What ‘Getting Brexit Done’ means generally and for South Africa

By the end of January 2020, the UK should have passed the Withdrawal Agreement Bill into legislation, giving Prime Minister Boris Johnson’s Conservative Party-led government full discretion to finalise a new trade deal with the European Union (EU) by the end of 2020. The Withdrawal Bill makes it “illegal” to extend talks beyond 2020.

There is a commonly held view that the Johnson government, which now has a solid parliamentary majority, is in a much better position to negotiate a good deal with Brussels. This view is wrong. While the decision to leave the EU is a political decision, the process of actually leaving and making the necessary arrangements subsequent to leaving is an economic and legal/technical question. A parliamentary (but not a popular), majority might allow Johnson’s government discretion to strike a deal with the EU, but he will find that he can’t negotiate with objective reality.

One objective reality is the UK’s geographical location just off Europe. The gravity theory of trade is well established empirically and theoretically. The proximity of trading partners is more important than the size of the economy. Over half of the UK’s trade is with other EU countries. The UK’s trade with the Netherlands alone is as much as 50% of the value of the UK’s trade with the US, an economy 20 times the size of the Netherlands. Even at the height of the British Empire, Britain’s trade with Europe was bigger than its trade with its colonies.

This is true for the southern African region too. Despite its relatively small economy, South Africa is the largest trading partner to many of its neighbouring countries on the continent. Even if the UK were to leave the EU without a deal, its largest trading partners would still be in Europe and would remain so into the future.

Johnson and his government, having learnt very little over the past three years, will also have to understand what the EU is and what can reasonably be negotiated.

At its core, the EU operates firstly as a customs union and then, more recently, as a single (also known as the common) market.

A customs union is the establishment of a single customs territory among different countries so that duties and other restrictive regulations of commerce are eliminated with respect to substantially all the trade between the members and that the same duties and other regulations of commerce are applied by each of the members of the union to other countries via a “common external tariff”.

The Southern African Customs Union (SACU) is the world’s first customs union and it is via SACU that South Africa has a free trade agreement with Europe. Turkey is in a customs union with the EU.

The single or common market is different. Article 26 of the Treaty of the Functioning of the European Union (TFEU) (where it is referred to as the “internal market”) is an “area without internal frontiers in which the free movement of goods, persons, services and capital (the four freedoms) is ensured in accordance with the provisions of the Treaties”. The single market extends beyond the EU to members of the European Economic Area (EEA), which includes European Free Trade Association (EFTA) countries, Norway, Iceland and Liechtenstein. EU single market rules apply through harmonising processes, a special court and a surveillance authority. But for the EFTA states, it excludes trade in agricultural and food products. The other EFTA member, Switzerland, has its own harmonisation and surveillance arrangements with the EU. Effectively, EFTA countries are rule takers from the EU and have limited influence on the formulation of the rules.

The purpose of the single market is to remove regulatory barriers between members including state support for companies. The single market rules provisions are then enforced by rulings from the European Court of Justice. The single market further requires the progressive harmonisation of national laws, establishing common rules to guarantee both free circulation of goods and services. The catch is this: By replacing national codes (and the freedom to legislate), single market regulation ceases to act as barriers to trade.

Another way of understanding the single market is through the analogy of building blocks, the first of which is a body of law specifying minimum requirements for the safety and environmental impacts of a wide range of products linked to a tranche of standards legislation defining technical or quality requirements. The second building block is a body of law defining conformity assessment procedures and a system of accreditation to ensure that conformity assessment bodies have the technical capacity to perform their tasks.

Another "building block" of the single market in goods is CE marking, used to signify that products have been assessed in accordance with relevant EU rules and meet the relevant safety, health and environmental protection requirements. The final building block is legal metrology, with legislation providing a consistent basis for measurements, weights and so on.

The single market, therefore, can be understood to be a regulatory union, the logical outcome of the four freedoms. What this means in practice, is regulation of a wide range of matters that would otherwise have to be regulated by each country’s national legislatures or lawmakers.

EFTA members are not in the EU’s customs union and could therefore negotiate their own trade or partnership agreements with other countries, but the scope to do so is very limited due to their participation in the single market. The EU itself has 40 comprehensive free trade agreements covering 70 countries and various other trade arrangements or partnerships with most of the rest of the world. For the UK, these 40 EU trade agreements represent about 11% of the UK’s trade and includes that component of its trade with South Africa.

It is possible (and a likely outcome), that the UK could formally leave the EU but remain within the single market. For the UK, this would mean Brexit in name only and a worse deal than it already has in almost every respect.

The arrangement works for Norway as it can exercise full jurisdiction of its large fishing sector and can maintain its own agricultural policies. But over 50% of Norway’s exports are oil and gas, both globally traded commodities and not regulated by the EU. Moreover, Norway has just 8% of the UK’s population and its economy is just 15% of the size of the UK’s. The UK, in contrast, is a much more diversified economy, the second- or third-biggest in the EU and far more tightly integrated with the broader EU economy. Like Norway, the UK does have a fishing sector, but it is much smaller than Norway’s and it’s a vanishingly small part of the UK’s national economy.

In addition, Norway’s contributions to the EU budget that secures its participation in the single market, is on a per capita basis, not far off what the UK already contributes as a full EU member.

