Brexit: Time to think on the lines of ‘Trade & Economic Integration’

Post 1930; the repercussion of ‘Smooth-Hawley Act’ by United States resulted into massive retaliatory measures by US’s many trading partners. The general price rise in global merchandise market due to huge tariffs and various protectionist measures lead the world to think in terms of tariff reduction by negotiating bilaterally or multilaterally and giving preferential treatment in specific sector to boost trade; this gave a birth to the concept called ‘Economic Integration’. Preferential Trade Agreements with those forming trade bloc or trade union gave members of such bloc a chance to further reduce tariff which was generally meant to create win-win situation for all.

European Union as it stands today is undoubtedly a biggest example of such economic integration. But it is matter of debate that; whether such integration in European region is a success story or not? To understand the Brexit; one needs to understand the evolution of EU’s economic integration first.

Oversimplified version of evolution of any economic integration:

1.      Free Trade Area [FTA]: A bloc or area comprising of member nations territories where only trade in goods is free; not in absolute terms; but in terms of lesser barriers in few or specific sectors and / or free trade in goods and commodities in few or specific sector. Terms of which gets decided my member nations based on various modes of negotiations.

a.       FTA requires ‘Rules of Origin’ [ROO] to be specified for every commodity i.e. while trading in goods the good needs to have ‘a national source of origin’.  ROO is a useful to avoid case of ‘Transshipment costs’; means commodity ‘x’ getting shipped form a non-member nation to a member nation; then a member nation half make or remake it and ships it further to a another member nation ‘freely’; giving undue advantage to the member nation who is not a source of origin for that commodity and such free trade results into loss for a recipient member nation; who could have earned revenue out of trade with the concerned non-member; which is an actual source of origin for that product.

b.      FTAs are politically straight forward; a member nation is free to decide upon its individual trade policy with any non-member nation. But the cost of administration is high due to lengthy and complex procedure to keep checks on ROOs.

2.      Customs Union [CU]: It is a step forward to integrate economies with destination neutrality. The CU unlike FTA imposed a common external tariff [CET] on its all non-members; which makes it easy for the union to freely circulate goods within its territory; without checking its source of origin; as the whole union have common and harmonized trade policies.

a.       Administratively it is easy to operate a CU with low checks and barriers; but surely a political hassle.

b.      Through Merger Treaty of 1967; the European Communities was established and gave a single institutional structure to EU by establishing European Atomic Energy Community [EURATOM], European coal and steel community [ECSC] and European Economic community [EEC] which in 1993 by Maastricht Treaty, gets a status of complete single market, known as the internal market, which allowed for the free movement of goods, capital, services, and people within the EEC; known as ‘common market’ discussed below.

3.      Common Market: A Typical market like EU’s internal market with famously knows as Four Freedoms i.e. free movement of goods, capital, services, and people and with common agriculture and industrial policy; making it a administrative safe heaven as far as trade is concern.

a.       By Schengen Treaty (1985-1995) a movement to form a complete single market was initiated.

4.      Economic Union: It is second last step on the way to complete integration of member nations. The significance of this level is member nations integrate and harmonize most of their socio-economic policies. Maastricht Treaty of 1995 established three pillars of EU; which were first; The European Communities [EC] which exclusively handles Economic, Social and Environmental concerns. Second; The Common Foreign and Security Policy (CFSP) pillar took care of foreign policy and military matters, and last The Police and Judicial Co-operation in Criminal Matters (PJCCM) for integrating justice and home affairs.

5.      Economic and Political Union: It is movement towards ‘Supra National’ institution with common parliament, common federal bank and common currency. A most difficult step to maintain and politically troubled Economic and Political Unions can lead to situations like Brexit and Grexit.

a.       Treaty of Lisbon, 2007 democratically legitimizing EU took a final step towards creating EU as an Economic and Political Union. And as some says a movement towards ‘Rule form Brussels’, the EU headquarters.

As the idea of Brexit coming towards a reality; it very much important to understand the most irritating factors to stay in EU as advocated by 'out' campaigners.

1.      Now a day’s EU Single market is seemed to benefit the most to Germany. As German manufacturing sector and its raising exports are reasonable enough to keep Germany one step ahead of any EU member; where Britain’s manufacturing sector is not helping its BoP.

2.      The Greece crisis is nothing but an example failure of EU to re-distribute and generate wealth. Like in India; a fiscal policy can help one specific underprivileged region to get more funds from central government; which will create social overhead capital there; which then will boost its regional economy; and the wealth generation-redistribution cycle goes on. This is all possible because in countries like India or any other sound democracy; the fiscal authority is there to redistribute the wealth generated out of government receipts or private economic activities. But in case of EU where say Greece is a deprived region; EU as an authority can only give loans to Greece to keep the pace of development; which in reality hurts the most and vicious cycle of debt burden and rapid unemployment start blooming.

3.      The decline of EU’s share as an economic bloc of the world GDP has declined by more than 10%; making the entire EU more troublesome itself.

4.      Britain; already troubled due to many factors; when put in a situation to share the burden of something like Greece crisis; the thought to leave the union gets more vocal.

5.      The EU Migration as well as Euro Crisis are again major reason for demand of more Legislative freedom from Brussels to restore the rule of London.  

