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BREXIT: Implications of the UK’s Vote to Leave the EU

On 24 June 2016, shock waves were felt globally, upon the discovery that the UK had voted 52% to 48% to exit the European Union. As a consequence, UK Prime Minister David Cameron, who campaigned to remain, announced his resignation as Prime Minister and Conservative Party Leader. This has left many in Hong Kong, and the world, questioning the nature of the UK’s place in the EU and as an entry point into the common European market.

Cameron’s resignation means it will be up to the next Prime Minister to initiate EU withdrawal procedures. This would require the UK to trigger Article 50 of the Lisbon Treaty, providing for a two-year exit negotiations process. Despite the referendum, prior to triggering the Article 50 mechanism, and throughout the negotiating process that follows, the UK will remain a full member of the EU.

Therefore, the current trading regime will remain for at least two years. This includes access to the European common market, the UK’s full voting rights in the EU Council and Parliament, and observance of EU regulations. As stated by George Osborne, the Chancellor of the Exchequer: “In the meantime,…, there will be no change to people’s rights to travel and work, and to the way our goods and services are traded, or to the way our economy and financial system is regulated.
 
Nonetheless, change is coming and much will depend on the results of the leadership election. The Conservative Private Members’ Committee, which is tasked with Conservative Party leadership procedures, has released their timetable and a new Prime Minister is expected to be elected on 9 September 2016. Whoever is elected, previous assertions of ‘informal negotiations’ seem unlikely. The new Prime Minister will need to go through Article 50 procedures as Jean-Claude Junker, EU Commission chief, has “banned” any official or unofficial negotiations to take place prior to Article 50. All support the notion that despite great political turmoil, the legal framework is unchanged.

While the election of a new Prime Minister is clear, the impact of domestic UK politics on “Brexit” negotiations is muddled. There has been a great deal of introspection surrounding the relationship between the UK and Scotland. Nicola Sturgeon, the First Minister of Scotland, has repeatedly voiced her desire to keep Scotland inside the EU even at the expense of membership of the UK. Sturgeon’s mandate stems from every Scottish local area voting to remain in the EU. Sturgeon intends on opening her own line of negotiations with Brussels, and the possibility of an independent Scotland as a member of the EU is growing. Alternatively, Sturgeon has expressed the possibility of a “Scottish Veto” on a London attempt to alter the UK’s relationship with the EU, an untested constitutional manoeuvre. Regardless of the route she takes, traders from Hong Kong will likely see protracted progress towards “Brexit” rather than the immediate initiation of negotiations: a “Brexit” timetable of years rather than months. 

Eventually, however, negotiations in some form will begin and Article 50 of the Lisbon Treaty provides the mechanism for withdrawal from the EU. When a State triggers Article 50 it begins a two year timeline on negotiating terms of withdrawal. The parties would be the EU and the UK, with the UK treated as a non-EU nation for the purpose of these negotiations. The two-year timetable can be extended with the unanimous consent of the 27 other European Council members. Given that it took the EU three years to negotiate the withdrawal of Greenland, a request for an extended timeline is expected for the UK. Once an agreement is concluded, it will be put before the European Council (27 leaders) for qualified approval requiring at least 20 countries representing 65% of the EU’s population. It would then require a simple majority ratification by the European Parliament.

The worst case scenario for Hong Kong traders would be the EU and UK being unable to come to an agreement. In that case the UK would withdraw from the EU without an agreement in place. Such an eventuality would result in the EU and UK being obliged to apply to each other the trade restrictions they apply to the rest of the world. Even this scenario is not straightforward, if the UK wants to regain WTO rights and obligations it had formerly exercised as a part of the EU; in such case it would require the ascent of all WTO members. However, given the UK’s importance to EU trade, it is unlikely negotiations would be allowed to lapse. Instead the UK is likely to follow one of four different routes.

First, the UK could attempt to negotiate a series of bilateral agreements as Switzerland has done. Switzerland does have tariff and quota-free trade with the EU on most goods. However, as Switzerland is outside the EU customs union Swiss firms face additional administrative costs. In addition, Switzerland is not a party to the EU’s trade deals with the rest of the world. Such a relationship comes with an additional price: Switzerland has no vote and little influence on the development of EU law. While Switzerland is not obligated to update its laws with the EU’s, failure to do so would risk an end to access to the single market. In addition, given the recent rejection of freedom of movement in a 2014 Swiss referendum, there is little appetite in Brussels for the Swiss model.

The second option is the Norwegian model. The EU has looked a lot more favourably on the European Economic Area (EEA) enjoyed by Norway, Iceland and Lichtenstein. These States have access to the common market without being members of the EU. However, that access is predicated on following all EU regulations of the common market. Many “Brexit” advocates have pointed to the EEA as a means of protecting national sovereignty, yet refusal to adopt even some EU regulations could lead to a partial suspension of the EEA Agreement. In the nearly two decades of its existence, those EEA members have been able to delay EU legislation, but have never successfully stopped EU legislation.

While both the Swiss and Norwegian models would allow Britain continued access to the common market, it would be without a legislative voice on EU regulations. There is an additional difficulty. Given that the focus of the “Brexit” mandate is on restriction to immigration, it is still unclear whether the UK would be willing to accept freedom of movement as readily as the other EEA members. 

The third alternative would be to negotiate a free trade agreement similar to Canada’s Comprehensive Economic and Trade Agreement (Ceta). Ceta is not yet in force, but with the exception of a few “sensitive” food items like chickens and eggs, it does provide preferential access to the single market while eliminating most trade tariffs. Unfortunately, it only applies to goods which are entirely “made in Canada”. Such a model would limit the access of the common market to goods entirely made in the UK. This, in turn, would foreclose the UK as an entry point to the common market for Hong Kong- and Chinese-manufactured goods.

The fourth model would be a customs union similar to Turkey’s. It would likely take the form of no tariffs or quotas on industrial goods exported to EU countries. However, the Turkish model would require the UK to apply the EU’s common external tariff on goods imported from outside of the EU. In addition, it does not provide common market access for services and it does not allow Turkey to participate in EU-negotiated free trade agreements. Like any arrangement, save full EU membership, Turkey has no say on the tariff’s level.

The EU has never faced a test of its structures quite like any (let alone a large) Member State withdrawing. Therefore, the true shape of Britain’s membership in the EU remains uncertain and will likely be a new hybrid of the above models. The only current certainty is that until Article 50 is triggered, the UK remains a full member of the EU with all relevant rights and obligations.

Content provided by Picture: HKTDC Research
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