Seminar Paper, 2017
16 Pages, Grade: 1,0
1. The “hard Brexit - CETA Option”
2. Brexit’s risks and opportunities - an uncertain future
2.1 Risk and Opportunities for UK businesses
2.2 Risk and Opportunities for EU businesses
2.3 Notable examples from our role play – The automotive and the finance sector
3. A possible scenario – an outlook for the future
On 23 June 2016, 51,9% of British citizens voted to leave the European Union (EU). The British Government has asked for the withdrawal from the EU on 29 March 2017. In accordance with Article 50 of the Treaty on the European union, the EU and the British Government must decide about the terms of divorce and their future relationship until 29 March 2019. One possible scenario for a Brexit deal is a “hard Brexit” in which the UK withdraws from the European Single Market and the Customs Union and negotiates a comprehensive free trade agreement with the EU like the Comprehensive Economic and Trade Agreement (CETA) (“Canadian model”). In this paper, we will discuss how a “hard Brexit - CETA option” probably will look like, which risks and opportunities for both EU and UK businesses we can anticipate and what shape a post-Brexit trade deal could take.
The CETA is a comprehensive free trade agreement between the EU and Canada. Negotiations launched on 6 May 2009 and were concluded on 26 September 2014. The final agreement was signed on 30 October 2016 and was approved by the European Parliament on 15 February 2017., Although, EU Member States still need to ratify the final agreement in accordance with their constitutional requirements, a provisional application of the agreement has been started on 21 September 2017.,
CETA removes duties on 98% of products that the EU trades with Canada. Customs duties for almost all goods will be removed at least within seven years. M per year will EU businesses exporting to Canada safe in the future, when tariffs are finally abolished. CETA includes agreements on the mobility of workers, the mutual recognition of professionals (Chapter 11), and restrictions in financial services (FS) and maritime transport services., The EU defines it as “radical” in opening public procurement markets. Article 4.3 and following contain the mutual recognition of European and Canadian accreditation and conformity assessment bodies, by accepting the results of each other’s technical standards and regulations. This process is not automatic and has to be agreed product by product; Canadian bodies will test Canadian products for export to the European market according to European rules and vice versa. The regularity convergence could be described as an voluntary harmonization of Canadian and European rules where possible. CETA has no direct reference to the EU law, which means that the agreement avoids any commitments by Canada to approximate EU legislation (or vice versa). A lot of the furthering of the market access has been left to future process of negotiation. CETA is limited to trade policy issues, and therefore excludes any coordination in security and foreign policies, home and justice affairs and other EU areas of influence.
With the CETA model, the UK would not be member of the single market or the customs union, there would be no overall free movement of persons and the UK would not contribute to the EU’s budget. A CETA model would slash tariffs, but the export of food would be restricted by quotas and phytosanitary controls. However, with CETA the EU and Canada will be able to export nearly 92% of its food and agricultural products duty-free. A Canada-style arrangement for the UK would provide limited commitments towards cross-border regulations for services, and no direct connection to FS, according to EU chief Brexit negotiator Michel Barnier.
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Source: British Broadcasting Corporation. “Brexit: What are the options?”. 12.06.17
When evaluating the risks and opportunities of the Brexit one thing stands true: we are facing a relatively unforeseeable future with many uncertainties. The UK and the EU have less than 18 months to negotiate the Brexit, while negotiations for the CETA took nine years and CETA is still to be formally signed and sealed., According to the EU’s legal database EUR-Lex, are there currently over 12.000 EU regulations in force that are forming parts of UK law; they must be replaced by national laws before March 2019 to not create a legal vacuum. UK Government’s internal divisions, UK’s divided society, uncertainties about a potential second Scottish independence referendum and an unclear future for the Republic of Ireland-UK border became a political reality.,
The Brexit could mean the loss of the easy access for UK businesses to the largest single market in the world. In 2016, the EU accounted for 43% of UK exports. Although reduced tariffs in CETA are better than a trade under WTO rules for both the UK and the EU, the fact that the UK would be no longer part of the Single Market and the Customs Union could cause immense market reactions. Free trade under a Canada-style agreement would be far from “genuine”; just like in CETA for Canada, UK exports would need to comply with EU rules over which the UK would no longer have influence. The concern about “bizarre EU rules that dictate everyday life in the UK” has been used from populist sites to campaign for a Brexit. An abolishment of these regulations could be an opportunity for UK businesses. However, if the EU would be still an important export market for UK goods after the Brexit, the UK would need to comply with these rules. It should be called into question if it’s possible to implement a double standard export policy, where companies produce in principle the same products with different standards, depending on the country of destination for the exported good. In Canada’s case it is estimated that CETA could increase Canada’s income by $12bn annually, due to an increase of bilateral trade by 20% annually. However, it is hard to argue with potential success for Canada, if the status quo for UK businesses in a no-Brexit-scenario would be more profitable. In case of a Canada-style arrangement, with limited commitments towards regulations for services and more important no arrangements for FS, the UK economy could face various obstacles. When considering that a CETA model could be the fundament of a Brexit agreement, 9 years of negotiation (of the Canada-EU agreement) would be unacceptable for both the UK and the EU, since uncertainty presents a major enemy of businesses.
