08 January 2019

​Brexit – how did it come to this and what’s next

Watching from the sidelines, it has been interesting to observe the machinations that have followed the decision by the UK in June 2016 to leave the EU, the world's largest trading bloc.

How did it come to this? In an effort to move the Conservative Party away from 'banging on about Europe' the Prime Minister David Cameron found it impossible to resist pressure from his backbenchers and increasingly difficult to shake off past election promises, and decided to call for a referendum on the proposal to leave the EU.

Cameron's gamble did not pay off. He seriously misread British public sentiment against the backdrop of populist antagonism towards Europe's political elite, the EU's onerous rules, widespread discontent about the scale of immigration, and the traction generated by the pro-Brexit movement led by some very charismatic individuals. The rest, as they say, is history.

Following the referendum result, the UK Government became the first ever EU member to invoke Article 50 of the Treaty of Lisbon, starting a two-year countdown to negotiate an exit package with the EU. Negotiating a complete and comprehensive arrangement with the EU within that timeframe was a hugely ambitious task, given the length of time it normally takes to negotiate trade deals.

As the March 2019 deadline approaches, a clearer picture is beginning to emerge of the possible scale and content of a future deal between the UK and EU. We are also starting to understand the implications for New Zealand exporters of the UK's divorce from the EU. Within the UK and New Zealand the respective governments have initiated a process of public consultations about a future bilateral trade accord. The clock is ticking.

Recently the UK and EU notified New Zealand, and other WTO members, of their plan to impose a split of the EU's Tariff Rate Quotas (TRQs) on the basis of a three-year reference period of imports from 2013 to 2015. In its submission on this proposal, the New Zealand Government and exporters made it clear that this approach would not be acceptable. It would undermine the flexibility New Zealand exporters' have had since the Uruguay Round of negotiations ended in 1994, to maintain market stability by responding to shifts in consumer demand and changing market conditions in Europe and the UK markets.

Reduced flexibility in trading product between the UK and Europe under TRQs, particularly for lamb exports, would have an economic impact on exporters and the potential to upset market dynamics. It would also negatively affect local suppliers providing product to these markets.

Looking ahead, a provisional agreement on the withdrawal package has been reached by negotiators and endorsed by the UK Cabinet and EU member states. However that provisional agreement now needs to pass through a number of additional steps before it can enter into force. The required vote in the UK parliament will be critical, but based on media reports this would appear uncertain. Much more political jostling appears inevitable, meaning several more scenarios could play out. The possibility of the UK departing the EU without a deal cannot be ruled out.

A 'no-deal Brexit' would mean that the free circulation of goods between the UK and EU would cease. This would have significant downside implications for exporters, importers and consumers. It would cause severe disruption along the supply chain for New Zealand's exporters trading into Europe through the UK.

The prospect of the UK leaving the EU without a deal remains unlikely, given the mutual interests of the UK and the EU in securing a satisfactory negotiated outcome. But as David Cameron's decision to hold a referendum on Brexit clearly showed, there are no guarantees in such a volatile political environment.

New Zealand has strong historic links with Britain and current two-way trade is worth almost NZ$6 billion annually. The priority for New Zealand is to move quickly to start negotiating a new long-term free trade agreement with the UK, to safeguard the position of our exporters in that market, and allow goods and services to continue to flow unhindered between the two countries.