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Institute of Economic Affairs ‘Brexit’ Prize: A Blueprint for Britain outside the EU Michael Fabricant MP MP for Lichfield Vice Chairman of the Conservative Party Anthony Pickles Chief of Staff, Welsh Conservatives 1 Table of Contents Executive Summary page 3 Introduction page 4 Domestic Policy page 4 Future Trade after EU exit page 5 Rest of the World page 5 UK joins the North American Free Trade Area page 6 - 7 Conclusion page 8 References page 9 Contact: House of Commons, London, SW1A 0AA [email protected] / [email protected] / +44 (0)7807 222656 2 Executive Summary The case for Britain exiting the European Union has been made since before the UK even entered the EEC in 1973. However since 2009 and the widening Eurozone Crisis, both public and political opinion have been sharpened towards the UK’s involvement in the European Union. From what historically was a relationship based on trade and economic competitiveness, the crisis which has engulfed the European Union has put a spotlight on how Britain sees itself in the 21st Century as we continue to examine our future in a changing world. The case to leave the EU is both procedural (how it will actually happen) and strategic (what the UK will do once it has left). Both are crucial in determing how Article 50 will be invoked. Firstly, the UK must remain on good relations with the remaining EU and ensure that trade (estimated at between 40 – 50% of the UK’s own export market) is maintained whilst being able to carve out trading opportunities with markets like India, China and the United States. An overview of any plan would have to include the following as priorities: Agree future access to the Single Market and friendly relations post withdrawal. A plan for transitional Britain from EU member state to independent nation: legal frameworks and constitutional transition. The UK’s place in the world will require continued EU trade alongside building world trading opportunities and bilateral deals particularly with trade blocs like NAFTA. A change in the UK’s geo-political standing. There are also secondary issues of great importance that would effectively no longer exist following a withdrawal such as the Common Agricultural Policy, the Common Fisheries Policy and European Structural Funds for poorer areas. However, as the second largest net contributor of funds to the EU, the money that the UK spends on European policy could potentially be redirected to some of these programmes by the UK Government if it so wishes. The most important factor facing the Government is stability of the process – maintaining the confidence of the world markets and business whilst reaching a settlement that allows the UK to grow its economy on bilateral free trade with partners like the USA and the Anglosphere †.1 1 †Defined here as USA, Canada, New Zealand, Australia, India, Singapore, Hong Kong 3 Introduction Prior to the Treaty of Lisbon in 2007, there was no formal mechanism for withdrawal from the European Union. Previously, the only examples to be drawn upon were Algeria in 1962 following its war of independence with France and when home rule was granted to Greenland and a subsequent referendum led to withdrawal from the European Economic Community in 1985. Under these new arrangements, the UK Government would have a period of negotiation with the European Union over its precise terms of relations following full withdrawal. Article 50 of the Lisbon Treaty sets out that: “A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union.” The terms of a withdrawal are clearly labelled as a “negotiation” and given that a UK withdrawal would be unprecedented in both the scale of the UK economy in relation to the European Union and the geo-political consequences, a negotiation would be taken very seriously by both sides. Given that there are over 40 years’ of accrued EU law on the statute books and shared institutions (at EU level), a negotiation between the EU and the UK would be prolonged. There would need to be negotiation over whether any of the treaties could still stand. Article 50 of the Treaty for the European Union (TEU) again sets out that there could be agreement between the EU Council and the Member State: “The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.”(Treaty of Lisbon, Article 50, 2007) The UK Government would need to assemble a team of senior diplomats and civil servants who would engage in the intricacies of the negotiation, whilst Ministers push the top lines of a UK exit. This should not be foreign territory however given that there have been 4 major EU Treaty negotiations in the past 20 years.* Domestic Policy The most pressing domestic issues to face the UK Government would include how EU law such as employment rights are taken forward following a withdrawal. How would they apply following withdrawal from the Treaties? The obvious answer to this problem would be that EU law would remain on the statute until repealed (or left in place) by the UK Parliament (or devolved legislatures if applicable by competence). Secondly, all British Citizens have been in ownership of EU passports since the Maastricht Treaty in 1993. Neither Norway nor Switzerland are satisfactory examples of an alternative model because of Schengen (in Norway) and Swiss identity cards. The UK could choose to maintain EU 4 passport regulation for a set period whilst introducing a transition towards UK passports. Given that the UK did not join Schengen, passport checks at EU borders would not change. There would also be pressing issues around the payments of Common Agricultural subsidies and EU structural funding and how the UK Government would adapt these funding streams. Internationally, the UK Government would seek immediate clarification of the legal status of the European Economic Area which was formed of the European Community and the European Free Trade Area (EFTA) to which the UK was a signatory prior to accession to the EEC in 1973. Given the status of Norway and Switzerland – there would not be difficulty in maintaining free trade with the remaining 27 EU member states and the other EEA and EFTA countries. There would also be discussion about how the UK Government relates the European Union on issues around the Single Market and environmental obligations. Whilst negotiations were proceeding in order to find a fixed settlement with the EU Commission, the UK Government would explore potential free trade agreements with other trading partners of significance. Prime Minister Cameron has already made clear his desire to conclude an EU-USA trade agreement; these