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Source: Centre for European Policy Studies (CEPS). “An Assessment of the Economic Impact of Brexit on the EU27”. March 2017, p.10
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Source: Erken, Hugo et al. “The permanent damage of Brexit”. RaboResearch - Economic Research. 12.10.17, p.4
With a CETA-Brexit the UK would not contribute to the EU budget; UK’s estimated gross contribution in 2016/17 reached £12.2bn. A UK withdrawal could therefore lead to governmental investment in the UK economy. However, these £12.2bn seem like a minor detail, when considering that the UK government’s Office for Budget Responsibility calculates with costs related to the Brexit of £15bn per year. A possible €60bn Brexit bill or a potential €400M bill for an outstanding rent for the relocated European Medicines Agency (EMA) must be considered as well., Relatively unpredictable for the future is the devaluation of the British pound (GBP). The GBP dropped after the Brexit vote and as uncertainties and risks of further Brexit deadlocks remained, there is no soon recovery expected. Due to a low GBP it will be cheaper for importers from other countries to purchase products from the British market. A low GBP results in less purchasing power for the UK economy, which leads to a more expensive production for UK businesses with parts of their production chain from foreign markets. The decline of the GBP resulted in increasing prices of import commodities and provoked therefore an ongoing inflation. In some cases reduction in value of the GBP has created bargains; increasing international stake may lead to business opportunities and at the same time to external determination. The already ongoing emigration from the UK - and thus the risk of brain drain - could increase in many Brexit models and immigration towards the UK will most likely decrease, due to policy measures. Government measures of driving down the number of lower-skilled migrants could also increase wages in affected sectors., The so-called “Singapore model”, which would include alleged low tax, low public spending, and low red tape and regulation regime for the UK, could present an opportunity for UK businesses and the UK economy in general. It could be implemented in combination with a CETA like agreement. However, it is questionable if the “Brexiteers’ fantasy” is completely feasible since it works for Singapore, and it could maybe work for other cities and small states, but it seems rather inapplicable to a complex economy like the UK. After the UK general election in June 2017, Theresa May (Prime Minister of the UK) has backed away from a Singapore Model. An indirect effect of the Brexit will be new trade agreements for the UK with other nations worldwide (e.g. the US). However, at this point, the UK government is probably missing staff and political capacity for further trade agreement negotiations and will focus on the Brexit first.
Just like for the UK businesses, EU businesses are facing a potential loss of an unproblematic access to a big national economy. In terms of GDP the UK presents the 6th biggest economy in the world, UK imports from EU countries account for 54% of all UK imports and exports from EU countries are around 16% of all exports into the global economy., With a CETA like agreement the concrete access to the UK market for EU businesses would have to be renegotiated. Uncertainty exist about rights of EU workers in a post-Brexit UK. Chapter 10 of the original CETA allows a temporary entry to natural persons for business purposes from Canada or the EU in both countries. A similar regulation is in interest of both parties, and is likely to be agreed on; UK Brexit Secretary David Davis declared that an agreement with the EU has to protect the mobility of skilled workers and professionals in the UK. In case the EU is willing to negotiate on a similar agreement with the UK, it is probable that the agreement will focus on skilled workers and business persons, since the UK wants to decrease number of low-skilled migrants from Europe. A possible abolishment of EU regulations in the UK – in combination with the reduced tariffs in a CETA like agreement – could also lead to new business opportunities for EU companies exporting to the UK. In a CETA model without contribution of the UK to the EU budget, the EU would be missing 13,45% of its budget. Since the GBP lost in value, imports from the UK will be cheaper for EU companies, especially when potential goods are covered by tariff reductions in a CETA model. A weak GBP could also increase the competition on international export markets, and therefore could present a threat towards EU businesses.
