International Trade Documentation and Publications

The United Kingdom is to resume its sovereignty

In a national referendum on 23rd June the electorate of this country voted by a substantial majority that the UK should leave the EC. This was despite the campaign to produce the opposite result: Mr. Cameron’s pathetic negotiations earlier in the year gave the impression that, as the president of the EC Commission expressed it, “Cameron wants to dock his country permanently to Europe”. The government and some plutocrats threatened that leaving would produce major harmful consequences and the fears linger in many minds. One was that leaving would cause unemployment to rise to three million (a tenth of the entire workforce), because so many jobs depended on trade with the EC, although the Treasury had reported some months before that there was no ground for such a claim. Another was that British exports to the EC would be prevented or at least hampered for years while a new trade treaty was negotiated, and there has been some belligerent posturing from Brussels to this effect. The actual figures for our recent trade with the rest of the EC were quoted at the beginning of the July issue of this Briefing and show that our deficit in 2015-6 was higher than ever. The UK is a major export market for producers on the continent and it is unrealistic to fear that they would tolerate interruption of their deliveries to dealers in the UK because that would cause major economic and political difficulties especially in Germany. So there should be no difficulty in any negotiation required to ensure that trade will continue without interruption. Some doomsayers threatened that British people would no longer be able to live in or even travel to EC countries and vice versa as we did before 1973; one obvious benefit of leaving should be that we can control our borders and check the present flood of illegal immigrants who have nothing to contribute to our economy but we can surely be on good terms with continental countries, as we were before Mr. Heath’s government took us into the EC.

An inevitable result of the recent referendum was the resignation of the prime minister and his replacement by Mrs. Theresa May, formerly home secretary and a member of the campaign to stay in the EC. She does now seem determined to implement the result and has appointed a cabinet which will support her in that. One assumes that vigorous preparations are going on but so far the UK remains a member of the EC and there is talk that negotiating exit will take two years (or more, some say) a period of uncertainty which would not help the British economy. The sooner residual fears about our prospects are resolved the better.

Voting in some parts of the country did not produce a majority for leaving the EC. In particular the Scottish electorate had a majority for staying in, and this has encouraged Miss Nicola Sturgeon and the Scottish National Party to talk about a second referendum on Scottish independence so that if it won the SNP could aspire to take Scotland into the EC as a separate country. The British government has said that it will not allow another referendum and the President of the EC Commission has indicated that a separate Scotland would not be able to join. Mrs. May apparently intends to manage relations with the Scottish National Party gently and will not initiate our exit without at least consulting the leader of the SNP. Miss Sturgeon has indicated five interests which she will want to see protected before the UK initiates its exit from the EC: the need to ensure that Scotland’s voice is heard and its wishes respected, free movement of labour and access to the single market, protection of workers’ and wider human rights, ability to work with other nations to address issues such as terrorism and climate change, and having a say in the rules of the single market. Not long ago the EFDD group of MEPs proposed in the EC parliament that we should take back control of our former territorial waters, a change which would have excluded factory trawlers from Spain and elsewhere, enabled fish stocks to recover somewhat, and would have helped the British fishing industry which has suffered badly under the Common fisheries policy. Scottish MEPs voted against the motion.

The vote in Northern Ireland was 56% for staying in the EC. The prime minister Mrs. Arlene Foster’s Democratic Unionist Party voted to leave but Sinn Féin voted to remain in the EC and has demanded a referendum on reunification of Northern Ireland with the Republic. Mrs. May has visited Belfast for discussion with Mrs. Foster. There is little popular support for union with the Republic which would be crippled financially by it. Since the Republic became independent Ireland and the UK have usually operated a Common travel area allowing free movement of people, trade and services, but with security checks in wartime and during the troubles. The Republic is not party to the Schengen agreement. The Irish land border will be the UK’s only land border with an EC member country, but there seems little support for a new hard border to deal with customs tariffs and backdoor immigration. Mrs. May has promised a practical solution.

