Brexit: a bluffer's guide

Expert Samuel Lowe explains international trade terms to ensure your first date will lead to a second

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A lot of nonsense gets written about Brexit. Not a day goes by without another acronym being added to the Brexit lexicon (Brexicon?). EEA, EFTA, WTO, MFN… WTF? A colleague who used to be in the civil service speaks of that venerable institution’s eagerness to discuss TLAs in meetings. TLA stands for three-letter-acronyms. And you too can be fluidly conversant with the help of this handy guide to some, not all – there’s bloody loads! – of the Brexit TLAs in common currency. Feel free to cut it out and keep for use around the dinner table, hanging out with friends and trying to impress a potential suitor – all the big occasions.

The European Union
Let’s start with the easy one. The European Union is a political and economic union made up of 28 nation states (for now). On 23 June 2016 the UK voted to leave, which among many other things led to me writing this.

What is a tariff and who pays it? A lot of people writing very confidently on trade fail to get this right. For our purposes, a tariff is a tax levied at the border on a product entering the UK. It is paid by the person or company importing the product. It is not paid by the country or business exporting the product to the UK. For example, if I was to buy a car from the US I would need to pay the tariff, coming in at 10 per cent of the car’s value, to HMRC in order for it to be released into my possession. While there is some variance product to product, when a business pays a tariff on an imported product, for example wine, it usually passes on the cost to the final buyer or consumer: you and me.

World Trade Organisation
The WTO is a rules-based membership organisation where nation states collectively agree on the international frameworks governing trade in goods and services and make enforceable commitments to open up their own domestic markets in exchange for enhanced access to the markets of other WTO members.

Any benefits extended by a country to one other member must also be extended to all. If we were to drop tariffs to zero on cars imported into the UK from the US, we would need to drop tariffs to zero on cars imported from all 162 other WTO members. This is known as the most favoured nation (MFN) rule.

The UK is currently planning to replicate the EU’s WTO commitments after Brexit. If we were to trade with the EU solely on the basis of our WTO commitments this would mean big tariff barriers in the areas of food and cars as well as regulatory barriers and reduced access to the European market for our services industry.

Free trade agreement
Although I said above that the WTO MFN rule means that benefits extended to one must also be extended to all, there are exceptions to this rule – one being that countries are allowed to sign bilateral and multilateral free trade agreements with each other.

A free trade agreement is what happens when two countries (bilateral) or a group of countries (multilateral) sign an international treaty agreeing to lower or remove barriers to trade between each other. While they nearly always cover goods and the removal of tariffs, they can also, among other things, remove barriers in the areas of trade in services, investment and public procurement.

Customs union
A customs union is a comprehensive goods-focused trade agreement whereby not only do the two countries (or more) agree to remove tariffs on the goods traded between each other, they also agree to levy the same external tariff on goods entering from the rest of the world. This creates a necessary (but not sufficient) condition for the removal of customs checks on trade between the countries within the customs union.

The UK is currently within the European Customs Union by virtue of our membership of the EU. Leaving the EU means leaving the customs union. However, the UK and EU could choose to create a new EU-UK customs union, much like the one Turkey currently has with the EU. Doing so would place constraints on the UK’s ability to negotiate new trade agreements with the rest of the world, but it would also make avoiding customs checks on the Irish border considerably easier. You
win some, you lose some.

Non-tariff barrier
When it comes to trade we spend far too much time talking about tariffs. The real issues for most companies selling across borders are differences in regulatory regimes, paperwork, checks at the border, multiple languages to deal with, and much more beside. These issues, essentially barriers to trade that aren’t tariffs, are collectively known as non-tariff barriers (shocking, I know). Yet non-tariff barriers and efforts to remove them can cause controversy. One person’s barrier to trade can be another’s product safety regulation or animal welfare measure. Post-Brexit, would allowing any old crap into the UK reduce prices for UK consumers? Probably. Would it improve UK consumers’ overall welfare? Perhaps not.