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Source: Portes, Jonathan. “After Brexit: how important would UK trade be to the EU?”. National Institute of Economic and Social Research. 02.11.15
EU automotive industry employs 12M people and accounts for 4% of the EU’s GDP. The sector is the largest private investor in research and development (€50.1bn in R&D annually) and has an important multiplier effect for many other industries., The EU is the largest exporter of motor vehicles in the world. The UK automotive industry employs more than 700.000 people, accounts for 4% of the UK’s GDP invests £4 billion each year in automotive R&D. Innovation in UK automotive was supported by significant EU R&D funding; in total approximately £3.5 billion. The UK exported €19.3bn “Road Vehicles” in 2015 towards the EU27 (10% of all exports towards the EU27) and imported €58.8bn from the EU27 (19% of the imports from the EU27). At least 10% of the people working in the UK automotive manufacturing sector are from the EU27. Their freedom of movement would be at risk in case the UK leaves the Single Market. Many car manufactures have interconnected and interdependent supply chain networks across Europe, the UK, and the world; duties on cars would result in a huge increase of costs. Car manufacturers have warned to make significant cutbacks in case of increasing production costs due to an unfavourable Brexit scenario. Trade under WTO rules would mean 10% tariffs on exports and imports to and from the EU, which would be extra costs of £1.8bn on exports and £2.7bn on imports for the UK car industry. The EU car sector (especially the German car industry) has also no interest in a post-Brexit trade under WTO rules. The best scenario for both car industries would be a “soft”-Brexit where the UK stays in the Single Market and the Custom Union. A Canadian model would not mean to be a catastrophe either. Tariffs between the EU and Canada on vehicles will be phased in the upcoming years. Since there are no tariffs currently between the EU and the UK on cars, a CETA-UK model could include an agreement where both parties don’t even start with levying duties on cars.
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1 Bierbrauer, Elfriede. “Negotiations on the EU-Canada Comprehensive Economic and Trade Agreement (CETA) concluded”. Directorate-General for External Policies of the Union Policy Department. 15.10.14, p.4 http://www.europarl.europa.eu/RegData/etudes/IDAN/2014/536410/EXPO_IDA%282014%29536410_EN.pdf
2 Blanchfield, Mike. “Trudeau Brussels-bound to sign CETA on Sunday”. The Canadian Press. 28.10.16 https://www.yorkregion.com/news-story/6934897-trudeau-brussels-bound-to-sign-ceta-on-sunday/
3 Press Release European Parliament. “CETA: MEPs back EU-Canada trade agreement”. 15.02.17 http://www.europarl.europa.eu/news/en/press-room/20170209IPR61728/ceta-meps-back-eu-canada-trade- agreement
4 Harte, Roderick. “CETA ratification process: Recent developments”. European Parliamentary Research Service. June 2017 http://www.europarl.europa.eu/RegData/etudes/ATAG/2017/607266/EPRS_ATA(2017)607266_EN.pdf
5 European Commission. “EU and Canada agree to set a date for the provisional application of the Comprehensive Economic and Trade Agreement. Statement by Mr Jean-Claude Juncker, President of the European Commission and Mr Justin Trudeau, Prime Minister of Canada”. 08.07.17 http://europa.eu/rapid/press-release_STATEMENT-17-1959_en.htm
6 European Commission. “EU-Canada trade agreement enters into force”. 20.09.17 http://europa.eu/rapid/press-release_IP-17-3121_en.htm
7 European Commission. “CETA – Summary of the final negotiating results”. February 2016, p.1 https://trade.ec.europa.eu/doclib/docs/2014/december/tradoc_152982.pdf
8 European Commission. “CETA – Summary of the final negotiating results”
9 Government of Canada. “International Mobility Program: Canada-European Union (EU) Comprehensive Economic and Trade Agreement (CETA)”. 21.09.17 https://www.canada.ca/en/immigration-refugees-citizenship/corporate/publications-manuals/operational-bulletins-manuals/temporary-residents/foreign-workers/international-free-trade-agreements/canada-eu.html
10 European Commission. “CETA explained”. http://ec.europa.eu/trade/policy/in-focus/ceta/ceta-explained/
11 Centre for European Policy Studies (CEPS). “An Assessment of the Economic Impact of Brexit on the EU27”. March 2017 http://www.europarl.europa.eu/RegData/etudes/STUD/2017/595374/IPOL_STU(2017)595374_EN.pdf p.23
12 European Accreditation. “CETA Agreement and Conformity Assessment”, p.3 http://www.european-accreditation.org/brochure/ceta-agreementand-conformity-assessment-accreditation-a-tool-to-enhance-tradebetween-the-european-union-and-canada
13 Centre for European Policy Studies (CEPS). “An Assessment of the Economic Impact of Brexit on the EU27”, p.23
14 Ernst & Young. “UK/EU: Working through uncertainty. Practical considerations for Financial Institutions”. 23.06.17, p.10 http://www.ey.com/Publication/vwLUAssets/EY-UK-EU-Working-through-uncertainty/$FILE/EY-UK-EU-Working-through-uncertainty-considerations-for-Financial-Institutions.pdf
