UK and the BREXIT Saga

UK and the BREXIT Saga

UK AND THE BREXIT SAGA- FROM JOINING THE EU TO EXITING EU

by Alejandro Delgado Lamothe and
Prof. Gurram Gopal

On August 15, 1945 World War II ended, leaving extreme devastation, hunger and poverty across the European continent and the reconstruction of Europe began. ?European integration was seen as a way to prevent more European wars and as an antidote to the extreme nationalism that had led to these horrible consequences. ?The procedures started with the 1948 Hague Congress, but it was not until 1951 that six European nations -Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany, by the Treaty of Paris, founded the European Coal and Steel Community (ECSC) that was the seed for the European Union (EU). In 1957 these countries signed the Treaty of Rome which created the European Economic Community (EEC) that established a customs union. Between1973 and 1986 Denmark, Ireland, United Kingdom (UK), Greece, Portugal and Spain joined the EEC. 1985 saw the Schengen Agreement of free borders, which enabled people to move without passport controls between most member states and some non-member states. It was not until 1992 that the European Union (EU) was formally established in the Maastricht Treaty, and since then the EU has grown with the inclusion of several new members. A new currency, Euro, was adopted on 1 January 2002 by every member of the EU at that time except United Kingdom, Denmark, and Sweden.

Since joining the EEC in 1973 the United Kingdom has been benefiting from that political and economic union that included a single market, a standardized system of laws, policies enabling free movement of people, goods and services. However, numerous detractors of this agreement (dubbed Eurosceptics) appeared. In June 1975 the Labour Party forced a referendum on whether to leave or remain in the European Community and 67.2% of the electorate voted to stay (Miller, 2015). Subsequently the Labour Party changed its Eurosceptic policy but new Eurosceptic parties appeared in the British political panorama including the Referendum Party (founded in 1997), Democracy Movement (founded in 1998) and UK Independence Party (UKIP), founded in 1993. These parties obtained a few seats in national and European elections until 2004 when the UKIP party obtained third place in the European Parliament elections. Support to UKIP increased over time and it became the second largest UK party in the 2009 European Parliament election and the largest in the 2014 European Parliament elections with 16.5% and 27.5% of the votes respectively. ?It was the third most popular party in the 2015 general elections with 12.6% of votes. ?This increasing Euroscepticism made Conservative Prime Minister David Cameron propose another referendum in 2015 in order to let UK citizens decide whether to leave the EU. The referendum was held in United Kingdom and Gibraltar on 23rd June 2016. The Labour party, Liberal Democrats, the Scottish National Party (SNP), Plaid Cymru and the Green Party were in favour of the UK remaining in the EU, while UKIP supported leaving the EU, and the Conservative party remained neutral. The voter turnout was 72.2%, and as 51.9% of the votes were in favor of leaving the EU this referendum meant the exit of UK from the EU and the start of a process known as Brexit (British-Exit).

Even though the referendum was held in June 2016 it was not until March 2017 that the UK government formally announced the country's withdrawal, beginning the Brexit process and negotiations with the EU. On January 31st, 2020 the UK and EU came to a withdrawal agreement, commencing a transition period that is set to end on December 31, 2020. In this transition period the United Kingdom will remain subject to the European Union law, EU customs union and EU single market and this period will function as a temporary space for UK and EU to negotiate their future relationship. Another issue that has to be addressed is the border between Republic of Ireland (Country member of the EU) and Northern Ireland (Region member of the UK). With Brexit the entire UK comes out of the EU Customs Union as a single customs territory. However, the border between Northern Ireland and the Republic of Ireland (henceforth called Ireland) remains an entry point into the EU Customs Union, creating a de facto customs border down the Irish Sea, something that at first sight looks difficult to manage. Figure 1 shows a timeline of the events in this dramatic saga spanning more than four decades.

