Brexit, Part 2: Potential Alternatives and Life After the E.U.

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Editor’s Note: Check out Part 1 here

The option of European Economic Area (EEA) membership like Norway — which is not in the European Union (E.U.) but has open borders with the bloc and accepts some of its laws and regulations — seems strangely to have not been an option debated (at least publicly).

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The reason may be a hysterical backlash from those in favour of Brexit whenever a compromise position is mooted, so wedded are they to total exit.

The fact remains, however, the U.K. is making compromises on all fronts as it becomes increasingly clear it has no cards to play that the E.U. values. At risk of revolt or not, it may yet try to stay in the customs union as negotiations reach a head during the summer.

Should Britain leave the E.U. without an agreement, the worst that would happen would likely be World Trade Organization (WTO) rules on tariffs. That means the U.K. could end up with a deal like the U.S., where tariffs rates reflect the various parties’ home vested interests.

By the Numbers

The E.U. charges 10% on imports of U.S. cars, for example, compared with the only 2.5% the U.S. charges E.U. car makers, that would be a serious obstacle for major U.K. exporters like Jaguar Land Rover, Nissan, and BMW-owned Mini. The U.S., on the other hand, charges 130% duty on peanuts and 350% on tobacco, effectively cutting off trade in those areas.

Without an existing template to adopt, the U.K. would have a prolonged negotiation and an uncertain couple of years while the details were hammered out during which some firms inevitably would hedge their bets and move some facilities abroad as Rolls Royce aero engines announced it was considering this week, The Telegraph reported.

Everyone has an opinion, and frequently they are at odds.

Sir Lockwood Smith, New Zealand’s former high commissioner to the U.K., issued a warning as the government comes under pressure to stay in the customs union. He warned against remining locked into the E.U. system, saying failing to leave the customs union would be “awful for Britain and for the world,” The Telegraph reported last week.

But the commonwealth country’s experiences of free trade have not been to exit a major trading bloc on their doorstep in return for the tenuous opportunities further afield.

New Zealand has done very well from removing tariff barriers and opening up its economy. Prior to that, however, it was clearly stifled by restrictive barriers; that is not the case with the U.K., as trade with Europe is flourishing.

Life After the E.U.

Few now can be found who still cling to the notion the U.K.’s economy will expand faster or living standards will rise faster if the U.K. leaves the E.U. Even Brexiteers are notable for calling for a return of national sovereignty and immigration controls rather than the economic benefits.

But despite the gloomy outlook, both sides of parliament remain enthralled by the notion that “the people have spoken” and are unable to have a reasonable debate about whether it remains the best course of action.

As a result, Britain will almost certainly leave in some form, either soft or hard. It will probably fudge, compromise and capitulate to remain in the customs union, but there remains a chance – as a result of political revolt, rather than policy – that it could have a hard exit.

If that happens, manufacturing and services will both experience a systemic shock that could take years to overcome. British exporters will be forced to look for opportunities outside of Europe as markets within the bloc become less viable. Likewise, importers will look further afield if the imposition of tariffs and border controls puts European suppliers on the same footing as those from the rest of the world.

U.K. manufacturing and service industries will, to some extent, be forced to relocate plants and offices into Europe. New car plant investment, for example, would make more sense in eastern Europe than the U.K., should the U.K. leave the trading bloc without a free trade deal. Likewise, banking and insurance will need an E.U. presence to secure the licenses necessary to continue to operate within the E.U.

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It’s hard to see how the outcome can be good for anyone. The objective now is to hope for the least bad of options.

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