17 Centre for European Policy Studies (CEPS). “An Assessment of the Economic Impact of Brexit on the EU27”, p.7
18 European Commission. “CETA – Summary of the final negotiating results”, p.2&8
19 European Commission. “CETA explained”.
20 Mischke, Judith, Maïa De La Baume. “Barnier dashes Britain’s trade hopes”. Politico. 17.11.17. https://www.politico.eu/article/brexit-trade-barnier-dashes-britains-hopes-of-something-better-than-canada-deal/
21 Henley, Jon, Rankin, Jennifer, Asthana, Anushka. “UK will have less than 18 months to reach deal, says EU Brexit broker”. The Guardian. 06.12.16 https://www.theguardian.com/politics/2016/dec/06/uk-will-have-under-18-months-to-negotiate-deal-says-eus-brexit-broker
22 Ernst & Young. “UK/EU: Working through uncertainty. Practical considerations for Financial Institutions”.
23 Department for Exiting the European Union. “Legislating for the United Kingdom’s withdrawal from the European Union“. March 2017, p.14 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/604516/Great_repeal_bill_white_paper_accessible.pdf
24 McIntyre, Niamh. “Brexit: No deal could trigger new independence referendum, says Scotland’s leading EU expert”. The Independent. 14.10.17 http://www.independent.co.uk/news/uk/politics/brexit-no-deal-scottish-independence-eu-expert-kirsty-hughes-a8000871.html
25 Henley, Jon, Walker, Peter. “Brexit weekly briefing: Irish border question becomes big obstacle”. The Guardian. 28.11.2017 https://www.theguardian.com/politics/2017/nov/28/brexit-weekly-briefing-irish-border-question-obstacle
26 European Commission. “EU position in world trade”. http://ec.europa.eu/trade/policy/eu-position-in-world-trade/
27 Ernst & Young. “UK/EU: Working through uncertainty. Practical considerations for Financial Institutions”, p.10
28 Foster, Alice. “Ridiculous EU rules that Britain has to adhere to: Six of the worst”. Daily Express. 24.06.16 https://www.express.co.uk/news/politics/669356/EU-ridiculous-rules-Britain-must-adhere-balloons-toasters-bananas-lightbulbs-pet-horses
29 The Canadian Press. “CETA in effect today as Canada-EU trade pact comes into force. Backers say deal will boost Canada's income by $12 billion annually”. 21.09.17 http://www.cbc.ca/news/business/ceta-europe-free-trade-1.4300071
30 Mischke, Judith, Maïa De La Baume. “Barnier dashes Britain’s trade hopes”
31 Keep, Matthew. “The UK's contribution to the EU Budget”. House of Commons Library. 18.12.17, p.3 http://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7886#fullreport
32 Eaton, George. “Forget gaining £350m a week, Brexit would cost the UK £300m a week”. New Statesman. 19.09.17 https://www.newstatesman.com/politics/uk/2017/09/forget-gaining-350m-week-brexit-would-cost-uk-300m-week
33 Barker, Alex. “The €60 billion Brexit bill. How to disentangle Britain from the EU budget”. Centre for European Reform. February 2017. http://www.cer.eu/sites/default/files/pb_barker_brexit_bill_3feb17.pdf
34 Kroet, Cynthia. “EMA faces €400M, decades-long London rent bill: report”. Politico. 27.04.17 https://www.politico.eu/article/report-ema-faces-e400m-decades-long-london-rent-bill/
35 Source: XE Currency Charts: GBP to EUR https://www.poundsterlinglive.com/exchange-rate-forecasts/8013-barclays-releases-new-fx-forecasts-for-2018-year-ahead
36 Trading Economics. “United Kingdom Inflation Rate” https://tradingeconomics.com/united-kingdom/inflation-cpi
37 New York Times. “How ‘Brexit’ Could Change Business in Britain”. 18.09.17 https://www.nytimes.com/interactive/2016/business/international/brexit-uk-what-happens-business.html
38 Savage, Michael. “Fear of Brexit brain drain as EU nationals leave British universities. Failure to guarantee rights of staff and students will damage ability to recruit, say academics. The Guardian. 03.06.17 https://www.theguardian.com/politics/2017/jun/03/brexit-universities-academics-eu-rights
39 Hopkins, Nick, Travis, Alan. “Leaked document reveals UK Brexit plan to deter EU immigrants”. The Guardian. 05.09.17 https://www.theguardian.com/uk-news/2017/sep/05/leaked-document-reveals-uk-brexit-plan-to-deter-eu-immigrants
