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Brexit Uncertainties Haunts U.K. 

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July 09, 2018

What is the issue?

  • Brexit has opened up a Pandora’s Box for the future of U.K.
  • With economic pressures mounting and the deadline approaching fast, this article tries to summarise the multiple issues revolving around Brexit.

What are the broader implications for U.K. on leaving the EU?

  • On leaving EU, U.K. will be excluded from the EU space project Galileo, and lose access to the crucial EU global positioning system (GPS).
  • It will lose EU funding for scientific research and the U.S. under Trump is likely to drive a very hard bargain for rights for British airlines.
  • Britain will also lose its place as a leading country in the EU’s customs union and will have to painfully negotiate partnerships to gain new markets. 
  • A recession in the near future is also likely due to Brexit as real estate and businesses within the U.K. will lose value. 

What is the current economic scenario within U.K? 

  • Britain’s growth rate has been abysmal, and investment is stagnant with much EU business having cut their investment plans after the Brexit vote.
  • Mortgage approvals are less than 25% of the pre-2016 levels and an expected interest rate rise has been deferred amidst talk of possible recession.
  • Over the past year, inward investment has dropped by $181 billion, outward investment has risen by $120 billion.
  • Real income has fallen by 10% as employers resort to low-paid, low-skilled casual work and services sector has become dependent on low-end EU labour.
  • More importantly, if visas are required for these EU-labourers after Brexit, the outcome will be even more devastating for the U.K. economy.
  • The only bright sign is that high-tech companies that threatened to leave Britain have not yet shown signs of doing so.
  • Also, there is little consensus even within the ruling Conservative Party on what kind of a post-Brexit deal would be ideal with the EU.

What are the varied relationships that countries have with the EU?

  • Single Market - Being part of the single market is one step short of full membership, as except the partial political union, all other aspects are covered. 
  • Norway is part of the European single market although it is not EU member, as it has done the following:
  • Eliminated tariffs, quotas and taxes on trade
  • Accepted the jurisdiction “European Court of Justice”
  • Allowing free movement of goods, services, capital and people
  • Makes payments towards the EU’s budget
  • While those soft-peddling Brexit would want to remain within the European Single Market, such an arrangement isn’t even being considered seriously.  
  • Customs Union - Turkey is not an EU member and is outside the European Single Market but it is part of the “European Customs Union”.
  • Notably, unlike a Single Market, a customs union does not cover food, agriculture or services, but encompasses other trade aspects within it.
  • Some politicians vouch for a Turkey like relationship for U.K. with EU in future, as it would help in resolving the challenging “Irish Question”. 
  • But others have opposed this as being part of the Customs Union would mean that U.K. can’t negotiate trade agreements with other countries.

What is the U.K. government’s proposal in the post-Brexit scenario?

  • “Free Trade Area” is one where there are no tariffs (or quotas) on specified goods and services from one country entering another.
  • For now, all EU members are part of an integrated market (two levels above ‘free trade zones’), and EU has “Free Trade Agreements” with some blocks. 
  • Challenge - Leaving the EU without a proper deal will cut off U.K. from the single market and Customs Union and impose barriers to trade with Europe.
  • To offset this loss in market access, U.K. has to move swiftly to establish “Free Trade Arrangements” with other counties. 
  • But negotiations to establish such arrangements can take years, thereby proving a nightmare for U.K. officials.
  • Alternative - To minimise the impact of loosing markets, the May government is considering a toned down “customs partnership arrangement”. 
  • This hybrid model, unlike a full “customs union membership”, envisions duel tariffs depending on the destination of the good under consideration.
  • Under this, U.K. proposes to collect E.U. mandated tariff (on EU’s behalf) for goods destined to EU via U.K.
  • This model moots a separate set of tariffs for goods destined for U.K.’s local markets, which is likely to be lower than those for EU markets. 

How are the proposals being perceived?

  • The hybrid customs model has been criticised by hard line members who prefer a clean break with the EU with minimal market relations.
  • Also, the various envisioned models are currently very complex are lack clarity.
  • More importantly, the EU might not agree to the complex U.K. proposals, which in any case would not be ready by the 2020 Brexit deadline.
  • While the EU will be looking to seal a deal as early as October 2019, U.K. is hinging its hopes for extending the deadline due to possible mutual losses.
  • Nonetheless, the prevalent political uncertainty regarding Brexit and the stability of the “May government “will affect U.K. more than the EU.

 

Source: The Hindu

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