Caribbean Trade Law and Development

Year: 2016

  • Is Brexit a risk for the Caribbean?

    Is Brexit a risk for the Caribbean?

    Alicia Nicholls

    In a few weeks’ time, June 23rd to be exact, the British people will vote in a referendum to determine the future of the United Kingdom of Great Britain and Northern Ireland’s 40-plus year formal relationship with continental Europe. The possibility of a UK vote for an EU exit, poignantly termed “Brexit” in popular parlance, was identified by the International Monetary Fund (IMF) in its recently released World Economic Outlook Update Report as a major risk to the global economy.

    The fear of a negative impact of Brexit on the UK and global economy has been echoed off the walls of practically every major economic and political forum within the last few months, with the recently concluded IMF/World Bank Group Spring Meetings  being the latest example.

    Though the US, Canada, and in some respects China, have surpassed the UK’s economic importance to the Caribbean region as a destination for Caribbean exports and as a source of foreign direct investment (FDI), the UK remains an important source market for tourist arrivals.  It is also the region’s closest ally in the EU and a partner in helping to ensure the region’s concerns are raised and considered. Therefore, there are possible economic and foreign policy implications for the Caribbean if the UK severs its ties with the EU.

    Background

    The UK joined the European Economic Community (EEC), the predecessor to the EU, in 1973 but has never joined the eurozone, opting instead to retain the Pound Sterling as its currency and set its own monetary policy. While it is outside the scope of this article to delve into the merits and demerits of either position or to render an opinion on such, those who support the “Vote Leave” cite immigration from poorer EU countries and the perceived impact on UK social services, as well as the loss of British sovereignty as the EU looks to create an “ever closer union”. They see the costs of EU membership (both financial and figurative) outweighing the benefits and point to Switzerland and Norway as examples of European countries successfully striving outside of the EU.

    Those in favour of the “Stay vote” highlight the EU as a final destination for nearly half of all British exports and the hypothetical havoc that would be inflicted on the UK economy should the UK cease to be a member of the single market.According to data published by the UK Office of National Statistics, the EU in 2014 accounted for 44.6% of UK exports of goods and services, and 53.2% of UK imports of goods and services.

    While Article 50 of the Treaty on the European Union (TEU) provides for withdrawal from the EU by any member state, the current UK situation is untested waters. In 1975 British voters opted to remain in the EEC. Although Greenland left the EEC in 1985 following a referendum, no state has ever left the EU.  Therefore, there is uncertainty about the impact of a potential Brexit on the EU and the global economy considering that the UK is the EU’s 2nd largest member by GDP and 3rd largest by population.

     A “leave” vote will not automatically mean the UK is out of the EU and there is a process to be followed which Article 50 of the TEU outlines once the UK notifies its intention to withdraw pursuant to Article 50(2). This includes negotiation and conclusion of a withdrawal agreement in accordance with Article 218(3) of the Treaty on the Functioning of the European Union (TFEU). Unless the European Council and the UK decide an extension, EU treaties would cease to be applicable to the UK once the withdrawal agreement enters into force or, failing that, two years after the UK has notified its intention to leave.

    Caribbean Implications – Trade, Tourism & Investment

    The UK still ranks as a major partner for many Caribbean countries’ exports and imports. For commodities-exporting economies like Guyana, Belize, Suriname, the UK is within their top 5 export markets.

    The UK is more importantly a main source of tourist arrivals for many Caribbean countries. Some 1.1 million UK tourists visited the Caribbean in 2015, according to the Caribbean Tourism Organisation’s State of the Industry Report in February this year. For those tourism-dependent countries in the Caribbean for which the UK is the major source market, their economic fortunes are tied to the health of the UK economy and strength of Sterling. This was clearly illustrated by the slowdown many tourism-dependent economies in the region suffered while the US and UK economies were in recession during the global economic and financial crisis and during the height of the Air Passenger Duty (APD) saga when British demand for travel to the region fell..

