Category Archives: European Union

Post-Brexit UK-Caribbean Trading Relations: What are the options?

Alicia Nicholls

With the United Kingdom’s Prime Minister Theresa May due to formally begin the Brexit process by making the Article 50 notification this Wednesday (March 29), it is worth considering what are the possible options for future Caribbean trading relations with post-Brexit “Global Britain”. Moreover, should one of the options be participation in a Commonwealth-wide free trade agreement (FTA)?

UK-CARICOM Trading Relations

The UK and the Commonwealth Caribbean have a shared and close relationship which goes beyond historical, cultural and diplomatic ties. While Commonwealth Caribbean countries’ trade with the United States dwarfs trade with the UK, the latter remains the region’s largest trading partner within Europe. Caribbean Community (CARICOM) Member States, as part of the CARIFORUM (CARICOM plus the Dominican Republic), enjoy preferential access to the UK market under the CARIFORUM-EU Economic Partnership Agreement (EPA) signed in October 2008.

As the EU agreements to which the UK is currently part will cease to apply to the UK once it has completely withdrawn from the EU, here is what CARICOM/CARIFORUM will losing preferential access to (a) the world’s fifth largest economy (or sixth largest according to some reports), (b) a market of over 64 million people which includes a Caribbean diaspora population whose potential demand for Caribbean goods and services and as a source of diaspora investment still remains largely under-exploited, and (c) a trading partner with a shared language, shared culture and shared values and a common law legal system which brings a level of assurance and certainty for cross-border commerce.

Merchandise trade aside, the UK is an important source of tourist arrivals for many Caribbean countries, while in Barbados, for example, British high net worth individuals (HNWIs) are the largest buyers of luxury real estate on the island, making the UK the largest source of real estate foreign direct investment (FDI) into the island.

Whilst the UK cannot formally commence negotiations with third States until it has left the EU, the May Government has reportedly already begun preliminary informal trade talks with some States. Indeed, several countries around the world, including Commonwealth states like Australia, Canada and India have lined up in hopes of being among the first negotiate post-Brexit trade agreements with the UK. Here in the Caribbean, the Dominican Republic has also signalled its interest in a post-Brexit UK-DR FTA as the UK is apparently the Dominican Republic’s fastest growing market for Dominican exports according to the statement made by the DR’s Ambassador to the UK.

To this point, it is heartening to note that Prime Minister May has bucked the protectionist trend and intends to expand the UK’s trading relations around the world under her “Global Britain” banner. Indeed, Mrs. May argued that one of the compelling reasons for Brexit was so Britain would be free to expand its trade with the rest of the world on its own terms. The door is clearly open to the region for dialogue.

Possible Options for post-Brexit UK-CARICOM/CARIFORUM Relations

As I see it, the possible options for post-Brexit UK-CARICOM/CARIFORUM trading relations are as follows:

  1. Interim Arrangement which preserves EPA-level concessions before an FTA can be negotiated
  2. Negotiation of a UK-CARICOM or UK-CARIFORUM FTA
  3. Commonwealth FTA
  4. Most Favoured Nation (trading under WTO rules)

The Commonwealth Advantage?

This discussion is even more interesting in light of what is clearly a Commonwealth pivot by the UK government as it seeks to map its future trade policy and relations. Most CARICOM countries are member states of the 52-member Commonwealth of Nations, an intergovernmental organisation which consists primarily of former British colonies and current dependencies spanning Africa, Asia, the Americas, Europe and the Pacific.

The Commonwealth is not a trade bloc. However, despite the absence of a Commonwealth FTA, intra-Commonwealth trade and investment flows are substantial and growing. According to a 2015 report released by the Commonwealth, not only is “trade between Commonwealth members on average 20 per cent higher and trade costs are 19 per cent lower compared with in trading between other partners”, but intra-Commonwealth trade is expected to reach 1 trillion by 2020. The Secretariat’s International Trade Policy section also publishes very timely  and insightful research on trade matters. A good example is this brief which was part of the Meeting documents.

However, despite this, Commonwealth Trade Ministers have not met frequently. This is why the Inaugural Commonwealth Trade Ministers Meeting two weeks ago was such a momentous event.  From all reports the meeting was not only well-attended but the ministers discussed prospects for deepening intra-Commonwealth trade and investment ties using the “Commonwealth Advantage”. Inter alia, Ministers directed the Secretariat to “develop pragmatic and practical options to increase Commonwealth trade and investment”, to regularise and institutionalise Trade Minister meetings, and to cooperate on the implementation of the WTO’s Trade Facilitation Agreement.

