Chapter 5 Regional Economic Integration & Brexit

5.1 The WTO and RTAs

5.1.1 Guiding Principles of GATT/WTO

  • Most Favored Nation (MFN)
    • Any preferential treatment offered to one member country must be extended to all other members
    • Members can extend MFN to non-members
  • National treatment
  • Generalized System of Preferences (GSP)
    • For Less Developed Countries, to give them a chance to develop their economy
  • Exceptions for regional arrangements (such as EU, NAFTA):
    • Nested within the WTO: given precedence when recognized

5.1.2 WTO and Regional Arrangements

WTO Members are permitted to enter into such arrangements under specific conditions which are spelled out in three sets of rules:

  • Paragraphs 4 to 10 of article XXIV of GATT concerning the formation and operation of customs unions and free-trade areas covering trade in goods;
  • The Enabling Clause fore preferential trade arrangements in trade in goods between developing country members;
  • Article V of GATS to govern the conclusion of RTAs in the area of trade in services for both developed and developing countries.

“When a WTO member enters into a regional integration arrangement through which it grants more favourable conditions to its trade with other parties to that arrangement than to other WTO members’ trade, it departs from the guiding principle of non- discrimination defined in Article I of GATT, Article II of GATS, and elsewhere.”

5.1.3 Evolution of RTAs in the World, 1948-2016

Rise in the number of RTAs being discussed





5.1.5 What It Looks Like Geographically

Source: WTO

5.1.6 Types of Regional Arrangements

© 2013 Cengage Learning. All rights reserved.

5.1.7 Regional Integration in a Snapshot

5.1.8 Expanding RTAs, Trade Flows and the MNE

Key questions

RTA size and trade bias: * Old Q: are RTAs building or stumbling blocks (impact on world trade) * Pure building block: trade creation with no trade diversion * Weak building block: trade creation exceeds trade diversion * Weak stumbling block: trade diversion fully offsets trade creation * Pure stumbling block: trade diversion more than fully offsets trade creation * New Q: Is an expanding RTA more of a building block or stumbling block?

MNE expansion strategies: * Identify linkages between activities of MNEs and the RTA environment in which they operate, using an analysis over time (dynamic versus static assumptions)

Methods

  • Gravity equation
    • Trade costs
    • Transport and transaction costs, regime costs arising from differences in legal systems and practices, languages, networks, competitive policies, and monetary regimes, and tariffs or tariff- equivalent restrictions aimed at discriminating against foreign producers.
    • Non-observable, and are proxied by physical distance, cultural distance and institutional distance
  • 11 RTAs, four of which expanded over time (ASEAN, CARICOM, EU and NAFTA)

Trade creation and trade diversion depends on the size and expansion of RTAs
SPARTECA pure building block; ANDEAN a weak building block; USIS – pure stumbling block, along with the other 4 (as weak stumbling blocks); ASEAN expanding building block (peaked); EU building block (weaker than ASEAN) peaked at 10 members; NAFTA comparable to EU weak building block; CARICOM – pure stumbling block

5.1.9 The Trans-Pacific Partnership: A Building Bloc?

5.1.10 Environmental Influences on MNE Subsidiary Role

5.2 Globalization or regionalization

5.2.1 NAFTA

5.2.1.1 North American Integration

5.2.1.2 What is NAFTA?

The North American Free Trade Agreement (NAFTA) is a regional agreement between the Government of Canada, the Government of the United Mexican States and the Government of the United States of America to implement a free trade area.

Article 102 of the NAFTA states that:

“The objectives of this Agreement, as elaborated more specifically through its principles and rules, including national treatment, most-favored-nation treatment and transparency, are to:

  • eliminate barriers to trade in, and facilitate the cross-border movement of goods and services between the territories of the Parties;
  • promote conditions of fair competition in the free trade area;
  • increase substantially investment opportunities in the territories of the Parties;
  • provide adequate and effective protection and enforcement of intellectual property rights in each Party’s territory;
  • create effective procedures for the implementation and application of this Agreement, for its joint administration and for the resolution of disputes; and
  • establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of this Agreement.” The Parties endeavor to fully implement these objectives by 2008.