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Figure 1: A timeline of evolution of Euroscepticism in the UK

?CONSEQUENCES OF BREXIT

There are socio-political, economic, and environmental consequences of Brexit that need to be understood in the context of a future roadmap of the relations of the UK not only with the EU, but also with other countries, especially China and the United States (US).??The relationship between the UK and the EU has changed drastically after Brexit. Exiting the EU has also meant exiting the EU common laws and treaties. Most of these treaties are economic, but there are also socio-political ones that include rules in many areas including food safety, public safety, aviation, fishing, intellectual property protection, consumer protection in the purchase of financial products, and free movement people, amongst others. Even though UK did not sign the Schengen Agreement, it allowed for mostly free movement of people between the EU and the UK. Brexit will mean that this free movement will end, and this could have an enormous impact on UK tourism, UK expatriates in the EU and EU expatriates in the UK. Around 900,000 UK citizens are long-term residents in the EU and almost 90% of them live in Spain, Ireland and France. There are about 3.6 million EU citizens that live in the UK. This new border status has created tensions in the British society, with rising cases of extreme nationalism, racism and xenophobia not only towards people from an ethnic minority but also towards EU expatriates that live in the UK. Racial hate crimes doubled between 2013 and 2018 in England and Wales, areas where Brexit had more support[i] .

An Independent Scotland?

England and Scotland have been a joint kingdom since 1707, and since the 1880s a political movement to reestablish Scotland as an independent country has emerged. In the first two independence referendums (1979 and 1997) a significant majority of Scots voted in favor of staying in the UK, however in 1997 the Scots obtained the right to establish a Scottish Parliament with some powers (devolution). The last Scottish Independence referendum was held in 2014, before the 2016 UK Brexit referendum. More than 55% of the Scottish voters voted NO to independence. Analysts attributed this to the strong will of the Scots to remain in the EU and the fact that Scotland as an independent country would most likely be treated as a new state, and therefore would have to apply for membership on the EU which could take years. The issue of currency (British pound or the Euro or another currency) also played a role in the result. In the 2016 UK Brexit referendum 62% of the Scots voted to Remain in the EU and rejected Brexit. With the passage of Brexit, the opinion of many Scots towards independence has changed. The leader of Scottish National Party (SNP) and Scotland’s first minister Nicola Ferguson Sturgeon, claimed that Brexit might trigger a fourth referendum on Scotland’s independence as UK withdrawal from the EU can negatively affect the Scottish economy[ii] . The result of this referendum could be considerably different from the previous one as Scotland’s population becomes more pro-European. Before the Brexit decision, Scotland’s independence efforts were fading away, now the possibility of United Kingdom’s dissolution is becoming more real and with it the probability of escalating social and political tensions.

UK, Northern Ireland and Ireland- A “Troubling” Time

Socio-political issues in Northern Ireland can be one of the hardest to solve in the Brexit negotiations. The root of the problems in the last century lies in the 1921 agreement in which the government of Great Britain divided the island of Ireland into two parts, the independent Republic of Ireland, and Northern Ireland which became part of the UK. In Northern Ireland Unionists or Loyalists, mainly protestant, wanted Northern Ireland to remain in the United Kingdom while the Republicans or Irish nationalists, mainly Catholic, wanted Northern Ireland to reunite with the Republic. Violent clashes between English security forces, Irish republican paramilitaries and Ulster loyalist paramilitaries lead to 3,532 people killed and around 50,000 casualties between 1960s and 1998[iii] . ?The Good Friday Agreement in 1998 ended the war and established a demilitarized open border between Ireland and Northern Ireland. With Brexit, the Good Friday Agreement is being threatened as a border has to be set between the UK and Ireland (which is part of the EU) in order to control the transit of people and goods.

Three approaches have been suggested for this problem (Figure 2). One option gives Northern Ireland a special status where it will stay in the EU single market and there will be checks on goods transported between Northern Ireland and Great Britain. This is hard to implement, as it would be difficult know whether a product came from Republic of Ireland (EU) or from Northern Ireland (UK). UK also wants Northern Ireland to have an opportunity of voting periodically on whether this arrangement should go on, an element that would generate much uncertainty in EU and UK markets. A second option is a “hard border” between Ireland and Northern Ireland. This option is unpopular with Ireland and could lead to another armed conflict. A third option, keeping the whole UK in the EU single market, will not please the UK or the EU.

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Figure 2: ?Northern Ireland border trade-offs

Source: https://commonslibrary.parliament.uk/brexit/policy/brexit-and-the-northern-ireland-border/

Economic consequences of Brexit

The economic consequences of Brexit affect not only the United Kingdom and the EU but countries around the globe. Trade between UK and the EU will be seriously affected but Brexit is also seen as an opportunity for UK to change its major trade partners and look for new ones.