    Studies on the impact of Brexit on the UK economy are inconclusive and range the gamut from positive to disastrous. However, the IMF position is clear as seen in its most recent WEO Update Report where it cut its growth projections for the UK from 2.2% to 1.9% in 2016, representing a projected slowdown from the  2.3% growth the UK economy realised in 2015.

    In Barbados, British nationals are also an important source of real estate FDI. It was recently reported by local real estate agents in a news broadcast that the softening  in the  value of the Great Britain Pound has dampened demand for Barbadian luxury real estate by British second home buyers and affected the tenuous recovery the island’s second home market was experiencing.

    Trade Agreements

    There is some disagreement among academics as to the continuity of the UK’s participation in treaties which it signed as part of the EU with third states. These include the Economic Partnership Agreement signed with CARIFORUM states, which is considered a “mixed” treaty under EU law, that is, a treaty under which both the EU and its member states exercised competencies and thus  is concluded by both the EU and its member states. Some posit that the UK can avail itself of the principle of continuity of treaties, which is more likely in a “mixed” treaty than an “exclusive” scenario where the EU has exclusive competence.

    However, the principle of continuity actually applies in the context of state continuity and succession and there is no precedent of a scenario like this where a state ceased to be a member of a trading bloc in which capacity it had concluded a treaty. Even if the continuity principle applies, the UK would have to enter into some kind of negotiations with these states if it is to continue to benefit from treaties it signed as part of the EU which still means there will be uncertainty for CARIFORUM exporters and investors. In the worst case scenario, CARICOM or CARIFORUM would have to negotiate a separate agreement with the UK to maintain the level of preferences to the UK market to what they have with the EU under the EPA. As the EU treaties and directives would no longer apply to the UK after the date of entry of the withdrawal agreement, the UK would have the regulatory freedom to set its own standards, such as technical standards and sanitary and phytosanitary standards, which may or may not be as onerous as the EU’s.

    Foreign Policy Implications

    The UK is most Commonwealth Caribbean countries’ closest ally in Brussels. A British exit would mean the UK no longer has the power to directly influence EU policy and the Caribbean region would lose an important voice to raise and articulate its concerns in regards to the future of EU foreign policy. It is particularly critical now as the EU is contemplating its position on the future framework for cooperation with the countries of the African, Caribbean & Pacific (ACP) Group once the Cotonou Partnership Agreement expires in 2020.

    The situation becomes more complicated for UK dependencies in the Caribbean which are not officially a part of the EU but benefit from EU funding and preferences because of their relationship with their mother country, the United Kingdom. A “yes vote” would raise questions about what future relationship they have with the EU.

    According to this news report, a  poll by YouGov released on Friday “found support for “In” stood at 40 percent, while 39 percent intended to vote “Out”, 16 percent were undecided and 5 percent did not intend to vote”. Similar to the Scottish independence referendum where polls were close and ultimately the status quo prevailed, my personal view is that despite the growing anti-EU sentiment in the UK, the British people will not vote to leave the EU. Besides the uncertainty a Brexit would portend for the British economy and business, Prime Minister David Cameron was able to secure several sweeping changes from Brussels after two days of negotiations in February and which would go into effect if the “stay vote” wins. 

    However, in the event that the “out vote” prevails, it is likely that the UK will negotiate some kind of preferential arrangement, similar to what obtains between the EU and Turkey, given the strong trade and investment ties to the continent. This would ensure UK businesses and exporters are not disadvantaged and still have favourable access to the EU single market once the transition period ends.

    The Bottom Line

    Brexit would be a risk to Caribbean economies. The nature of the risk would depend on several factors, including the type of withdrawal arrangement the UK negotiates with the EU and the impact on the British economy during the period of transition.

    The uncertainty in the UK economy during the post-exit phase could have strong implications for countries like Barbados whose economic fortunes are closely tied to the strength of the UK economy, something which we are already seeing happening to some extent as uncertainty among investors has led to the weakening of Sterling in recent months.  Furthermore, the UK’s exit from the EU would mean uncertainty for Caribbean exporters in the UK market and the loss of the region’s closest ally within the trade bloc at a time when the EU is reconsidering its foreign policy and its post-Cotonou cooperative framework with ACP countries. As such, the Region must brace itself for whatever happens on June 23rd.