5.2.1.3 What is a Countervailing Duty (CVD)?

A countervailing duty is a special duty imposed on imported merchandise to protect a domestic industry from injury caused by subsidized imports from other countries. * North American Free Trade Agreement * North American Agreement on Environmental Cooperation (NAAEC) * North American Agreement on Labor Cooperation

5.2.1.4 The North American Free Trade Agreement

  • NAFTA eliminated the majority of tariffs on products traded among the United States, Canada, and Mexico, and gradually phased out other tariffs over a 15-year period.
  • The treaty also protects intellectual property rights (patents, copyrights, and trademarks)
  • The treaty is trilateral in nature; the terms apply equally to all countries, in all areas except agriculture, in which stipulations, tariff reduction phase- out periods, and protection of selected industries, were negotiated on a bilateral basis.

5.2.1.5 The Limits of NAFTA

  • It is not a Customs Union!

5.2.2 European Economic Integration

5.2.2.1 What is the European Union ?

  • An « economic and political association » of 27 countries: Germany, Austria, Belgium, Bulgaria, Cyprus, Denmark, Spain, Estonia, Finland, France, Greece, Hungary, Ireland, Italy, Lithuania, Latvia, Luxembourg, Malta, Netherlands, Poland, Portugal, Czech Republic, Romania, Croatia, Slovakia, Slovenia, and Sweden.

The United Kingdom withdrew from the European Union on 31 January 2020.

5.2.2.2 Objectives

  • The European Union has two objectives:
  • To establish the foundations of a closer union between european peoples, to protect peace, and to advance the political union
  • To ensure, by a common action, the social and economic progress.

5.2.2.3 How does the EU work?

  • The EU institutions are built upon treaties.
  • The EU is not a state, but a supranational organization, with competencies transferred by the European states.

5.2.2.4 Competencies

  • Exclusive competencies (agriculture, trade, and monetary issues)
  • Shared competencies
  • Supported competencies (research, etc.)

5.2.2.5 A privileged partnership with other organisations in Europe

  • Council of Europe
  • European Free-Trade Area (EFTA)
  • European Economic Area (EEA)

5.2.3 Europe

  • Europe is a free-trade area (total)
  • Europe is a customs union

5.2.4 Integration in America Latina

5.2.4.1 The first wave of integration

  • Commercial unions have been established in Latin America as collective responses to external shocks that threatened to inflict severe damage on the economies of the region.
  • One such external event was the creation of the European Community. The EC’s common external tariff and protectionist agricultural policy sent shockwaves through Latin America, a continent that depended on free access to the markets of industrialist countries
  • Another discriminating feature was the EC’s extension of the preferential arrangements of individual colonial powers to the whole Community. As a result, the dependent territories of France, Belgium, Italy, and the Netherlands in Africa and Asia had preferential markets access to all the member states of the Community after 1958.
  • Thus, coffee and cocoa exported from the French colonies in Africa were admitted duty free to the entire common market after the creation of the EC, while cocoa supplied by Honduras or coffee supplied by Brazil now faced a uniform external tariff.
  • A first response was the creation of the Latin American Free Trade Association (LAFTA) (Treaty of Montevideo in 1960) by Argentina, Brazil, Chile, Mexico, Paraguay, Peru, and Uruguay. Ecuador and Colombia joined in 1961. Venezuela in 1966, and Bolivia in 1967.
  • Failure was publicly announced acknowledged at LAFTA’s 1969 annual conference.
  • The Caracas protocol postponed the deadline for free trade from 1973 to 1980.
  • In 1980, LAFTA was replaced by the Latin American Integration Association (LAIA), a considerably more flexible trade-liberalization arrangement that granted tariff preferences to only about 10% of all goods traded.

5.2.4.2 The latest wave of integration

  • The second wave was triggered, like the first one, by external events that threatened to inflict severe damage on the economies of the region:
  • The new round of enlargement and deepening of the European Union coincided with the collapse of communism in Eastern and Central Europe.
  • Fears arose in Latin America:
    • The likely imposition of new trade barriers in ‘sensitive’ industries such as textiles, steel and certain minerals.
    • Investment diversion to Eastern Europe was another worry. In the late 80s, Europe’s investments in Brazil, Argentina, Paraguay and Uruguay were larger than the US ones.
    • Aid diversion was also a concern to Latin American countries. European official development assistance to the region had steadily increased in the 1980s and reached $2.7 billion in 1990 – almost twice the amount provided by the US.
    • Another catalyst for integration was the defection of Mexico when President Salinas proposed a free-trade agreement with the United-States.
  • At the core of the latest wave of regionalism in Latin America is the Mercado Comun del Sur, MERCOSUR.
  • It was established by the Treaty of Asuncion signed by Brazil, Argentina, Uruguay, and Paraguay in March 1991.

