|Source: Chicago Showbiz|
We now have some clarity on what is going to happen regarding the UK's exit from the EU (otherwise known as Brexit). UK PM Theresa May has determined that the type of Brexit that occur has to be of the "harder" variety, and she made a speech to this effect, and you can read the full version of the speech here. Also, after the challenge made in the UK High Court (roughly equivalent to the US Supreme Court), the UK Houses of Parliament has had to vote on a bill to take the UK out of the EU, and although many of the MPs themselves wanted to remain, there was a "whip" to ensure that the vote (498 to 114) to start the Brexit process formally by allowing the PM to trigger Article 50 (which then is the official notification to the rest of the EU that the UK is on a 2 year timetable to leave).
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Some commentators, such as Martin Wolf of the FT (see here) had already gone on record to say that he thought the only feasible outcome is now a so-called "hard" Brexit. Martin Wolf stressed that the linear (or quadratic) programming problem that satisfies all the political and economic constraints for a deal is essentially an empty set. So Martin Wolf sees this as leading to the hard option, with no soft "squidginess" allowed. I think that indeed "ceteris paribus", this is certainly the direction of the negotiations, but that the mostly likely outcome will be more nuanced than this.
OK, so let's back up a moment and remind ourselves of the distinction between a customs union and a single market. A "single market" means you have the "4 freedoms" - free flow of goods and services, workers and capital - in other words free flow of all goods and factors of production. A "customs union" is different - it is a free trade agreement where the participants agree to a common external tariff (CET). And then of course you have a free trade agreement (FTA) where each country can set it's external tariff separately. So for example there are countries in Europe that are members of the single market, but not of the customs union ( - Norway and Iceland for example), and countries that are members of the customs union but not of the single market ( - Turkey, Andorra and the Isle of Man).
So how do PM May's "customs agreements" fit into this framework? I had actually never heard the expression before PM May's talk, so what might it mean? Remember that PM May has stated that she would like a free trade agreement (FTA) with the EU, which then suggests no CET, so my interpretation of a "customs agreement" is that for trade in certain sectors, the UK would agree to use the EU's CET. In other words this opens up a "sector by sector" negotiation. But are these two concepts (FTA and a CET in certain sectors) compatible?
My answer to this question depends on who you are. I think to the UK, these two concepts are completely compatible, as they just see trade in goods and services continuing as before, except with certain sectors having to have tariffs the same as the EU's tariff levels to ensure that no "trade deflection" occurs ( - companies trading through the UK because for example it has a lower external tariff than other countries). But to the EU this is not compatible, as the customs union is just not the same as an FTA to the EU, because with FTAs there has to be a geographical distance there (or internal value added thresholds) to permit different external tariff rates. So for example the EU now is moving towards an FTA with Canada in both goods and services, but this is in a limited number of goods and services (given how small the Canadian economy is compared to the EU's) and so differential external tariffs are not likely to cause a company to set up in Canada in order to export to the EU, or vice versa. The same cannot be said of the UK though as it is much closer to the rest of the EU, and there is a lot more trade in goods and services between the two entities. So I think that an FTA with the UK will not be that attractive to the EU, but they will go along with the "customs agreements". Incidentally a useful map of all the trade agreements that the EU has with the rest of the world is shown below.
|Source: HM Government - Alternatives to membership: possible models for the United Kingdom outside the European Union (Annex A) p.45, 2016.|