40 Partington, Richard. “Fall in migration after Brexit could push up inflation, says Carney. Bank of England governor says labour shortages could also raise wages in short term, but Brexit would have only modest impact on prices”. The Guardian. 18.09.17 https://www.theguardian.com/business/2017/sep/18/migration-brexit-inflation-mark-carney-bank-of-england-wages
41 Magnus, George. “Stop saying Brexit Britain could follow a “Singapore model”—it wouldn’t work here”. Prospect. 27.11.17 https://www.prospectmagazine.co.uk/politics/stop-saying-brexit-britain-could-follow-a-singapore-model-it-wouldnt-work-here
43 Gordon, Sarah et al. “UK to diverge from EU on financial services rules after Brexit”. Financial Times. 21.09.17. https://www.ft.com/content/582ca822-9e06-11e7-8cd4-932067fbf946
44 Wats, Joe. „Donald Trump and Theresa May agree immediate talks on post-Brexit trade deal. Prime Minister says this is the 'first step leading to a future trade deal with the US which could provide huge benefits to our economic muscle and will give businesses additional certainty and confidence'”. The Independent. 28.01.17 http://www.independent.co.uk/news/uk/politics/donald-trump-theresa-may-trade-deal-brexit-lunch-european-union-holding-hands-menu-card-a7550956.html
45 Spence, Peter. “New Zealand offers UK its top trade negotiators for post-Brexit deals”. The Telegraph. 30.06.16 http://www.telegraph.co.uk/business/2016/06/29/new-zealand-offers-uk-its-top-trade-negotiators-for-post-brexit/
46 International Monetary Fund. “GDP, current prices. Billions of U.S. dollars”. http://www.imf.org/external/datamapper/NGDPD@WEO/OEMDC/ADVEC/WEOWORLD
47: Portes, Jonathan. “After Brexit: how important would UK trade be to the EU?”. National Institute of Economic and Social Research. 02.11.15 https://www.niesr.ac.uk/blog/after-brexit-how-important-would-uk-trade-be-eu
48 Stewart, Heather. “David Davis seeks to reassure City on transfer of workers after Brexit. Brexit secretary says government hopes to strike deal with EU that would allow City firms to move staff in and out of UK”. The Guardian. 14.11.17 https://www.theguardian.com/business/2017/nov/14/david-davis-seeks-reassure-city-transfer-workers-after-brexit
49 Hopkins, Nick, Travis, Alan. “Leaked document reveals UK Brexit plan to deter EU immigrants”.
50 Statista. “Share of total contributions to the European Union budget in 2016, by Member State”. https://www.statista.com/statistics/316691/european-union-eu-budget-share-of-contributions/
51 European Commission. “Automotive Industry”. https://ec.europa.eu/growth/sectors/automotive_de
52 European Automobile Manufacturers Association. “Research and Innovation” http://www.acea.be/industry-topics/tag/category/research-and-innovation
53 European Commission. “Automotive Industry”.
54 Gorthon, Madeline. “EU is the largest exporter of motor vehicles in the world. The US is the largest importer”. Evonews. 27.06.17 https://evonews.com/life/auto/2017/jun/27/eu-is-the-largest-exporter-of-motor-vehicles-in-the-world-the-us-is-the-largest-importer/
55 Hawes, Mike. “The UK Automotive Industry and the EU. An economic assessment of the interaction of the UK’s Automotive Industry with the European Union”. KPMG. April 2014, Introduction https://www.smmt.co.uk/wp-content/uploads/sites/2/SMMT-KPMG-EU-Report.pdf
56 Ibid., p.7
57 Ruddick, Graham. “Toyota UK warns of cutbacks if Britain leaves EU. Carmaker says Brexit would reduce competitiveness of UK operations, as SMMT finds most automotive firms want to remain in EU”. The Guardian. 03.03.2016 https://www.theguardian.com/politics/2016/mar/03/uk-motor-industry-backs-uk-remaining-in-europe-survey-eu-positive-impacy
58 Deloitte. “Brake Block Brexit - How a hard Brexit would impact the German automotive industry”. Deloitte Brexit Briefing 5. June 2017 https://www2.deloitte.com/content/dam/Deloitte/de/Documents/Brexit/Brexit-Briefings_Pt5_Hard-Brexit-German-car-industry.pdf
59 Lewis, Sara. “Canadian, EU Auto Industries Welcome Trade Pact”. WardsAuto. 24.02.17 http://wardsauto.com/industry/canadian-eu-auto-industries-welcome-trade-pact
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