    Alicia Nicholls, B.Sc., M.Sc., LL.B. is a trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.

  • IMF trims global growth forecast to 3.2% in 2016

    Alicia Nicholls

    In the run up to its annual spring meetings in Washington DC  this week, the International Monetary Fund (IMF) in its World Economic Outlook released today, has cut its baseline projection for global growth  to 3.2% in 2016 and 3.5% in 2017, down from 3.4% and 3.6%, respectively, in its forecast in the January 2016 WEO Update Report. The title of its latest WEO Report “Too slow for too long” pretty much sums up the sluggish and disappointing pace of global growth post the global economic and financial recession and comes on the heels of the recently released World Trade Organisation’s report in which the WTO cut its forecast for global trade growth yet again.

    Noting that the global recovery has weakened further in the midst of turbulence in financial markets, the IMF report highlighted several factors which have hampered global growth including legacies from the global recession and the eurozone crisis, declines in potential growth, the impact of low oil and commodities prices (on oil and commodities exporting countries), currency fluctuations and geopolitical tensions which they assumed to remain elevated in 2016 given the situations in Russia, Ukraine and the Middle East. However, the IMF forecasts the modest eurozone recovery to continue in 2016/17.

    Emerging market and developing economies are expected to grow by 4.1% in 2016, compared to 1.9% projected output growth from advanced economies for the same period. While emerging and developing economies will continue to comprise the largest share of global growth in 2016, the IMF forecasts that growth  in these economies will be uneven and weaker than in the previous year as a result of a moderate slowdown in China and a weak outlook for non-oil commodities exporters owing to further softening in commodities prices.

    Not unrelated to the slowdown in global trade is the softer global investment demand, particularly in commodities-exporting economies due in part to China’s rebalancing and general uncertainty about global growth.

    Caribbean

    In regards to the Caribbean, the IMF forecasts real GDP growth of 3.5% (slightly above the global forecast) in 2016 and 3.6% in 2017. However, like the global situation, this growth will be uneven. The expected high flyers are as follows: Dominican Republic which is forecast to grow by 5.4% in 2016, Dominica at 4.9% and St. Kitts & Nevis at 4.7%. Barbados is projected to experience real GDP growth of over 2% in 2016, which is an improvement on the 0.5% growth in 2015 but still below both the global and regional average. Economic output in commodities exporting countries, Suriname and Trinidad & Tobago, is  forecast to contract by 2% and 1.1% respectively in 2016.

    Turning to the United States, the Caribbean region’s largest trade partner and one of the beacons of hope in an otherwise still subdued global economy, the IMF cut the United States’ growth forecast to 2.4% in 2016, down from it previous forecast of 2.6%. However, the IMF noted that stronger balance sheets, an improving housing market and better fiscal position would help offset any negative effects on US exports from appreciation of the US dollar, weaker manufacturing and tighter domestic financial conditions in some sectors in the US economy.

    In regards to the United Kingdom, a major tourist source market for many Caribbean countries, the IMF projects UK economic output to grow by 1.9% in 2016, down from 2.2% in 2015. The IMF listed Britain’s potential exit from the European Union ‘Brexit’ as one of the main risks to its outlook, noting that such a development would pose major challenges not just for the UK but the rest of Europe. Among the challenges highlighted would be disruption of trade and investment flows, while also increasing financial market volatility due to uncertainty during any post exit negotiations. Brexit is a development which the Region should monitor closely as any negative fall-out the UK’s exit from the EU has on the UK economy could affect countries like Barbados which depend heavily on the British market for tourist arrivals and real estate foreign direct investment inflows.