In reality the prospects could hardly be better. Britain is the fastest-growing EC economy outside the Eurozone although a huge contributor to the Brussels budget, second indeed only to Germany. We can do better without that burden: not contributing to the EC budget will yield about ½% of GDP to be put to better use. Many EC producers need the British market if they are to stay profitable. For many years the UK has attracted much foreign investment which has stimulated the economy, increased employment and created new initiatives in commerce and industry. Outside the EC our government will be free to aid new industries and to intervene when foreign control may not be beneficial. The UK economy in the second quarter of this year showed a rise of 50% in growth over the first quarter and so far surveys suggest that actual orders and output remain as expected. Our exports in 2015 grew faster than world exports for the first time since 2006 although our sales to the EC continued to fall. Real disposable incomes are rising at more than 3% a year, employment levels are at a record high and credit is readily available. The result of the referendum led to temporary uncertainty in financial markets. The pound fell by about 15%, and that should have delighted those who have said for years that the strength of the pound hindered exports by making British products too expensive overseas; the Bank of England cut interest rates by ¼%, another little help for exporters. Competition apparently prevents retailers from passing higher import costs to their customers.

An important question is where our new government wants our economic policy and external trade to go in the longer term. There are hints about wanting free trade with other countries and easing regulations on business. The prime minister has met leaders of small businesses, which have suffered particularly from the costs of social regulation in the EC, to talk about opportunities under a national regulatory system. More than half of our employment is in small businesses and it should be the more innovative and dynamic part of our economy. The change away from subsidised farming, for example, will not be easy.

The EC is highly protectionist and raises prices of manufactured goods, foods and imports generally by about 20%, and this alone means that the cost of living is about 8% higher than it need be. It insists that if we want to stay in the single market any trade deal we make with another country must be on terms no better than that country has with the EC, and if that hardline is maintained it may mean we must leave the single market; resolving that issue will take some time. (Joining the European Economic Area would not help because although the EEA can negotiate its own trade deals it is bound by rules agreed with the EC for access to the single market.) When we leave, EC prices can be replaced by world prices and this will generate healthy competition and higher productivity, thus pushing manufacturers towards adopting more efficient, hi-tech processes. Manufacturers will no longer have to pay EC tariffs which add about 2% to their costs, perhaps £2,000m nationally. The City of London is a major international financial centre and has been under attack from Brussels and Frankfurt for years. It can look forward to having its regulations made in London. Even if Brussels withdraws “passporting” and the ECB requires eurobonds to be cleared in Frankfurt, the City may just sell less in the EC and more elsewhere. The EC takes a progressively smaller proportion of our visible exports as years pass.

The EC is a signatory of GATT 1994 and was thus committed to abolish all existing customs preference agreements within five years from then, replacing them with lower import duties all round. This was intended to enable developing countries to take much bigger parts in international trade while allowing them the bigger import charges they needed to finance their administrations. The EC did not honour its commitment but made new preference agreements with many of the world’s poorer countries, enabling its high-value manufactured goods to enter at low duties countries which had little or nothing to sell us in return. Any theoretical benefit to other countries was often nullified by non-tariff barriers against imports to the EC. The result has been that the countries of the world are now divided into numerous trading blocs to protect themselves against the EC: the general section of the Export Guide lists about three dozen such blocs with at least three members each but the list is not complete. This is just the outcome which GATT 1994 was intended to avoid and frustrated the hope of the Doha round which was to increase the external trade of many developing countries. One result of UK sovereignty could be that trade rounds begin again to the benefit of all.

