A UK-EU divorce splits opinion

VANCOUVER // There are two schools of thought on the impact Britain’s potential split from the European Union would have on the Americas.

In one camp, it is bit of a shrug, not unlike when, say, your sister divorces her husband. Sure, you liked the guy but the fact that he is not coming to family dinners anymore is not going to change your life.

Then there is the other side, which appears more complicated. Maybe you preferred dealing with your brother-in-law instead of your sister and losing him is going to make your life more difficult.

In reality, there is no precedent for what could happen if British citizens vote to exit the 28-nation European Union, which will be decided in a vote on June 23.

There has been a lot of speculation on what could happen to trade between the United Kingdom and the Americas in the event of a Brexit but no research-based conclusions, according to Demosthenes James Peterson, a partner at Los Angeles’ Longview Global, a research and advisory firm.

Most of the analysis to date has been about the impact on the UK. In part, that is because nobody believed it could happen, at least until the polls this spring started to signal the exit side could win. “Outside of the UK, for so long, nobody considered this a reality. It wasn’t worthy of studies or scenarios,” Mr Peterson says. While the UK would be hardest hit, he says Brexit’s impact on the Americas would largely be the uncertainty over existing trade deals with the EU, or those still in the works.

Then there is the dilemma of how to deal with Britain by itself if it severs ties with its closest economic partners.

“One of the things that’s very attractive about the UK as a trade partner is that it’s stable, predictable and business friendly. This is upending some very basic sentiment,” Mr Peterson says.

Brexit backers argue being connected to the rest of Europe is holding them back, while those opposed to the split worry it will cut off investment in the UK, creating economic upheaval. The Bank of England governor Mark Carney says Brexit “would increase the risk of recession” in the UK, a warning also issued by the IMF.

The effects of a Brexit on global trade would depend upon what arrangements were left behind, says the Capital Economics analyst Michael Pearce. He cites other peoples’ forecasts showing the UK’s trade with the rest of the world could be reduced by between 10 and 25 per cent if it leaves the EU.

“We suspect these estimates are too pessimistic,” Mr Pearce says, noting that existing trade arrangements would still be in place for two years in the event of a split from the EU, “and common sense suggests that it will be in all parties’ interest to reach a deal that largely maintains the status quo, at least initially”.

As a result, “the global ramifications of a Brexit have surely been overstated,” he says.

Still, the tough trade talk continues, aimed at scaring Britons away from voting in favour of leaving. The US president Barack Obama has warned that if Britain abandons its EU partnership, the country will be “in the back of the queue”, when it comes to trade with the US, the world’s largest economy. Warnings of messy divorce have come from a long list of global leaders, including the Virgin Group founder Sir Richard Branson. Meantime, those in favour of a split include celebrities such the England cricket hero Sir Ian Botham, and the actor Michael Caine.

Regardless of whether any of these famous people would actually be impacted by Britain cutting ties to the EU, experts warn a departure will leave the UK as a whole scrambling to set up its own trade deals. Considering that it has taken years for the EU to hammer out its own trade agreements with other jurisdictions around the world, a two-year grace period may not be enough. Brexit would disrupt trade deals either in place or being worked on across North and South America and hurt the countries that have invested vast amounts of time and resources negotiating the complicated and often controversial pacts.

“No governments in North or South America want Brexit,” says Charles Lichfield, as associate at the Eurasia Group. “They see the UK — with its English-speaking and highly qualified labour force — as the perfect gateway into European markets, for goods and for services.”

Brexit could change how countries in the Americas work with the UK and Europe. While the UK is appealing on its own, Mr Lichfield points out the European market is much larger.

“Crucially, as an investment destination, the UK is attractive because of its gateway status,” he says. “It may retain some elements of gateway status through negotiations it would have if it leaves the EU, but that status would be much less attractive.”

New trade deals would probably be struck over the long term, but Mr Lichfield says there would be years of uncertainty at first. What is more, the appetite may fade for new deals given the intense effort required and opposition that often comes from sectors and other stakeholders who feel threatened by the increased competition from foreigners players.

Britain’s largest single import partner is the United States, which represented about US$45 billion of total UK exports in 2015. Meantime, US exports to the UK amounted to $56.4bn in 2015, or about 3.8 per cent of its overall exports.