Inflation and the pound sterling post Brexit

According to a 2017 study estimated price inflation increased by 1.7 points with products having high import exposure suffering from a much higher inflation. This has made families spend £404 more on average per year[iv] . Food is a hot topic, as the United Kingdom grows only about 61% of the food it consumes and this percentage is expected to go down because of droughts and heat waves provoked by global warming that are reducing local food production. The rest of the food eaten in the UK comes mainly from EU, fruits and vegetables being the most imported. In the long term the unavailability of some fruits and vegetables, high prices or poor quality can lead to health and social problems along with economic ones. Further, Brexit is generating economic costs of £500m a week, resulting in a 2.5% reduction in GDP and perhaps contributing to the drop in value of the pound sterling.

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Figure 3 Effect of Brexit on UK's Sterling Pound value compared to Jan 2015

Source:https://voxeu.org/article/consequences-brexit-uk-inflation-and-living-standards-first-evidence

A lower pound means less international purchasing power for the UK residents but makes UK products cheaper for exports. It could also increase the popularity of UK in services such as tourism. If there is no trade agreement between the UK and the EU all products and services between the two will have to be tariffed, causing inflationary pressures for both entities.

Brexit, Investment and Employment

Increasing uncertainty due to Brexit has produced a reduction in investment and employment growth. It is estimated that Brexit has reduced growth in investment and employment by 6 and 1.5 percentage points respectively. A number of local and international companies as Barclays, HSBC or Lloyds, are moving some or all of their operations to other European localizations while others like British Steel, Jaguar Land Rover and Airbus have plans to reduce workforces in part due to Brexit related uncertainty. ?Another consequence is that UK citizens will not be able to apply freely for jobs in the EU. The possible restriction on the free movement of goods, services and people agreement will also diminish attractiveness of the UK as a place to immigrate, for EU workers.

Environmental consequences of Brexit

Post Brexit, the UK is free to pursue its own environmental policies and these are likely to be less stringent than the current EU standards as evidenced by the fact that in 2017 the UK faced daily fines from the European Commission for flouting EU limits for nitrogen dioxide levels. Further, the reduction in trade between the UK and the EU will systematically increase the trade between the UK and other countries such as the United States and China, increasing the transportation distances and resulting in higher emissions of greenhouse and other contaminant gases.

UK-EU Future Trade Scenarios

Five possible scenarios can be contemplated for a future UK-EU trade arrangement, European Economic Area + European Free Trade Association (EEA + EFTA), Customs Union, Bilateral accords + European Free Trade Association (EFTA), Free Trade Association (FTA), and World Trade Organization (WTO) rules.

One likely scenario is a Bilateral accord + European Free Trade Association (EFTA) in which the UK and EU have bilateral agreements which will control UK access to EU market sector by sector. In this case the UK will have to follow the regulations established by the EU on those sectors with bilateral accords. The UK can negotiate free trade agreements (FTAs) with other countries outside the EFTA on those sectors where agreements with the EU are not established. Switzerland, for example, has such an agreement with the EU currently. It would give the UK enough trade independence to justify Brexit and could still have several trade agreements with the EU in specific sectors. For a complete Brexit, UK will rely on the World Trade Organization (WTO) rules, and imports will be subject to UK’s and EU’s common external tariffs. In this case the UK will not be bounded by single market rules but will have to comply with EU product standards for exports to EU. An example of this type of agreement is the one EU has with China. The impact on the economy and society will be high, at least in the short term, affecting jobs and creating instability.

UK Trade Agreements with USA and China

Trade with the US gains particular importance if a trade agreement is not reached between the UK and the EU. In a pessimistic scenario there will be no new trade agreement between the UK and the US and the current tariff regime will continue on both sides. In a more optimistic scenario there is a new trade agreement in which the tariffs get relaxed or eliminated on certain products or sectors. As the US recognizes the dire need of the UK to find new markets to replace the loss of EU, it will negotiate an agreement that will significantly aid its industries. ?As an example, while the UK needs to find new markets for its autos, a reduction or elimination of tariffs on this sector by the US seems highly unlikely to happen. China is also very protective towards its markets. In a pessimistic scenario the current EU-China tariffs will apply to UK-China trade. In a more likely scenario the UK will enter into a free trade agreement with China similar to the one the latter has with Switzerland or to the Closer Economic Partnership Agreement (CEPA) it has with Honk Kong. This agreement will promote the exchange of goods and services with little or no tariffs. This is the most favorable scenario for the British industry and trade in general, making the United Kingdom less dependent from the EU.