negotiations could be completed very quickly with a UK-USA free trade deal. The Swiss have already set a precedent for a free trade agreement with the Chinese Government in July 2013. (Reuters News Agency. China, Switzerland sign free trade deal, July 2013) Future Trade after EU Exit The European Union has had control of the UK’s external trade relations in terms of trade barriers and external customs since 1973. Upon leaving the EU, the UK would be able to sign free trade agreements bilaterally whilst maintaining its access to the single market via the EEA/EFTA. It has been argued that the UK’s withdrawal from the EU would leave other EU Member States angry at the UK’s decision and therefore could result in a very acrimonious renegotiation of access to the single market. The likelihood of this happening however is limited given the fact that the EU has a trade deficit with the UK and countries like Germany and France would not want to damage access to the UK market. There is however a difference between the deficit the EU has with the UK in services and goods. Given the size of the UK’s service economy (around 75%) there is a disparity between the exports and goods surplus which could sway some of the negotiation. Rest of the world One of the main reasons that the UK would seek to leave the European Union in the first place would be to advance trade with other partners around the world. Looking immediately at the key markets and obvious trading partners the UK would target, the overall growth of countries outside the EU has been on average around 3% higher than the EU itself. The tables below demonstrate the potential trade links available to the UK. We have selected 7 Anglophone countries based on the use of common law and historical links through Empire. 5 Anglosphere economies on 2012 and 2013 figures show bigger growth than other countries (with the exception of China) and the UK continues to hold the advantage of shared heritage, language and the common law which cannot be understated in trade. Table 1.1 Anglosphere European Union GDP $16,641,109 trillion GDP $22,311 trillion Growth -0.2% (2012) Growth 3.08% (average) Unemployment 11.4% Unemployment 5.08% (average) (Figures based on IMF world GDP tables, 2012) Table 1.2 Country Australia Canada United States India New Zealand Singapore Hong Kong GDP $1.372 trillion $1.839 trillion $16,633 trillion $1.824 trillion $166.9 bn $318.9 bn $325 bn Growth 3.3% 1.9% 2.8% 3.9% 2.2% 0.3% 7.2% Unemployment 5.6% 7% 7.3% 3.8% 6.6% 1.9% 3.4% (Figures based on IMF world GDP tables, 2012) UK joins the North American Free Trade Agreement? The most obvious trade partner with whom to sign a bilateral deal would be the United States of America, if not joining the North American Free Trade Agreement (NAFTA) altogether. Firstly, the USA accounts for around 25% of world trade. The US economy dominated the world economy in the 20th Century and for the next 20 – 30 years at least shows little sign of waning. There is much talk of the rise of China and India economically, and whilst it is imperative that the UK increases both its imports and exports to India substantially from current levels, the United States remains the United Kingdom’s most important non-EU target market. It is not just the United Kingdom that has considered joining NAFTA. The United Stated International Trade Commission, an arm of the US Treasury, conducted a major examination in 2000 into the benefits to the United States economy, as well as to that of the United Kingdom, of the United Kingdom joining NAFTA. The conclusions of their weighty paper were encouraging for both countries. (US International Trade Commission: The impact on US Economy of industry in a free trade arrangement with the United States, Canada and Mexico. Aug 2000) British-American trade was worth $214 billion in 2012. That is the biggest bilateral trade relationship of any two countries anywhere. At a state level, New York trades more to the United 6 Kingdom than it does to any other US state. UK investment in the US is 116 times that invested in the US by China and 90 times that invested by India and 88 times that invested by Brazil. Around a million jobs on both sides of the Atlantic depend on US-UK trade. (UK Trade & Investment figures, 2012) If the UK were to join NAFTA, it could also trade bilaterally with Canada, another key Anglophone country. The UK is currently Canada’s most important European trading market (Canadian Government, foreign investment figures, 2012) 7 Conclusion For over 40 years, the UK’s main policy in economic areas has been steered by the European Union. A withdrawal from the EU would change the UK’s economic policy and Britain’s standing in the world. It is therefore imperative that the UK Government in charge of negotiating Britain’s course following an exit does so in a way that promotes a freer and more prosperous economy. The first aim is to secure the UK’s relations with the EU, both economically and as an ally. The EU is currently the largest economic bloc in the world (however this would change once the UK had left) and as such, the UK would not wish to lose trade because of a political negotiation. Therefore a UK Government negotiating would need to be clear that some concessions would be necessary for future relations. The second aim of leaving the EU would be to open the UK’s trade opportunities with the rest of the world. For the past 40 years and more, the UK has had its free trade with countries outside the EU negotiated by the European Commission. It would be strongly in the UK’s economic interest firstly to ensure that any internal economic reforms that are needed (planning, visa restrictions etc.) are in place in order to target bilateral free trade agreements with markets like China, but also the Anglosphere (see above table). The UK should also seek membership of the North American Free Trade Area given the shared interests that the American and Canadian economies have on both sides of the Atlantic. The UK’s history, identity and culture is based on its global role. Since the UK came into being in 1707, it has always been outward looking and based on world trade. 40 years out of 306 years have been based on European policy and not global policy. Leaving the EU would allow a return to the UK’s natural state of being a world trader. 8 References IMF world GDP figures 2012, 2013 BBC website Reuters News Agency Canadian Government website Australian Government website UK Trade and Investment website European Commission website Open Europe World Bank website The Commonwealth Secretariat US International Trade Commission 9