The British referendum on June 23 is demonstrating in real-time the interconnected nature of the global economy. While it may not seem that a voter decision in Durham should have an impact in Singapore, more than 10,000 kilometers away, it may.
Singapore signed a trade agreement with the European Union in October 2014. The deal is not yet in force, pending a ruling from the European Court of Justice about an issue over the investment chapter.
Now, however, the agreement may never see the light of day. Officially, this is not the direct result of Brexit. But in the wake of the UK’s vote, European member states are increasingly touchy about issues of sovereignty. The EU has just decided that parts of a similar pending trade agreement with Canada (CETA) must be sent back to each national level parliament for approval before it can be implemented.
This means that the EU-Canada agreement has to be approved by the EU, by the European Parliament and now by 27 individual member states before it can enter into force on the European side. The odds of a complicated trade agreement surviving such a daunting process intact with unanimous approval from all those bodies must be low to non-existent.
Once this precedent has been established for approval, moreover, other trade agreements that are not yet in force may also face similar treatment.
For countries like Canada, Singapore and Vietnam who have completed negotiations with the European Union, Brexit should also change their own internal calculus about the benefits and costs of the pending agreement.
The UK is the second largest economy inside the EU. Many of the provisions inside the EU agreements were made with the understanding that the UK markets would be included in the final commitments. If the UK is to be outside the EU, the overall value of the EU trade agreements may be less compelling to partners.
There is no exact parallel. But it would be like negotiating a trade agreement with the United States, only to discover that California had decided to withdraw from the union. Given the size and importance of the Californian economy within the overall American marketplace, this would be a significant change. If California were an independent country, it would have been the 8th largest global economy in 2014.
For some sectors, especially, the loss of access to California would be rather catastrophic. It would certainly upset the calculations of costs and benefits of a trade deal with the Americans. In some areas, it might make an agreement more attractive (fewer pesky agricultural issues, perhaps?) but in others it might be much less interesting (the loss of most of Silicon Valley, media and a host of digital and future-looking companies).
The same is true with Brexit. Partner countries like Singapore may need to relook at the existing EU agreement to see what the commitments will mean absent the UK.
And then the paralysis sets in—it is not really possible for Singaporean officials to look at what the EU-Singapore FTA might look like, because Singaporeans cannot tell what sort of arrangements the UK and EU might end up with since neither the UK nor the EU have any idea what sort of arrangements they might end up with either.
If relooking at the EU agreement is on hold, pending decisions on the final exit arrangements, Singapore might start thinking about signing a bilateral agreement directly with the UK.
One of the arguments of the Leave side in the Brexit debate was that the UK, unfettered from the irritatingly slow, bureaucratic EU could just get on with the business of signing trade agreements quickly. They wanted to start with the Americans right away, since the US is a big, important partner.
However, starting with one of your most important trading partners is never a good idea. As we noted right away after the Brexit vote, the UK does not have a large independent team of competent, trained officials in place to handle complex trade agreements. Going toe-to-toe with the Americans right away is a recipe for a total disaster. Too many mistakes will be made and the UK will end up paying a very high price for inexperience.
Hence, starting negotiations with an important, but not “mission critical” partner like Singapore would make a lot of sense. Singapore may be small, but it still has investments from over 1,000 British companies that account for half of the UK’s exports to ASEAN for a total of £5.6 billion in 2014. Singapore and the UK already share a common historical background, legal system, language, and so forth.
And this gets to the next set of practical problems. Singapore should not start negotiations with the UK directly, until the issues have been sorted with the EU. This is because a bilateral trade agreement depends critically on the baseline for negotiations. That baseline is nearly always a country’s commitments at the World Trade Organization (WTO).
The WTO pledges can be thought of as the foundation of a house. A free trade agreement builds on top of these stones and offers the partner better benefits than existing WTO members receive (which is why these agreements should not be called “free trade” but should be called “preferential trade agreements”).
The UK is a member of the WTO, outside of the EU. But—and this is the critical point—it does not currently have any independent commitments of its own at the WTO. In other words, it holds the membership card but has no specific benefits or obligations absent its fellow EU members.
For the UK to “fall back on” WTO commitments is much, much more challenging than most people seem to realize. The UK and EU obligations are intertwined. It would be, again, almost like California falling back on the WTO.
What the UK receives now in WTO benefits is a function of its position as part of the larger entity. The UK will have to negotiate its own, independent commitments at the WTO. These will also have to be done after the split with the EU is concluded so that each of the 162 WTO members are clear on what is actually being negotiated (and what remains as part of the EU’s obligations). [For more details on the difficulties of negotiating a separate UK WTO deal, see our Special Edition Talking Trade blog here.]
To launch negotiations on a free trade agreement with Singapore (or any other country) would mean starting to build a house without a clear foundation. No sensible partner would want to do such a thing. Instead, potential trade partners will want to wait until the specific terms and conditions of Brexit are sorted.
Then, and only then, will it be possible for the UK to figure out what sort of obligations it can take up with the EU, at the WTO, and with potential trade partners.
The uncertainty is likely to continue for a long time. No matter what all sides of the debate might like to have happen, the first order of business will have to be sorting out the future relationship between the UK and the EU—until this is finished, all future trade deals are likely to remain on hold. For both sides.
***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***