    IMF Recommendations

    Stressing that the “current diminished outlook and associated downside possibilities warrant an immediate response”, the IMF has made several recommendations, which are also applicable to the Caribbean. Though citing the importance of accommodative monetary policies, the IMF also stressed the immediate need for such policies to be supported by “other policies that directly boost demand and supply”, including infrastructure investment, public action to encourage of research and development activity, structural reforms in product and labour markets, tax reform and financial reforms.

    The full report may be viewed here.

    Alicia Nicholls, B.Sc., M.Sc., LL.B. is a trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.

  • The Movement of Wealth, Transparency, the Right to Privacy…and More

    Excellent interview by internationally renowned tax expert, Francoise Hendy, with IFC.

  • WTO predicts weak global trade growth in 2016

    WTO predicts weak global trade growth in 2016

    Alicia Nicholls

    “Trade is still registering positive growth, albeit at a disappointing rate.” This is according to the World Trade Organisation’s Director-General Roberto Azevedo in the WTO’s latest Trade Statistics and Outlook released this afternoon. In its latest report, the WTO has significantly revised its forecast of global trade growth in 2016 to 2.8%, down from its forecast of 3.9% in September 2015. This is disconcerting news for Caribbean countries  as weaker global demand also impacts demand for Caribbean exports.

    2015 performance

    According to the WTO, the projected expansion of global trade at 2.8% in 2016 would be same rate at which global trade grew in 2015. In what was described as a tumultuous year for global trade on account of weak global demand, 2015 saw trade declines in developing and developed countries in the second quarter of 2015 and a rebound in the final half of the year. South America saw the lowest growth in imports in 2015 as Brazil’s recession dampened demand for imports.

    The WTO did not provide any data for the Caribbean’s 2015 performance in its report. However, recently published data from the Barbados Statistical Service showed, for example, that though Barbados’ total merchandise exports from January-December 2015 increased year on year by $17.1 million or 1.8%  over 2014,  this export growth was limited to a robust 16.6% increase in re-exports whilst domestic merchandise exports actually fell by 8.8%.

    2016 forecast

    Though projected trade growth remains positive, WTO economists have noted that the rate of global trade growth remains below the average global trade growth rate of 5% since 1990. This year’s forecast would also make it five consecutive years that global trade would have grown at almost the same rate as global GDP, as opposed to twice as fast. The report also notes that despite the growth in trade volumes, the dollar value of trade fell 13% in 2015  due to falling commodities prices and exchange rate volatility.

    According to the WTO’s Report, Asia will lead global export growth in 2016 at 3.4% growth, followed by North America and Europe, which are both estimated to see a 3.1% increase in their exports. For South and Central America, Africa, the Commonwealth of Independent States and the Middle East, the picture is not as rosy, with imports expected to contract (albeit lower) due to low oil and commodities prices. WTO economists predict that while exports from developed countries are expected to grow around the same rate (2.9% in developed countries and 2.8% in developing), developed economies imports are projected to grow faster (at 3.3%) than developing countries’ imports (at 1.8%) in 2016.

    Noting that “risks to the trade forecasts remain tilted to the downside”, the WTO highlighted the slowdown in the Chinese economy, the worsening volatility in financial markets, exposure of countries with high levels of foreign indebtedness to sharp exchange rate movements and declining business and consumer confidence in developed countries which could lead to slower GDP growth in the EU and US in 2016.

    At the same time, the WTO has also suggested that more accommodative monetary policy of the European Central Bank could promote growth in the Euro area and encourage demand for goods and services. The WTO also highlighted the threat of “creeping protectionism” due to the growth in trade restrictive measures. The good news is that global trade growth is expected to pick up in 2017 to 3.6%.

    These are developments which the Caribbean should continue to monitor closely, particularly the developments in the US and EU, our major trading partners, as well as China which has become a leading development partner for the region. The drop in oil prices has negatively affected oil exports from Trinidad & Tobago and its economy is currently in recession. Commodities exporter Suriname has also faced hard times due to the low commodities prices.

    The full press release may be accessed here

    Alicia Nicholls, B.Sc., M.Sc., LL.B. is a trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.