A sovereign UK will in theory be able to negotiate free-trade arrangements with countries around the world, a policy in accord with the 1994 agreement signed for us and broken by the EC. The benefit will be not only that we shall export more freely but, much more important, that they can sell more easily to us. British consumers may hope for a wider range of imported goods at lower prices and a rise in their standard of living. (Food prices in the EC are on average about 17% higher than world prices because of the Common Agricultural Policy.) Our aim should be to achieve free-trade agreements with all other countries or at least with all which want to trade with us. Better still, we could avoid making numerous national agreements and go for unilateral free trade with other countries generally, as a few other nations such as New Zealand and Singapore have done. Even China has reduced its import tariffs to help its own development. We might achieve a gain in GDP and living standards of about 4% as well as freeing our nation from EC regulation. That would indeed be an aspiration for our new government and it is encouraging that members of our new cabinet are already talking to other governments about future trading arrangements. A new trade deal with the EC as a bloc would be impracticable if only because every member state would be able to exercise its veto on anything which might otherwise be agreed.

One may hope that a sovereign United Kingdom could in the next few years lead the world in breaking down trade barriers to the great benefit of mankind, not just in raising living standards in industrialised countries but in advancing the economies of many developing countries too. Published figures already show that the world economy is not in recession since the UK referendum but that global economic growth is accelerating sharply after being in doldrums for much of the last seven years.

The new British trade minister Lord Price, a former managing director of Waitrose, visited Hong Kong in July to talk about trade deals with emerging markets including China. He told the British Chamber of Commerce there: “I’m optimistic about the future: particularly in helping create a second Elizabethan Golden Age. The first Golden Age was based on peace, prosperity, new trading markets and a flourishing of the arts” and that he is pushing for “a continued close trading relationship with Europe ... There’s also a prospect for striking new deals with Canada, New Zealand and Australia which could form the beginning of a Commonwealth trading pact. And to the opportunities in the East, where for centuries British merchants have traded with China for tea, white gold and porcelain as well as with Japan, South Korea and other Asian nations”. The major trade deal with China is apparently off now that the Hinckley Point power station is not going to be built, and Chinese finance for the HS2 railway is also cancelled. New Zealand has offered to lend the UK some experienced trade negotiators to manage trade talks. President Obama has said more than once that Britain would be “at the back of the queue” for a treaty with the USA: he may be vexed that the British electorate did not vote as he wanted in the referendum, but his words belie the willingness of the USA for a trade deal with the UK when our relations with the EC have been settled.

Of course there are obstacles. Growth of world trade in many product groups and services has largely halted in recent years, being replaced by pursuit of national interests. Many countries practise import substitution instead of open markets and imports are subject to quality inspection and other forms of discriminatory regulation. (It would be impolite to name new African countries and others which demand that products from world-famous British manufacturers meet their standards.) Large companies are encouraged to invest in developing countries rather than export to them. It may be that countries willing to consider really free-trade agreements with the UK or anyone else are now largely those in the “Anglosphere”. Could we reinstate trading relations with Commonwealth partners which were given up in 1973? Australia is a small and distant market which deals with East Asia and with luck the United States but its prime minister has told Mrs. May that he wanted to sign a deal with the UK “as soon as possible”. India is protectionist both nationally and state by state. New Zealand? Perhaps. Canada has had “positive” talks with Liam Fox our international trade secretary but seems mainly interested in the rest of the EC. The USA has major problems with product liability, intellectual property, pricing medicines, arbitration of disputes and other things. The best prospects in the near future seem to be nearer countries, while others will take much longer. Since the UK is a major manufacturer it could not follow the example of Singapore which has little manufacture but imports cheaply and functions as an export-processing zone giving tariff-free access to whatever is available. But if we could only set an example of liberalising international trade other countries might follow. One mutual benefit might be that the British government could cure itself of the self-imposed requirement to spend 0.7% of its budget on aid to countries which would do better without it. This country now spends three times as much per head on aid as the United States, and much of the money goes to autocracies such as Rwanda and Uganda or to unstable and corrupt régimes such as Afghanistan and Somalia. Trade, not aid, generally raises real incomes in both partners by enabling them to specialise in what they produce and allocate scarce resources toward more productive activities.