5.2.5 Integration in Asia

5.2.5.1 ASEAN

The Association of Southeast Asian Nations (ASEAN) is a regional grouping that promotes economic, political, and security cooperation among its ten members: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. ASEAN countries have a total population of 650 million people and a combined gross domestic product (GDP) of $2.8 trillion. The group has played a central role in Asian economic integration, signing six free-trade agreements with other regional economies and helping spearhead negotiations for what could be the world’s largest free trade pact.

5.2.5.2 APEC

APEC’s 21 Member Economies are the United States; Australia; Brunei Darussalam; Canada; Chile; China; Hong Kong, China; Indonesia; Japan; Malaysia; Mexico; New Zealand; Papua New Guinea; Peru; The Philippines; Russia; Singapore; Republic of Korea; Chinese Taipei; Thailand; and Viet Nam.

5.2.6 Integration in Africa

5.2.6.1 COMESA: Common Market for Eastern and Southern Africa

COMESA (19) countries include: Burundi, Comoros, Democratic Republic of the Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia, and Zimbabwe.

5.2.6.2 ECCAS: Economic Community of Central African States

ECCAS is a grouping of 11 countries from Central Africa. This grouping comprises the following countries : - Angola - Burundi - Cameroon - Central African Republic - Chad - Congo - Democratic Republic of Congo - Equatorial Guinea - Gabon - Rwanda - Sao Tome and Principe

5.2.6.3 ECOWAS: Economic Community of West African States

ECOWAS was established in May 1975 to promote trade, co- operation and self-reliance in West Africa. It has the following members: Benin, Burkina Faso, Cape Verde, Cote d’Ivoire, The Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone and Togo.

5.2.6.4 AMU: Arab Maghreb Union

The Current member States of AMU are Algeria, Libya, Mauritania, Morocco, and Tunisia.

5.3 Regional and economic integration

5.3.1 The complexity of Integration

5.3.2 The big question

Asian companies are becoming the new players in globalization. In which regions will they invest?

  • Which regions of the world are currently the most attractive? To find out, it is (often) enough to identify where multinationals invest the most.

Foreign direct investment (FDI) is a medium or long-term investment by a foreign company in a domestic company that corresponds to at least 10% of its capital (United Nations). As such, it is a good indicator of the attractiveness of a particular country or sector.

  • During the twentieth century, companies in countries of the North and South invested in the same way: in the countries of the North.

  • The beginning of the 21st century has revealed a new phenomenon: FDIs, whatever their origin, now take place in both Northern and Southern countries.

5.3.3 Regionalization in Globalization

  • Almost all developing countries are engaged in regional integration (RI) processes, ranging from sectoral cooperation to political unions with transfer of sovereignty.

Definition

Regionalization has many facets.

  • It is more or less driven by regional trade agreements (RTAs) and institutions: De jure regionalism.

  • However, it can result from the practices of actors constituting commercial, financial, cultural and technological networks in regional spaces: de facto regionalism (e.g. the regionalisation of East Asia or cross-border trade).

  • It can also result from a fragmentation of the global space due to segmentation strategies by transnational actors.

Regionalization comes in many forms:

  • Economic union: coordination of economic or social policies

  • Regional cooperation: cooperation projects set up by stakeholders

  • Market integration: economic convergence

  • Specific integration/value chains: international relations within networks or companies

  • Industrial clusters: agglomeration effects and interconnection infrastructures within transnational territories

  • Institutional integration: rule-making or transfer of sovereignty with institutional structures

5.3.3.2 The question of multilateralism versus bilateralism

Clearly, regionalization raises the question of multilateralism versus bilateralism (again).

