EU regulations.

The UK farming sector has been the beneficiary of vast EU subsidies for many years and has deep concerns that these will not be replaced despite government promises to the contrary. This belief is compounded by fear their industry will be decimated by cheaper US and South American imports when ‘global Britain‘ takes off.

Post-Brexit Regulations

Getting a ‘bespoke’ trade deal with the EU is paramount for the UK and its success decides the future of the Tory party. The EU is toughening its stand on both transition and trade talks and is anxious not to convey any expectations of special treatment so a Canadian Comprehensive Economic and Trade Agreement (CETA) or “Canada plus” trade deal will not be a model they would likely agree for the UK.

This is unless the UK recognizes it will lose access to the Single Market for its Financial Services industries – a vital export driver contributing £71.4bn in revenue in 2016. There are some EU members, in particular, Italian Prime Minister Paolo Gentiloni, who are more disposed to granting Britain a ‘bespoke deal’.

This view, however, is not broadly not shared by other EU leaders who are waiting to see how the British government intends to move negotiations forward. This cannot be done without reference to many sectors of British industry. Manufacturers in the car industry with complex product supply lines have been prominent in voicing their anxieties about the difficulties of trading outside the Single Market. This led to some ‘private’ assurances by Theresa May that their interests will be protected. Other sectors are joining a chorus of pressure on the government to bend towards a softer Brexit – to stay under EU rules – to obtain the best possible trade deal.

Final Thoughts

As the world’s largest consumer market, the EU effectively exports its regulatory standards through its economic weight. The UK ‘Reform Bill’ will transfer EU regulations into UK statute recognising the ever-present ‘Brussels effect’, which dominates trade regulations throughout the world. How far this influences future upcoming transition and trade talks remains the subject of a separate detailed discussion.

The post Progress and Economic Realism in UK-EU Relations appeared first on The Market Mogul.

 

 

 

 

 

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