The departure of the United Kingdom will not leave the rest of the EC unaffected. The European project was intended from its beginning in the 1930s to create a single European state (dominated of course by Germany) but without letting the population generally realise what was going on. The secret could not be kept for ever, and successive treaties have increasingly subordinated member countries to central control so that more people now realise what is intended. They have also been harmed by the imposition of the common currency, which was done not because there was need for it but as an instrument of centralisation of fiscal and political control. In the last two years there has been a flood of immigrants, refugees from Syria and other disaster zones in the Middle East, and their number has forced several EC members to withdraw from the principle of free movement of people within the EC. The pursuit of “ever closer union” will end in economic ruin and perhaps great political conflict. Martin Selmayr, chief of staff to the president of the EC Commission, has said that “Britain’s departure will help Europe to finally forge a new identity”, but there is no evidence that anyone believes this.

Immigrant communities and rootless refugees have not been integrated into their host populations and their numbers and character surely mean that they cannot be, at least in the near future. So we have now had terror incidents in France, Germany and London, with others likely in these and other centres and serious warning of a major terrorist atrocity to come in this country. The citizens of France and Germany no longer trust their leaders and particularly Chancellor Merkel who deliberately admitted so many newcomers without adequate or indeed any checks. The EC agreed with Turkey that Turkey should hold refugees in return for EC financial support and the right of Turkish citizens to travel freely in the EC. Immigrants rejected by Greece would return to safety in Turkey: for every illegal immigrant returned, the EC would take a properly-documented refugee from a camp in Turkey. But Amnesty International has found that returned immigrants are held in detention centres and some have been sent back to Syria. Recent political violence has made Turkey decidedly unsafe: President Erdogan wants to introduce the death penalty and has imposed a state of emergency. Greece hesitates to send people back to Turkey. The EC has demanded changes to Turkey’s anti-terror legislation before granting visa liberalisation, but Erdogan is becoming harsher and has apparently lost interest in joining the EC. Many of those sent by Turkey for resettlement are young men with mental health problems. Germany took in 1.2 million refugees last year, so the attacks in German streets are seen by many as a result of Chancellor Merkel’s open-door policy. The interior ministry has said that fifty nine immigrants are being investigated for terrorist connections, but there is a popular feeling that this is seriously inadequate.

The situation is unstable. If President Erdogan threatens to allow many refugees into the EC unless he receives concessions from the EC, popular unrest could rapidly become worse. The Austrian election in September is expected to produce a far-right President Norbert Hofer. The constitutional referendum in Italy seems likely to weaken the government and the Eurozone: if the prime minister loses he may call an election and seek to take Italy out of the Eurozone. There is to be a referendum in Hungary which will probably reject immigration quotas. Next spring the ultranationalist Geert Wilders will be strongly supported in the Dutch elections. Marine le Pen is expected to reach at least the final round of election for the French presidency. Wilders and Le Pen both promise referenda on membership of the EC. By next summer there will be a fresh onrush of immigrants into Germany and this will strengthen the far right against the Christian Democrats.

Many commentators agree that the secession of the United Kingdom will be followed by other departures in the next few years. A likely one is the Irish Republic. The Irish business leader Danny McCoy was quoted in The Irish Times as saying that Ireland could suffer “potentially enormous” damage if an independent Britain became a magnet for foreign direct investment on the back of lower business taxes and deregulation (as Ireland did). Yet it is reported that since the referendum a number of British residents have moved to Ireland in order to stay in the EC. Other countries which might soon leave for their own reasons include Italy, Denmark, Holland, Spain and France. And several others, including even Germany, have growing anti-EC political parties. Eastern European countries will be much affected if the UK ends free movement. The Slovak prime minister Robert Fico said recently that years of economic weakness and an influx of refugees had led to disillusionment among voters throughout the EC and that the new situation is a good opportunity to re-evaluate its priorities: indeed, that had it done so earlier the UK electorate might not have voted to leave.

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