  • The constitution of a limited number of integrated zones can promote the consensus necessary for multilateralism. Regional agreements are therefore often preconditions for multilateralism (the NAFTA philosophy).

  • Another debate concerns the form of multilateralism. Should regional relations be diluted into more or less universal multilateralism or should cooperative multilateralism be implemented?

5.3.3.3 The different types of regional agreements

5.3.3.3.1 Features

Regionalization in developing economies is characterized by :

  • an intensification of trade flows with the removal of internal barriers (free trade area);

  • a common external tariff (customs union); and

  • factor mobility (common market).

5.3.3.3.2 In the real world

The actual configurations and processes do not correspond exactly to this typology.

  • For example, NAFTA liberalized the movement of capital, but not the movement of labour.

  • European Union

  • Association of Southeast Asian Nations (ASEAN) [html]

  • Common Market for Eastern and Southern Africa (COMESA) [html]

  • Mercosur [html]

  • Commonwealth of Independent States (CIS) [html]

5.3.3.4 Theories of regional integration

5.3.3.4.1 The first notions

Regional integration reveals both the renewal of the question of the nation-state in a context of globalization and the diversity of state structures at the global level.

This renewal of regionalism in the context of globalization has led to an analytical renewal.

  • Contrary to this concept of the 1950s - archetypal theories of the customs union (Viner, Meade) - regional integration does not only concern trade: it concerns capital flows and labour flows, the establishment of a common institutional environment or policy coordination allowing the convergence of economies and the anchoring of economic policies.

The analysis of regionalisation is renewed:

  • within the framework of institutional economics with emphasis on the role of organisations and rules,

  • the new economic geography or

  • the new international economy with imperfect competition and

  • international political economy**.

The regional space is thus a place for the reconstruction of public and private authorities and the strategies of national and international players in a context of globalisation.

5.3.3.4.2 New concepts
  • Several conceptions emerge:
  1. Traditional: state-planned integration (statist approach) versus market integration (liberal approach)

  2. New: integration linked to rules (institutional approach), integration induced by asymmetric actors linked to territorial dynamics (geographical approach) and political integration (see table).

Traditional approaches New approaches
Liberal approach (1) Geographic approach (3)
Statist Approach (2) Institutional Approach (4)
Political approach (5)
  1. Trade integration is equated with the liberalization of trade and factors of production; it is analyzed in terms of overall integration.
  • Integration means reducing distortions in national policies and bringing national borders closer to the international market.
  1. Regional integration is a process of disconnection aimed at protecting economies from globalization.
  • It involves protection, land use planning policies and the construction of a productive system more or less disconnected from the world price system.
  1. Productive integration is the result of internalization relationships within transnational firms or networks.
  • It is provided by conglomerates that deploy their strategies in a regional space. It leads to a regional division of labour.

  • Integration is characterised by ** agglomeration and polarisation effects**.

  1. Integration is the establishment of a common system of rules on the part of public authorities vis-à-vis private players.
  • The institutions are waiting for systems that will allow for the convergence of agents’ expectations. They stabilise and secure the environment, allowing credibility.
  1. Regional integration translates into transfers of sovereignty and conflict prevention objectives.
  • The convergence of economic interests is a means of overcoming political rivalries and antagonisms. Transfers of sovereignty and the production of public goods at the regional level are a response to the overflow of States in the context of globalization (creation of a regional currency for example).

5.3.3.5 The internationalization strategies of the multinationals in this “regional world”

The 2008 crisis and its consequences:

In 2014, for example, global FDI flows fell again, by 16% compared to the previous year, to $1,230 billion.

However, the year 2015 marked a revival, with growth of 11% and FDI estimated at $1.37 trillion, reaching $1.5 trillion in 2016 and $1.7 trillion in 2017 (source: UNCTAD’s World Investment Report 2015 on Global FDI Trends)..

5.3.3.5.1 American and Asian investors in a leading position
  • US companies are still the world’s largest investors (UNCTAD World Investment Report 2015).

  • Among the countries of the South, the emerging Asian countries (Hong Kong, China, India, Kuwait and Turkey in particular) account for the lion’s share.

  • Looking not only at countries but also at regions, it is the Asian region that is now in the lead: it is the region whose companies invest the most abroad (with $440 billion in 2014), followed by North America ($390 billion) and the European Union ($286 billion).

