Brexit debacle

The recent Brexit proposal all but looks DOA as all the opposition parties have for various reasons lined up against it while a significant chunk of the Tories are against it, also for different reasons with hard core remainers wanting a second referendum, while hard brexiters feeling it isn’t a clean enough break.  One of the problems here is it is easy to say one wants to leave the EU, but that can mean anything from remaining in the single market like Norway, being part of the customs union like Turkey, a simple free trade agreement like Canada, or defaulting to WTO rules like US, Russia, China, India, Brazil etc.  Of those four options each has their advantages and disadvantages and getting a majority to agree on one of the four paths is virtually impossible.  As such I think UK should plead with the EU for a one year extension, which can be done if all 27 member states agree.  There should be another referendum with four options which are remain in the single market, leave the single market but remain in the customs union, leave both single market and customs union while negotiate a free trade deal with the EU, or end all connections and instead trade on WTO rules.  I think the country is divided down the middle so holding another referendum on whether to cancel Brexit or not is counter-productive, but since politicians cannot agree on which of the four, why not let voters decide and it would be decided with a ranked ballot so if no option gets over 50%, the least popular is dropped and their votes re-distributed to second choices.  Before the referendum, a pamphlet would be sent to every home detailing exactly what each option means and would make clear there is no a la carte, it is all or nothing for each.  Whatever the outcome is, parliament would respect that and move forward on that basis.  But thanks to inability to find a deal, it looks like UK will leave on March 29, 2018 with no deal in place.  This could mean tariffs being put on British goods entering the EU, possibly even visa requirements to travel to the EU, and quite possibly a hard border re-appearing with Northern Ireland and the South.  I believe the deal May presented is the best realistic possible one and think MPs are making a mistake in going against it, so the above is more a suggestion for the impasse.  The last thing the EU wants is other member states to leave so they want an amicable divorce, but also not so good that it encourages others to leave too.  Since the two sides are so far important May tried to find a compromise, but it appears neither side is interested in that.  Also the deal the EU offered is probably the best the UK can realistically achieve.  If they shoot this down, the next deal if there is one at all, will likely be far less favourable.  As such I see the four possible deals as follows below.

Single Market

  • Continued access of both goods and services to the rest of the EU without any barriers
  • Continued passporting rights for the financial sector
  • No hard border between Northern Ireland and the Republic of Ireland
  • Continued payments to the EU with a slight reduction
  • Leave the common fisheries policy and agricultural policy
  • With limited exceptions must continue to follow EU law, but will not be able to appoint a commissioner, elect members to the European parliament, or vote at the council of ministers, so must follow without a say
  • Continued free mobility of labour throughout the single market.
  • A common external tariff on goods coming from third countries.

Since taking back control and ending free mobility of labour was a big reason for Brexit, this would essentially be remaining in the EU without having a voice at the table.  Best choice economically, but probably better to just remain overall as at least UK had a voice at the table whereas here they will not.

Customs Union

  • An end to free mobility of labour
  • No hard border between Northern Ireland and Republic of Ireland
  • Mobility of services would be negotiated separately but would be on a more limited basis than now
  • A common external tariff for third countries
  • Would not be able to negotiate free trade deals with other countries.  Must offer tariff free access to countries EU has a free trade deal but no obligation for those countries to reciprocate with the EU since UK no longer an EU member.
  • After final divorce bill, no more payments to EU
  • Would have the ability to make separate laws from the EU, but due to close integration would make little economic sense, thus would probably in over 90% of the cases end up adopting EU law anyways, just wouldn’t be required to.
  • Only passport controls as now between UK and the rest of EU save Ireland, but no customs checks, although at passport controls UK nationals would now have to use the non-EU line up unlike single market or now where they would still use EU line up due to loss of automatic right to live and work in EU countries.

While many problems with this, probably the best compromise.  Not close enough to the EU for remainers, not fully independent for leavers but an in between point so both unhappy but at least at the midway point between the two not favouring one side over another.

Free Trade Agreement

  • An end to free mobility of labour
  • No free movement of services meaning passporting rights for financial sector would end.
  • Able to negotiate free trade deals with third countries and independently set their tariffs on countries they don’t have deals with.
  • A hard border would be re-established unless Northern Ireland separately remains in the customs union in which one would be unnecessary, but there would be a hard border between both Ireland and Northern Ireland for entry to England, Scotland, and Wales.
  • Tariff free access to EU, but only for British made products where the majority of parts were British made.  All British goods entering EU would face customs checks to prove they are British in origin.  Goods imported from UK to EU that were not made in the UK or made in the UK with predominately imported parts would be subject to tariffs.  NAFTA eliminates almost all tariffs, but for example in the auto industry only cars where 65% of the parts are from NAFTA countries and manufactured in NAFTA ones can enter tariff free, so would probably be similar to this.

This does sound appealing and I think this is what most Brexiters want, but unless Northern Ireland is treated differently means a return to a hard border which neither side wants.  Also could be more costly to businesses as they would have to prove their goods were made in the UK with mostly UK parts whereas now or with the above two, you pay a tariff upon entry to the EU/single market/customs union but not any further ones for movement within the zone.

No deal

This means a hard border and it means UK defaults to WTO rules.  As such British goods would be subject to tariffs which on average is only 4% so not very high, but that is the average and some sectors with higher tariffs could be hurt.  Also WTO rules give the EU the right to set whatever tariffs they want, they simply mandate that they must treat all countries they don’t have free trade deals with equally.  Otherwise whatever the tariff rate is for countries they don’t have agreements with such as Russia, US, China, or India, they must charge that exact tariff for UK goods, no higher no lower.  I don’t think either side wants this, yet if no agreement is found that is exactly what will happen in a mere 133 days from now and would likely trigger a recession.

In summary, I fully understand why many Brits wanted to leave the EU.  When you have a union as integrated is the EU with 28 different countries, it is going to require a lot of compromises and there are going to be many flaws.  But despite all those flaws, evidence suggests things will be even worse once out.  I hope for the sake of the UK and Europe it works out, but I am not very optimistic at the moment.  Also with Italy’s new populist government who promises a very irresponsible budget of big program spending increases combined with tax cuts, I feel these two things make a recession in Europe a very real risk next year.  Thankfully in Canada we are not as closely impacted but often recessions are triggered by an event in one country that sets off a domino effect.  With NAFTA sorted out, we dodged the bullet thankfully, but this may still have some spillover for us although not nearly as devastating as termination of NAFTA would have been.

 

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