Charles Finny: Markets have over-reacted to vote result
I am convinced markets have over-reacted to the Brexit vote. There should have been a negative reaction. Markets were not expecting this outcome. Markets don’t like uncertainty and we have uncertainty about what the British-European Union relationship will look like now.
We have political uncertainty too. British leader David Cameron is off and we don’t know who will replace him. There may be implications for Scotland and others in Europe may want to join Britain in seeking a different relationship with Brussels.
But I think the reaction has been greater than it needed to be. Let’s look at the absolute worst-case scenario. In two years’ time (don’t forget nothing happens overnight) Britain is out of the EU with no free trade agreement with Europe in place. What would that mean?
Britain is still a World Trade Organisation (WTO) member and would join NZ, Australia, the United States, Taiwan and a few others as being one of the few WTO members not to have a free trade deal with the EU.
For Britain this would not be that bad. Those things it is best at – manufacturing and services – are not heavily restricted into the EU.
The Most Favoured Nation tariff rate into the EU is very low, and the EU services regime is relatively open. The only real negative would be for British agriculture. As we know very well, the EU agriculture market is heavily protected and Britain would – in this worst-case scenario – face the same barriers we face.
But the above is a worst-case scenario. While the EU is a major market for UK exporters, Britain is a major market for EU exporters. Why would the EU not want to keep its preferential access into the UK by including an FTA type deal as part of the Article 50 negotiating outcome?
There has been much focus on the free movement of people and concern about this was clearly at the heart of the strong “leave” sentiment.
I can’t see it being in either Britain’s or the EU’s interests to not have some reasonably generous commitments in what we trade negotiators call Services Mode 4 – the movement of people. This would be well short of the completely free movement of people now operating between the UK and the rest of the EU but would still allow lots of scope for well qualified Brits to work in Europe.
And if we look at another area of supposed doom and gloom – financial services – again I can’t see anything other than a good liberal outcome being negotiated between Britain and the EU.
Again, self-interest will prevail.
Where things get really interesting is looking at the implications for Britain’s trade relationship with the rest of the world.
Again, I think some commentators have been far too negative.
My view is that Britain can be much more nimble than the EU in negotiating with a range of economies.
The Canadian and New Zealand prime ministers have already signalled willingness to negotiate FTAs with the UK. I am sure Australia will follow.
I don’t see the EU-US TTIP negotiation concluding any time soon but I can see Presidents Clinton or Trump happily moving fast to negotiate an FTA with the UK.
And I see the outcome as being potentially much less controversial and much higher quality than that which the EU will negotiate.
Britain doesn’t share the French hang ups on the need to protect the film industry and doesn’t really give a hoot about geographic indications (protecting terms such as Parmesan, Champagne and Burgundy).
And what about Asia? There is no reason why the UK could not move fast there too, faster and more comprehensively than can the EU.
Okay, perhaps this is best-case scenario. But much of this can happen and could happen pretty fast if Britain addresses one very practical problem. It doesn’t have the skill set to negotiate good trade policy outcomes.
The EEC and now EU has been controlling the country’s trade policy since the early 1970s. Britain’s trade negotiators all moved to Brussels and are now enjoying retirement on their Eurocrat pension scheme.
There are people from the UK who have been consulted on European Union negotiating positions but this is no substitute for negotiating experience.
Britain will need some time and some help to build the capability necessary to negotiate effectively with the EU and the rest of the world.
So New Zealand, so long as we can keep our negotiation with the EU on track and negotiate an access agreement with the UK, should be relatively unscathed medium-term by what is going on.
And it is very interesting to observe that maybe Brexit has had a silver lining. The trade policy consensus seems to have been re-established. We have Prime Minister John Key, NZ First’s Winston Peters and Labour’s Andrew Little all supporting the rapid launch of a free trade deal – with Britain.
Charles Finny is a partner at Saunders Unsworth and a former official and trade negotiator for the Ministry of Foreign Affairs and Trade.