It is the UK’s reliance on the US that makes Mr Obama’s threat to put Britain on the trade back burner, if Brexit happens, worrying to some. Mr Obama, who leaves office in November, said the US would not prioritise setting up a bilateral trade agreement with the UK, and suggested it could take up to a decade to hammer something out.

Meanwhile, the presumptive Republican nominee Donald Trump has vowed trade between the two countries would not be impacted if he becomes president.

That said, Mr Trump also vowed to renegotiate America’s trade deals, including the North American Free Trade Agreement with Canada and Mexico. He has also commented that Brexit would make sense for Britons “especially in the light of the craziness of the migration chaos” but that he had no preference of which way they vote.

The US and the EU have been working for the past three years on developing the wide-ranging Transatlantic Trade and Investment Partnership, with a goal of lowering tariffs and regulations across many sectors. Canada and the EU, meanwhile, have been working for more than five years on the Comprehensive Economic and Trade Agreement, with hopes of ratification as early as next year.

Britain is the US’ seventh-largest trade partner and the third-largest for Canada. Given that the UK accounts for about 3 per cent of trade in the US and 2.5 per cent in Canada, Brexit’s risk to the North American economy is “minimal,” according to BMO Capital Markets.

“Moreover, while the EU might want to drive a hard bargain to lessen the potential desire of others to leave, there’s no reason for Canada or the US to materially alter the current trade relationship on their own (despite what outgoing president Obama said),” BMO economists said in a recent note.

What is more, the economists say there is a risk the EU could “apply pressure” to both Canada and the US, just to spite the UK.

While Brexit could be complicated and cause market uncertainty in the near term, should it happen the BMO chief economist Doug Porter does not expect it to be as earth shattering as some predict.

“It would clearly have a negative impact on the British economy and be a small negative for Europe, but it’s not clear that it’s a particularly bad thing for the rest of the world,” Mr Porter says. “I just don’t see it has serious long-term consequences for everyone else.”

In fact, longer term, Mr Porter says Brexit may even wind up strengthening ties between the UK and other parts of the world.

The bigger concern with Brexit, according to Mr Porter, is what happens if other European countries also want to drop out of the EU.

“It might act as an invitation for others economic in Europe to leave … that could have more troubling implications,” he says, in particular if they try to break up the euro currency.

In South America, Brexit may seem like a non-issue to many, given the very small percentage of trade countries on the continent do with the UK and EU. Still, there are various agreements in place, or in negotiation, between the EU and countries in Central and South America and the Caribbean, that would have to be revisited in the event of a Brexit.

In a report titled, Brexit: an Unwelcome Divorce, David Jessop, a consultant to the London-based Caribbean Council, cites “uncertainty and a possible negative impact on trade and development flows”, as well as a “diminution in the region’s ability to influence thinking on its policy concerns in Europe” as concerns over a Brexit.

“British withdrawal could also have wider consequences, for example for Europe’s future relationship with the ACP [African, Caribbean and Pacific Group of States], and accelerate the general trend towards dialogue with Latin America and the Caribbean as an undifferentiated whole,” Mr Jessop writes.

He says Britain would also probably have to renegotiate the Cariforum Economic Partnership Agreement (EPA), a subgroup of African, Caribbean and Pacific group of states established in 1992, as well as its association agreements with Central and South America.

The UK would also have to reapply to join the World Trade Organisation, and ensure its tariff and other related agreements stay the same, Mr Jessop says.

Brexit “arises at a time when a wholesale review of EU foreign policy is being undertaken, European trade priorities are being reconsidered, the future of the ACP relationship with Europe is in doubt, and new approaches are being developed to respond to the recently agreed UN sustainable development goals,” Mr Jessop says, while calling on policymakers to start making plans, just in case.

Regardless of whether the UK stays or leaves, Mr Peterson says the entire exercise is raising eyebrows and changing the perception of the UK as the stalwart of the EU.

“Whether it’s in New York, or Mexico, or Sao Paulo, people are saying, ‘What’s going on over there in Britain?’” he says. “It’s causing people to ask questions they didn’t necessarily need to.”

The timing of a Brexit could not be worse, given sluggish global economic growth. Britain’s economy is no exception. While Brexit is not being blamed for the anaemic GDP numbers coming out of the UK lately, it certainly does not help.

“It’s raising questions and adding uncertainty to the picture,” says Mr Peterson. “What you have is a slow-growth economy where any kind of reservation can exacerbate the problem.”

For now, the Americas, alongside the rest of the world, will have to wait until June 23 to find out just how different things might get.


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