EFTA member countries being relatively small countries within the context of the 500-million population of the EU would not significantly increase their influence if they were EU members. The UK is different. Having a country and an economy the size of the UK’s outside the EU decision-making process yet being a rule-taker and a significant contributor to the EU’s budget, but also unable to negotiate different arrangements with other countries by virtue of its participation in the single market just expands the democratic deficit and defeats the whole stated purpose of Brexit.

Leaving the single market, however, looks very difficult to do and any benefits, if there are any, will be hard to realise. A vast body of law, the so-called EU acquis communautaire, necessary for the UK to participate in the single market is already national legislation. Having the freedom to change say food standard regulation or product or financial market regulation is one thing, but what should the replacement regulation, if any, look like? Are UK consumers of, say food, less demanding of health and safety standards than their continental counterparts?

EFTA countries have never been in the EU and have, over time, built an extensive bureaucracy, including protocols around border checks over time. For the UK, all of this will have to start from scratch – a case of unscrambling an egg.

Leaving the EU’s customs union and single market would require the negotiation of a free trade agreement. the basics of which would have to be in place in its withdrawal agreement. The starting point for all trade agreements are the rules of the World Trade Organisation which requires of its 164 members that countries treat each other equally with regard to tariffs and services market access, known as “Most-Favoured Nation”.

Preferential treatment regarding tariffs is only allowed in a free trade agreement provided this covers “substantially all trade”. Unilaterally dropping tariffs for some countries and not for others is not permitted.

Agreeing to reduce tariffs for thousands of product lines and the quotas (quantity) for which those tariffs apply is just the first step. Securing preferential tariffs in a free trade agreement requires proof that a product comes substantively from one of the parties known as “Rules of Origin”. These prevent a country, not part of a free trade agreement, simply rerouting its products through a country that is in a free trade agreement. WTO rules covering Rules of Origin require substantial documentation processes, protocols on mutual recognition of customs processes and, unavoidably, border checks for compliance.

Having operated within the EU, very little of the customs checks bureaucracy and related infrastructure (such as truck and trailer parking), exists on either the UK or EU side. The nature and extent of these will be the outcome of the trade deal, if any, that can finally get negotiated. The issue of hard borders between Northern Ireland and the Republic of Ireland (which would breach the Good Friday Agreement between the UK and the Republic of Ireland) has already resulted in discussions to have Northern Ireland remain within the EU and therefore not be included in a new UK customs union.

Even after the border and customs infrastructure is put in place, the administration of them can be time-consuming and costly. One estimate is that a third of EU exports which could enjoy lower tariff charges through preferential trade agreements, don’t claim them to avoid proving origin.

Negotiating trade deals take a long time. The recently completed free trade agreement between the EU and Canada took seven years to complete. Larger countries with attractive domestic markets typically set the conditions for access to their larger market. They are therefore able to insert conditions regulating competition, minimum labour, intellectual property, public procurement, state support of national companies, environmental provisions and customs procedures. The EU-Canada agreement contains 30 chapters dealing with just these details.

None of the above addresses the issue of trade in services. Trade agreements typically don't deliver significant access to services markets. The UK is relatively strong in the services economy and its reach has been considerably strengthened via participation in the EU’s single market.

What does this mean for South Africa then? In 2018, South Africa exported nearly €31-billion of goods to the EU, representing 32% of total exports. The UK alone represented 7.4% of all SA’s exports (or 23% of SA’s exports to the EU). In addition, there are many non-trade related areas where the EU has agreements with South Africa such as development aid, investment support and other matters.

A good deal of South Africa’s exports to the EU, and particularly the UK, is in agricultural products (which is probably the country’s only remaining truly globally competitive sector). The Free Trade Agreement with the EU allows South Africa to export certain agreed quotas of agricultural products at zero or very low tariffs. This is important because average EU tariffs on agricultural products, at 12% (4% on non-agricultural goods) are a significant barrier.

Of course, South Africa has an interest that there is not too much disruption in its major export markets and its main source of foreign direct investment. But a raft of questions arise that are difficult to answer.

Should the UK leave the EU, will the EU seek to reduce South Africa’s existing tariff quotas by the amount represented by the UK market? If so, what is our position on that? It would certainly influence how South Africa might want to sequence its trade negotiations with the UK. Shoring up its existing EU free trade agreement before discussions with the UK commence would be wise.

Irrespective of the above, what would South Africa’s negotiating position be when negotiating directly with the UK? A free trade agreement with South Africa would be a significant prize for the UK, but outside the EU, its negotiating position would be much weaker. How should South Africa press home this advantage, knowing that the UK has its own farming sector lobby?

What is the capacity of the UK to negotiate with South Africa when it is simultaneously negotiating with the EU, the USA, China, Japan, Australia, South Korea and many of its other main trading partners? Each country will be asking itself the same questions and each of them will start the process of a trade negotiation by consulting with business and others as to what they wish to see.

The detail is all-important and there is a lot of it. None of this can be done in a year, not even remotely, whatever the political mandate within the UK might be. Besides, Boris Johnson, the very embodiment of “Perfidious Albion”, has a record of being dishonourable, disloyal and lazy. Not the type of leader who is able to navigate a divided country through a dimly understood political project that requires difficult decisions and concessions with limited upside benefits along with a lot of hard work.

2020 will reveal that “Getting Brexit Done” is merely an empty political slogan. To paraphrase a former British Prime Minister, Winston Churchill – the Brexit process is not even near the end of the beginning. DM