The European Single Market
Sometimes referred to as the Common Market, or Internal Market, the Single Market seeks to ensure the free movement of goods, capital, services and labour within the EU. Alongside removing all tariffs on goods, its primary achievement has been the removal of regulatory barriers to trade between the 28 countries – allowing products to move throughout the union without the need for border checks or safety inspections. While the single market in goods is close to complete, it still has some way to go in the area of services. Despite howls to the contrary, the European Single Market is without a doubt the deepest and most comprehensive free trade area in the world.

The European Commission and European Court of Justice work in tandem to maintain the integrity of this regulatory union, enforce the rules and resolve disputes between its members. For example, the French government lifted its ban on British beef after the mad cow disease episode only after it was dragged in front of the European Court of Justice, long after British beef was deemed safe.

European Free Trade Association
Not to be conflated with the EEA (yet constantly conflated with the EEA) EFTA is a regional trade organisation consisting of Iceland, Liechtenstein, Norway and Switzerland. While Iceland, Liechtenstein and Norway are also EEA members, Switzerland is not. The EFTA states sometimes choose to negotiate free trade agreements together as a bloc, but not always. The UK was originally, back in the 1960s, a founding member of EFTA and there is some talk of us re-joining upon leaving the EU. This would potentially give the UK access to EFTA’s existing trade agreements (likely subject to some renegotiation) and would be a necessary step were we to apply for EEA membership.

European Economic Area
The EEA agreement extends most, but not all (areas such as agriculture and fish are not covered) of the European Single Market to Iceland, Liechtenstein and Norway. While they are able to input during the development of EU rules via various committees, they do not have a final vote. Freedom of movement is written into the treaty, and the agreement is enforced in the EEA countries by the EFTA surveillance authority and the EFTA Court, which play the role of European Commission and European Court of Justice respectively. Confusingly, both the EFTA surveillance authority and the EFTA Court have nothing to do with actual EFTA.

It should be noted that the EEA countries are not in the European Customs Union or a customs union agreement with the EU, so there is still a need for checks at the border to ensure that products being sold into the EU under single market provisions actually originate in the EEA countries. The EEA countries are also able to pursue their own trade agreements, although they are unable to offer much in the way of non-tariff barrier reduction, what with them being bound to the EU regulatory regime in most trade-relevant areas.

Soft Brexit
In essence, a soft Brexit – whatever it technically looks like – means remaining as close and intertwined with the EU from a trade and regulatory perspective as politically possible, without actually remaining in the EU. This would cushion much of the economic blow associated with Brexit, but would constrain the UK’s regulatory autonomy and ability to negotiate new trade agreements with the rest of the world. From an economic perspective the softer the Brexit the better – there is no credible case to be made for anything other – but the economic arguments don’t currently have a good track record of winning in this hyper-political environment.

Hard Brexit
A hard Brexit is one – whatever it technically looks like – where we extract ourselves from the customs and regulatory mechanisms of the EU, taking the hit economically, so as to give ourselves the freedom to negotiate new trade deals with other countries. There are degrees of hard – ending up with a standard free trade agreement with the EU is still better than trading on WTO terms alone – but it all boils down to taking a bigger economic hit in the hope we’ll be able to do something good with our newfound freedom. There is little reason to think we will.

No-deal Brexit
When people say no-deal Brexit, they’re not actually talking about the trade deal. They’re talking about the withdrawal agreement. Essentially, we’re going to crash out without having agreed anything. This means our trade relationship with the EU would operate on the basis of our respective WTO commitments. However, in areas such as aviation there are no frameworks to fall back on and much of the UK economy would be in regulatory limbo. A no-deal Brexit is in absolutely no-one’s interest.

So there you have it. Hopefully this is a clear, bare-bones explanation of the acronyms and some of the issues surrounding Brexit. Do cut it out and keep this Brexicon – but on second thoughts maybe don’t produce it on a first date.

Samuel Lowe is a trade analyst at Friends of the Earth. Illustration: Mark Wheeler

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