INRODUCTION
On the 23rd June 2016, a majority of British voted in favour Britain’s exit from the EU. The Marshall plan, also known as the European Recovery Programme was initiated on April 3rd, 1948 by George C. Marshall who was the Chief of Staff under Truman of the US army. $13 billion was donated to the European Economic Community(EEC) to rehabilitate the economy of 17 European countries after the Second World War. In the following years, the European economic integration was a “smashing “success.
Charles De Gaulle, president of France in 1958 believed that “Instead of economic integration being the cost of achieving political integration, political integration became the cost of securing the gains from economic integration.” (Baldwin, 2016)
This resulted in the creation of The European Free Trade Association (EFTA). Political barriers within both the EEC and EFTA, the opposite was the case between the two. However, the effect on EEC was not as significant as it was twice the size of the EFTA. Therefore, the UK, Ireland Denmark.
The economic integration within the EEC was under a ‘Common Market’. It included free movement of goods and services, workers, and capital including the political infrastructure to run it.
In 1986, Margaret Thatcher, UK Prime Minister, introduced the ‘Single Market’. EFTA was left out of the Single Market but they did not suffer tariff discrimination. however, the experience non-tariff barriers also known as 'global value chains’ (Baldwin and Flam 1994), whereby different stages of the production of goods and services were spread across different countries. To rectify this discrimination, EEC and EFTA negotiated an agreement, The European Economic Area (EEA) also known as “the Norway option.”
In this paper, I hope to tackle the advantages and disadvantages of the UK joining the EEA focusing with focus on trade, Investments, Immigration and the economic regulations. In comparison, I will look at the effect of Britain joining an alternative agreement.
TRADE
Britain’s decision to leave the EU will definitely affect future trade resulting in trade barriers between EU and Britain. Joining the EEA increase the chances of fewer trade barriers, in comparison to alternative agreements.
The EEA is in the European Single Market. The Single Market involved, free movement of goods and services, capital, and people with a limitation to those who are economically (self-employed, workers) and semi-economically active(Students). Therefore, there would be no tariff barriers. However, they shall still experience non-tariff barriers as a result of being excluded from the European Customs union, being excluded from the EU rules on fisheries and agriculture. The EEA does not exclude Trade Barrier Instruments. (Eeckhout, 2017)
These include rules of origin and the potential problems associated are the paperwork proving the origin of goods, inspection of goods at customs causing customs delays. On the other hand, the possibility of anti-dumping duties, which are goods that are sold at a substantially low price in comparison to their normal value. This will, therefore, lead to import quantity restrictions.
INVESTMENTS
Before Brexit, foreign investors were attracted to the ease of access to the EU’s single market. However, after Brexit, there is a possibility of higher trade costs which would in-turn affect Foreign Direct Investment(FDI). The membership in the EU raised the FDI in Britain by about 28%(Dhingra et al., 2016). Joining the EEA would be Britain's access back into the single market with certain barriers. These include passporting rights, this will create a platform for organizations in the UK to have businesses within the single market. This will boost confidence in investors due to a decreased risk premium on investments certainty in savings.
The gravity model suggests that there shall be non-tariff barriers including regulatory constraints like the rules of origin need to be monitored in order for goods to receive tariff-free access. If UK joined the EEA they would have similar regulations, standards, and testing but their disadvantage shall be that the EEA is not in a Custom Union but just a trade agreement. This will contribute to additional administration costs and border delays. (Gudgin et al., 2017)
Below IS A GRAVITY MODEL illustrating How the Treasury arrives at their effects of Brexit on GDP (Dhingra et. Al). The results show that there shall be a declining effect on the GDP BY AROUND 7.8%.
TRADE
1.BREXIT effect on trade -19%
2.Effect of Trade on GDP(ELASTICITY) 0.30
3.BREXIT EFFECT OF GDP via growth -5.7%
FDI
1.BREXIT effect on FDI -20%
2.Effect of FDI on productivity (elasticity) 0.04
3.BREXIT effect ton productivity via FDI -0.8%
OVER EFFECTS ON GDP
-7.8%
ECONOMIC REGULATIONS
A closer look at the economic regulations discussed earlier suggest that as a member of the Single Market EU economic regulations must be adopted. The benefit of this common regulation across the border is a factor that ensures minimal non-tariff barriers and increasing the possibility of gains from trade. Consequently, UK as an EEA member and not an EU member excludes them from any vote of the economic regulations which would otherwise if UK was a member of FTA or followed WTO rules. Nikolai Astrup, the spokesperson on European affairs for Norwegian conservative explains it boldly “If you want to run the EU, stay in the EU. If you want to be run by the EU, feel free to join us in the EEA.” (Slaughterandmay.com, 2016).
The EEA and the EU are not in a customs union together have a regulatory union as the EU, an agreement on common standards accompanied by the single market legislation into domestic law. If the UK were not to join the EEA, they must have a Mutual Recognition Agreement(MRA) of testing and certification of conformity assessment. (Holmes, 2016)
“Overall, the cost of reduced control over economic regulation are lower than the benefits of regulatory harmonization.” (Baldwin, 2016)
WHAT ARE THEIR OTHER OPTIONS?
The other possible scenarios for the future of Brexit could be that Britain joins EFTA, like Switzerland, but not the EEA. This would involve a Bilateral agreement between the UK and the EU. The effects may not be too different from that of the EEA, however, the UK will have partial access to the single market in comparison to their position in the EEA.
Alternatively, they could exit totally from the EU. They could form a Customs Union that covers all their goods with the exclusion of services, most importantly financial services. Financial services are important because they account for 8% of UK output and around 3.5% of employment, and are a key sector for the UK as stated Mark Carney, Governor of the Bank of England in October 2015.
Another option would be to access the EU market under the WTO rules. The most important feature about the rules regards non-discrimination (unless under a separate trade agreement). This would mean that in the event the UK trades with the EU the access they have would not be more advantageous than for instance any third world or second world country. As mentioned above, financial services are crucial for the British economy which would not be covered under the WTO rules. The UK would experience non-tariff barriers and be subject to the EU safety standard and technical specifications. An estimated 90% of goods and export to the EU would have imposed Tariffs. (Leaving the EU, 2013)
Conclusion
According to the analysis above, joining in the EEA ensures that the UK remains part of the Single Market, furthermore, the UK remains well integrated into the larger part of Europe. Being in the single market shall minimise any other disruptions to the market, businesses, foreign investment and the economic governance of the UK.
Other options are viable, however, each of the other possible scenarios harms most importantly UK’s financial services which is critical in its economy. Their involvement in the single market minimises any harm to their trading systems and business. The big question is whether the costs as a result of BREXIT is worth it?