Case Study of the UK Automotive Sector

We performed a detailed study of the UK Automotive sector. Cars were the top UK’s trading goods in 2019, accounting for 8.5% of total exports and 6.8% of imports[v] .?Road vehicles, the top trading category between the UK and the EU, constituted 10.2% of total UK exports to the EU and 18.2% of UK imports from the EU[vi] . In 2019 this industry generated £18.6 billion value to the UK economy and produced around 1.3 million vehicles with more than 30 manufacturers supported by 2500 component providers building over 70 models[vii] . Roughly eight out of ten of the cars produced in the UK are exported overseas to 160 different markets. Majority of the vehicles manufactured in the UK are for export markets. Our detailed analysis of the auto sector reveals that if no free trade agreement with the EU is reached, (irrespective of new trade agreements with the USA or other countries) the automotive sector, in particular the sport Cars and premium vehicles and mid-level and low-cost cars and vans, would suffer significantly. Numerous factories would close, resulting in loss of thousands of jobs. Some auto companies have already announced partial or full plant closures, partly related to the Brexit uncertainty. The UK government can provide state aid or subsidies to keep these factories running, but this could run afoul of WTO rules.

COVID-19 and BREXIT

The Coronavirus disease, SARS-CoV-2, or COVID-19, is an infectious disease caused by severe acute respiratory syndrome coronavirus 2. The disease was first identified in December 2019 in Wuhan, the capital of China's Hubei province, and has since spread globally, resulting in the a still ongoing pandemic. This pandemic has had severe health, economic and political effects on the world’s population. Globally, as of 3:52pm CEST, 19 August 2020, there have been 21,989,366 confirmed cases of COVID-19, including 775,893 deaths, reported to WHO. The high contagiousness of the virus has forced governments to set compulsory confinements and individual protection measures. In the UK, this situation not only affects the health of its citizens and the economy, it also affects future political plans and particularly Brexit. The International Monetary Fund (IMF) has predicted a 10.2% drop in Great Britain’s real gross domestic product (GDP) this year[viii] . Additionally, the Office of Budget Responsibility (OBR) predicts that in the worst case the economy can shrink by 13% for the whole year of 2020. The United Kingdom is not prepared technically for a new immigration system and a complex customs and border arrangement as the COVID-19 pandemic has taken over the institutional focus. On 21 August, after the latest round of trade talks between Britain and the European Union failed, Michel Barnier, lead negotiator for the European Union, said that an agreement “seems unlikely.” On 9 September the UK Government introduced an “United Kingdom Internal Market Bill 2019-21” in the House of Commons. This would allow UK Ministers to create and implement policies, particularly with regard to trade and state aid, even if they violate the EU withdrawal agreement. This bill would allow the UK to remove all barriers between Northern Ireland and the rest of the UK; however, the border checks and customs between NI and the Republic of Ireland remain to be determined. This bill has created uncertainty, and increased the probability of a “no-deal” Brexit by the end of the year.

CONCLUSIONS

The UK Eurosceptics regard Brexit as essential for establishing their cultural, economic and trade identity separate from the EU, although this entails numerous political, social and economic problems both within and outside its borders. This could also fracture British society and tensions in Scotland and Northern Ireland may rise. Economically, Brexit does not seem to have a positive effect in the short term in any of the likely scenarios. In the automotive sector, for example, our analysis shows that a lack of trade agreement with the EU can be disastrous for many of the sub-sectors in this industry. It is clear that the current United Kingdom government is determined to deliver Brexit, and while this may deliver prosperity in the long run, many people might lose their jobs and struggle to make a living as British society goes through one of the most challenging periods in its history. ??

[i] Racism rising since Brexit vote, nationwide study reveals. The Guardian. https://www.theguardian.com/world/2019/may/20/racism-on-the-rise-since-brexit-vote-nationwide-study-reveals

[ii] https://www.bbc.com/news/uk-scotland-scotland-politics-51284836

[iii] https://cain.ulster.ac.uk/sutton/

[iv] The consequences of the Brexit vote for UK inflation and living standards: First evidence. VoxEU.Org. https://voxeu.org/article/consequences-brexit-uk-inflation-and-living-standards-first-evidence

[v] https://www.gov.uk/government/statistics/uk-trade-in-numbers

[vi] https://researchbriefings.files.parliament.uk/documents/CBP-7851/CBP-7851.pdf

[vii] SMMT. Retrieved March 27, 2020, from https://www.smmt.co.uk/industry-topics/uk-automotive/

[viii] https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020

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