Brexit – stepping into the unknown.


Trying to persuade 32 million people (the British electorate) into leaving Europe was easy. It was also easy to project one liners about immigration, extra cash back et al. It was all about what could happen – freedom, border control etc., we know the story well.

There was something about that message that resonated with the Brits. In fact it is clear that we’ve never really been all that comfortable with the idea of anything that surpasses the idea of free trade with our European partners. The Europeans were never that comfortable with the British Government always seeking a playing field that resisted unified currencies and laws.

Breaking up after 45 years is painful, it was always going to be painful, but maybe that concept was never flagged up by either side of the argument. Anyway here we are. As I said in my last blog, it’s an argument of the optimistic innovators against the status quo, the let’s not change brigade.

It is not surprising that both sides are polarising so dramatically. This breakup is widely regarded as the biggest issue to face the UK government since the Second World War. But is it really? After all there was life before the UK joined the EU and the EEU. What about WTO rules and the Most Favoured Nation clauses, Canada E U Trade Agreement and all that?

To put it simply, an MFN clause is a non-discrimination requirement. It means that if you give a favour to one trading partner, you have to give it to all partners who benefit from an MFN clause. The principle is central to the World Trade Organization (WTO) which requires a member to give equal access to its home market to all members of the WTO. An MFN clause applies both to trade in goods and services.

What matters for present purposes, however, is not an MFN clause under the WTO Agreements but an MFN clause under the EU’s trade agreements with non-EU countries. The EU’s FTAs also contain an Most Favoured Nation clause which means that the EU must provide equal treatment to those trading partners who benefit from an MFN clause under their FTAs with the EU. What the EU offers to the UK must, then, be offered to Canada, Korea, Singapore and  other partners with whom the EU has negotiated an MFN clause.

Why does the EU not agree to this is one of the fundamental issues which supports the argument that the EU is a protectionist organisation which looks primarily inwards. Some even claim that the EU is a negative influence to free trade especially to developing economies.

There are, however, important exceptions to a Most Favoured Nations clause under these new Free Trade Agreements. Under Canadian deal an MFN obligation does not apply to cross-border trade in services and investment which covers provision of services through commercial presence, but it can be done with an element of goodwill. By allowing British banks and financial institutions to establish in EU countries and agreeing to recognise professional qualifications as it does now. So called Passporting rights may be covered by this exception because they allow free access to financial services market without imposing further regulatory requirements (i.e. local authorizations), thus constituting recognition of UK home state regulations.

This is tangential to the issue of allowing access to qualified persons of the enterprise working in EU countries and the employment of EU nationals in those enterprises. Again this seems an issue where a sensible compromise should be easily facilitated. However the EU does have and has consistently argued that right to free movement of labour and capital is a redline which cannot be compromised. Furthermore, Annex II of CETA establishes additional reservations (i.e. exceptions) applicable in the EU. One of the listed reservations to an MFN obligation in trade in services provides that the EU reserves the right to adopt an agreement with a third country (i.e. UK in case of an EU-UK deal) which (a) creates an internal market in services and investment; (b) grants rights of establishment; or (c) requires the approximation of legislation in one or more economic sectors (i.e. alignment or incorporation of laws between the parties). While the first two options seem unlikely given the UK government’s current red lines, but need it? It seems that passporting rights will require some form of approximation of legislation.

Of course the harmonisation of rules will necessitate the UK adopting EU rules for their operations abroad and for those regulations to be harmonised with the UK operations. But it would seem common sense anyway. This is surely a question of give and take, which has so far been eliminated by the time wasting posturing of both the UK and The EU.

Other services industries merely have to accede to EU standards where they are already established, i.e. air safety which is subject to world-wide agreed standards anyway. What’s the problem? There isn’t one really

In other words, these exceptions mean that the MFN principle must not be a barrier to a future EU-UK trade deal including financial services.

In the event, it remains to be seen whether the EU’s trading partners would find it practical to challenge larger benefits under a future EU-UK deal. On the one hand, it is probable that they would seek to secure passporting rights under their FTAs with the EU if such were given to the UK.

On the other hand, UK’s passporting rights allow non-EU firms properly established in the UK to get automatic access to sell financial services across the EU. Non-EU firms, including Canadian ones, have been using this route extensively. Whether the EU will agree to continue this scheme post-Brexit is yet to be seen. It is though a key issue.

These issues are complex and there is bound to be adverse consequences in the short term, many possibilities of the negative effects have been postulated by the institutions such as the World Bank who got it wrong at the outset and those who have most to gain from seeing the UK remaining in the EU. Those who threw out the optimistic one liners during the referendum debate have been firmly put back in their box.

It is important to note the things which influence both sides of the argument. The EU is a conglomerate of countries with many different cultural mores, however they are all bonded because of their experience of the World Wars. They were all one way or another, occupied, fought over blitzed or wrecked. The UK however was never invaded, it still sees itself the victorious leader and the defender of democracy.

This conditions the attitudes that prevail at local and government level. The Continent see the virtue of mutual support as Britain sees the future in terms of its individual and positive past.

Where there’s a will there’s a way. Or so the saying goes, but maybe there are two ‘will- sets’ here. Safety in numbers, a desire to be the leader. Two entirely different points of view. It maybe that the British aspiration to go back to its past is unattainable, but so maybe the dream of a Europe united in multi cultured harmony.




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