The prospect of a Commonwealth-wide FTA has been floated informally, although it does not yet appear to be a firm policy proposal. The arguments for a Commonwealth FTA include a ready market of over 2.4 billion people yoked by a shared language and history, common principles and values, respect for the rule of law, the common law legal system, all of which form part of the “Commonwealth Advantage”. Additionally, it is argued by proponents of a pan-Commonwealth FTA that the potential for even greater intra-Commonwealth trade and investment should be harnessed as a buttress against rising protectionism and slowing global trade which are potentially harmful for Commonwealth developing States.

To be sure, the Commonwealth brings important value for the Caribbean. It has, for example, developed a strong small states agenda, which is not surprising given that thirty-one of its member States are small States. As an illustration, the Commonwealth launched the Commonwealth Small States Trade Finance Facility in 2015. Moreover, the fact that the current Secretary-General, Dame Patricia Scotland QC, is a daughter of the soil is also an advantage for the region.

There is also, of course, merit to fomenting closer commercial and political ties with fellow Commonwealth countries as some of the more developed Commonwealth countries are part of influential fora like the Group of 20 (G20), Organisation for Economic Cooperation and Development (OECD) and the Financial Action Taskforce (FATF) where Commonwealth Caribbean countries are not represented.  This is doubly important in light of the on-going slowdown in global trade flows, an apparent retreat from multilateralism and rising protectionism. Moreover, Commonwealth Caribbean countries have been seeking to diversify their trading partners, including source markets for tourism, foreign investment and international business and deepening ties with the rest of the Commonwealth could be useful.

Nonetheless, while I have not done any econometric analysis on what would be the possible economic and welfare benefits of any Commonwealth FTA for CARICOM/CARIFORUM, given the length of time it may take to negotiate a Commonwealth FTA, the varying levels of development, the differences in economic profile, and the diverse offensive and defensive interests of the various Commonwealth Member States which will need to be managed, the negotiation of a Commonwealth-wide FTA will not be an easy task. Therefore, I submit that the Caribbean region’s interests will, at least in the short to medium term, be better served by either negotiating an interim arrangement  with the UK which preserves EPA-level concessions until an FTA can be negotiated or negotiating an FTA with the UK straight off the bat.

So what should a possible UK-CARICOM/CARIFORUM take into account?

CARICOM countries have limited experience in negotiating FTAs with developed countries. So far the EPA is the region’s only completed FTA with a developed partner, as the Canada-CARICOM negotiations are currently in abeyance. Perhaps, fortuitously, the UK has even less experience with negotiating trade agreements, as trade negotiations have hitherto been handled exclusively by the European Commission, pursuant to the EU’s common commercial policy. So both parties, despite the power asymmetry, will be on a learning curve.

Commitments made under any prospective UK-CARICOM/CARIFORUM free trade agreement should take into account the sustainable development and economic growth needs and interests of both parties in a mutually beneficial way, while also taking into account differential levels of development among CARICOM/CARIFORUM countries.

CARICOM/CARIFORUM countries will also want at least the same level of concessions for their service suppliers, particularly in Mode 4 (Presence of Natural Persons) which has been the mode of supply which is the least liberalised. Additionally, as capital-importing States, CARICOM/CARIFORUM countries will likely wish to negotiate an investment chapter which protects, promotes and liberalises investment between CARICOM/CARIFORUM and the UK for the mutual development of both parties.

Of course, stakeholder consultations with not just the private sector but also civil society and citizens at large should continue to inform the region’s negotiating positions, including whether there is actually the need for an UK-CARICOM FTA and what are the region’s offensive and defensive interests.

FTA negotiations can take several years. The EPA negotiations, for instance, had been launched in April 2004 and the Agreement was not signed until October 2008. Therefore, unless a WTO-compatible interim arrangement could be negotiated whereby the UK agrees to continue EPA-type concessions to the region until a UK-CARICOM/CARIFORUM FTA is negotiated, it is possible that UK-CARICOM/CARIFORUM trade relations may revert to MFN conditions. Even so, while the UK is also a WTO member in its own right, its schedules are part of the EU’s which means the country will have to work out its own tariff schedules under the WTO post-Brexit. Additionally, WTO MFN conditions will not afford CARIFORUM countries the level of market access, especially for their service suppliers in the UK market, that they currently enjoy under the EPA.

Although the argument is often rightly made that the Caribbean region will be at the low rung of the negotiation priority ladder, I believe that the region cannot sit idly by as the clock begins ticking come Wednesday. While other major countries have begun to erect barriers, the May Government’s “Global Britain” outlook is a welcomed open door for the region. We should at least signal to the May government our interest in beginning talks on cementing a mutually beneficial UK-CARICOM/CARIFORUM trading arrangement post-Brexit, and take steps to do the ground work for such an eventuality.

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.

Advertisements

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.