UK Discussion Group: Brexit and Trade

Alongside the US election results, there was another issue Kennedy school students were eager to understand more about at the end of last semester: Brexit. The UK caucus held a packed discussion group on November 23rd with special guests Robert Lawrence, Professor of International Trade and Investment at HKS, and Peter Sands, former CEO of Standard Chartered bank based in London and a visiting fellow at HKS, to discuss Brexit and its implications for trade.

Read other posts in the UK discussion group series.

 

By Sebastian Leape

The discussion began with an overview of the different options for Brexit by Professor Lawrence, which confusingly seem more like styles of egg than trade options: Norwegian, soft and hard. The Norwegian option involves remaining part of the European Economic Area which would give the UK full access to the single market, albeit with no say in shaping policies, in exchange for contributions to the EU budget. This was considered economically attractive but politically challenging given demands from Brexiteers for full parliamentary sovereignty.

The soft Brexit option, sometimes referred to as the ‘Swiss option’, would give the UK discretion to sign up to bilateral deals and participate partially with the single market in areas of interest. It would pay a fee to participate in certain programs, but a lower overall contribution than the Norwegian option and would enable the UK to withdraw from obligations to allow free movement of persons. This was also considered economically attractive but politically challenging.

The ‘hard’ option would involve withdrawing from the single market and possibly also the customs union, leaving the UK free from any EU legislative obligations and able to negotiate its own trade deals with the EU and all trading partners. This was considered the most economically disruptive but also the most politically likely given recent comments by the Prime Minister.

 

Hard Brexit:  The risks to the UK

Having agreed a ‘hard’ Brexit was most likely, Professor Lawrence went on to discuss the potential risks for the UK and the world from such an arrangement.  If we were to withdraw from the single market and customs union, there would be a long period of uncertainty, given the long timelines necessary for the UK to exit the EU and renegotiate the wide range of trade deals and export related legislation required as a result.

This uncertainty could potentially effect private investment and increase risk for the private sector. These renegotiations would also have an opportunity cost, given the significant government time required to make it happen which would not be dedicated to other issues of importance to the UK economy.

Alongside opportunity costs, there would be real costs for many firms associated with increases in red tape and bureaucracy. This is because the UK would have to reinstate a customs border with time consuming checks and paperwork required for all imported and exported goods. UK exporters to Europe would have to continue abiding by EU regulations to enable them to access the free market but also have to follow a new set of UK regulations on top of existing EU ones.

As we began discussing sectoral impacts, Peter Sands commented on the likely effects to the finance sector, the UK’s largest generator of jobs and income. He believed it was likely that some financial services business would leave the UK, particularly the Euro clearing business and other activities associated with passporting rights.

Dublin is likely to be the major beneficiary of said move, given its proximity to London, attractive regulatory regime, time zone and language. The financial services industry as a whole is unlikely to suffer large losses given its geographic flexibility, though some business would move away from London. Despite this, London is likely to remain a global financial hub in the medium term.

 

Hard Brexit: The opportunities

The discussion also touched on potential opportunities from Brexit particularly in agriculture and fishing. If the UK were to leave the common agricultural policy and formulate its own replacement, it could open up its agricultural sector to greater international competition lowering food prices as a result.

Unfortunately, the weakening of the sterling following the Brexit vote has probably wiped out any savings from lower prices. Africa has the potential to capitalize on a liberalized UK food market, though assuming UK food safety standards remain at their current levels, many African producers would continue to struggle to meet them.

For fisherman, Brexit would enable the UK to reduce fishing rights for European trawlers in UK waters and set its own fishing quotas based on up to date fish stock data. The fisheries lobby have argued this would result in a substantial increase in fishing in UK waters with jobs and economic activity to follow. Overall however, the opportunities from Brexit were considered to be far below the costs and risks associated with it, particularly if a ‘hard’ Brexit is implemented.

 

Outstanding puzzles

The discussion group concluded by reflecting on how challenging the task is for the current government, given that the political debate surrounding Brexit remains riddled with inconsistencies. Professor Lawrence notoedone striking contradictionin the disconnect between Brexit elites in the Conservative party and Brexit voters. While many Conservatives see leaving the EU as an opportunity for further removal of barriers to free trademany voters saw Brexit as an opportunity for increased protection from globalization and world markets.

Another inconsistency is the desire to reduce regulation on UK companies and consumers, despite the fact that many businesses consider the single market itself to reduce regulatory burdens. If the UK were to leave the single market, companies that directly export to the EU or those who supply companies who export to the EU will have to continue to comply with many EU regulations as well as new British regulations as well.

The EU also reduced public sector costs associated with regulating the single market by consolidating the regulatory function for all member states into single departments, such as trade deal negotiation. In a post-Brexit world, the UK will need up to 750 trade negotiators when it is currently reported to have less than 30. Safe to say the demand for students from Professor Lawrence’s class will be sky high!

 

Sebastian is a 1st year MPP student from the UK. He is currently writing a paper on Brexit and Trade with Peter Sands, Ed Balls and Nyasha Weinberg for the Mossavar-Rahmani Centre for Business and Government.

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