6.      Compulsory compliance to EU regulatory framework has been regarded as nuisance for UK’s growth and stability.

7.      The regulatory independence in financial sector and more autonomy to Pound are major factors for ‘out’ campaigners.

Ahead of Referendum by the end of 2017; PM Cameron wants to renegotiate the terms of UK’s membership; who himself a strong supporter for ‘in campaign’; looking for following key objectives to achieve to appeal UK voters to let Britain stay in EU.

(Courtesy: BBC, Q&A: What Britain wants form Europe?)[1]

1.      Economic Governance: Securing explicit recognition for Pound; to create level playing field with Euro. Making UK less vulnerable form contribution to euro zone bailouts.

2.      Competitiveness: Securing a position where UK will limit the excessive regulatory burden created due to single market.

3.      Immigration: Creating advantage for UK citizens by putting more limits on movement of labour. Which deviates from the core principle of common market and UK right now is in favour of limiting its scope.

4.      Sovereignty: Granting more powers to national parliament to block EU legislations and deviating from the fundamental principle established in Treaty of Lisbon i.e. ‘EU as a ever closer union’

Now; after analyzing the evolution of ‘Economic integration’ and understanding the concerns of Brexit supporters; we just need to connect the dots; Britain leaving EU is definitely leaving it for political reasons related to labour and money market failure; but both ‘in’ and ‘out’ campaigners supports the view that leaving EU-Free Trade Area would be disastrous. Access to EU FTA for the sake of trade is the one of the major logically sound argument Prime Minister Cameron thought to sell it to UK voters to vote for ‘in campaign’ in upcoming Brexit referendum.

Last month, Press Trust of India also noted that; Cameron, who secured a deal on EU reforms at a summit in Brussels last week, asked lawmakers to favour staying within the EU to prevent the UK losing its "negotiating muscle" in future trade and investment deals in the event of an exit from the 28-nation bloc.[2] Cameron while arguing the benefits of staying in EU also made it clear that; India will prioritising its trade commitments with EU first and Britain latter; and this would be the case with almost all the countries who are in process to negotiate different preferential and free trade agreements with EU.

Wealthiest and second wealthiest nations on earth like Norway and Switzerland also opposed the EU membership with popular vote on several occasions Norway; the non-EU member state of European Economic Area (EEA) gets better deals with EU single market with almost 5 to 6 million population; as it is the case with Switzerland; by virtue of mere bilateral agreements with EU and not even being a member of EEA i.e. sometimes referred to as waiting room for EU; exports more than 60% of its total exports to EU. While Britain with its over 60 million population seemed to be deprived of the common market benefits which EEA offers; with the fact that Britain is economically as well as politically integrated with EU since 1973. The fate of which will be decided in the battle of Parliamentary Sovereignty vs. Supra National Organisation.

Independent Bilateral trade deals with non-EU countries as well as countries like US and China (UK’s biggest import partners) will strengthen comparative advantage of UK over other EU states and trying out something like EFTA without living in shadow of customs union like EU would make UK itself a biggest trading partner of EU; but Europhiles feared that this would not be the case; because it is beyond doubt that remaining EU countries will not give Britain the four freedoms[3] of EU very easily.

In the presence of WTO rules which apply to all multilaterally; UK outside EU will discriminate with EU by using different tariff barriers cannot be the case but with a more autonomous governmental authority; Britain while staying in Common EU Market but out of common EU government can give Britain its due share more significantly. UK is a member at WTO and its Market Access Commitments are included in those of European Union-wide Market access obligations; which complicate the Brexit procedure because any addition, subtraction and amendments to these commitments would require all WTO members to agree to it; which ultimately make the whole Brexit procedure more complicated.

TO gain its control over raising unemployment, sudden boom in purchasing power showing inflationary tendencies and currency fluctuation; UK will do all that is required but the biggest dilemma UK’s politicians are going to face post-Brexit is the need of EEA’s free trade benefits with more governmental autonomy to deal with market failure and structural problems.

EU which provides private parties to enforce their right before various EU forums; then be it an investment or homosexuality; the goal of social justice which EU sought to achieve through its dynamic dispute settlement arrangement; will no longer be there for British nationals; but the regulatory freedom looks like to be a priority for UK right now as numbers supporting ‘out campaign’ are sliding in upward direction.

As the world moves towards more integrated economic activities with lesser barriers to trade; words like LPG [Liberalisation, Privatisation, and Globalisation], PTAs [Preferential Trade Agreements] and FTAs [Free Trade Agreements] are becoming symbols of sophisticated economic integration for better tomorrow; the result of Brexit referendum would definitely leave long lasting impact on the development of bigger and larger regional trading blocs and would start a movement in European region to disassociate political integration with an economic one.

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[1] BBC News; UK Politics: Q&A: What Britain wants from Europe, Feb 17, 2016. Accessible at < http://www.bbc.com/news/uk-politics-32695399> Last Visited at 25-03-2016

[2] Business Standard; PTI Stories; Feb. 22, 2016. Accessible at http://www.business-standard.com/article/pti-stories/cameron-uses-trade-with-india-as-a-case-for-uk-to-stay-in-eu-116022201188_1.html [Last visited at 25-03-2016]

[3] The four freedoms of [Free Movement of] goods, services, capital and labour come as a package for any EU member; to practice this freedom within all member territories.