American and Asian investors in a leading position

  • Today, most of the FDI comes from multinationals in the South.

  • They even broke records in 2014 with $500 billion invested abroad, in countries of the North and the South, an increase of 30% compared to 2013.

  • More impressive: the share ** of investments from the countries of the South reached 36% of global investments**. Among the top 20 investors, nine come from emerging countries (Hong Kong, China, Russia, Singapore, Malaysia, Chile, Kuwait and Taiwan).

5.3.3.5.2 Regions that capture investment
  • Investments were first directed to developing countries ($681 billion in 2014 alone), and to China. Of the 10 countries that attract the most FDI, five are developing or emerging countries. Asia received a record flow of FDI in 2014 with nearly 500 billion dollars, making Asia the most attractive region in the world.

  • Another observation is that investment by firms from the South to the South also rose from $1.7 trillion in FDI stock in 2009 to $2.9 trillion in 2013.

5.3.3.5.3 What about other regions?

Flows to developed countries fell by 28% to 499 billion dollars.

The United States and Japan were particularly affected by this decline.

Latin America and the Caribbean seem far away. FDI flows to this region reached only $159 billion in 2014 and have even started to decline.

Africa also appears very small, with inflows of $54 billion.

5.3.3.6 Conclusion

The 21st century confirms a paradigm shift from the previous century. Investments, both inward and outward, are no longer limited to rich countries.

Multinationals are increasingly interested in the countries of the South, particularly in Asia. These capital inflows, accompanied by new skills and capabilities (human capital, governance rules, etc.), are increasingly strengthening the region’s infrastructure.

A tripolar world - North America, Europe and Asia - is consolidating.

5.3.4 North American Free Trade Agreement (NAFTA)

5.3.4.1 NAFTA and Trade

  • First deal Canada-US in 1988
  • Mexico joined the agreement in 1994
  • Led to the reorganization of value chains within North-America

Source: Globe and Mail, 2017

5.3.4.2 NAFTA in Context

Source: UN Comtrade Database; WTO - World Trade Statistics

Source: http://www.europeanfinancialreview.com/?p=17412#!prettyPhoto

5.3.4.3 NAFTA and FDIs

  • Generally positive effect on inward FDI into the entire region

  • Benefits accruing only to the United States and Canada

Source: Feilsand Rahman (2008) “Regional Economic Integration and Foreign Direct Investment: The Case of NAFTA” Management International Review

5.3.4.4 Trade Agreement, FDIs, and National Policies

Source: “GE closing U.S. engine plant, moving to Canada; cites lack of U.S. export financing”, Canadian Business based on The Canadian Press and Associate Press, September 28th 2015 http://www.canadianbusiness.com/business-news/ge-closing-u-s-engine-plant-moving-to-canada-cites- lack-of-u-s-export-financing/

And what came next: https://www.theglobeandmail.com/report-on-business/international- business/us-business/ge-chooses-ontario-as-site-for-state-of-the-art-gas-engine-plant/article30223899/

5.3.4.5 The New USMCTA (to take effect in 2020)

  • Will be reviewed every 6 years and could expire in 2036, or be extended to 2052
  • Canada will ease restrictions on its dairy market and allow American farmers to export about $560 million worth of dairy products (about 3.5% of Canada’s total $16 billion dairy industry)
  • US Tariffs on steel (25%) and aluminum (10%) still in place
  • Maintenance of the dispute settlement process (panel of representatives from the 3 nations
  • Requirement to have the other partners agree if a trade agreement with China is to be signed
  • Stiffer intellectual property rules
  • Increase in the rule of origins (75% regional content, $16 wage provision, etc.), making Mexico less competitive
    • … which may also make Mexican companies not to comply and just pay the 2.5% MFN tarriff
    • …but they do not want that (see Annex 2-C) because to qualify, they need to satisfy the OLD rules of origin of the original NAFTA

5.4 Brexit

“Brexit frees us to build a truly global Britain.” - Boris Johnson

“Should the United Kingdom remain a member of the European Union or leave the European Union?”

  • 72% of voters

  • 52%: ‘Leave’.

Working people and young people prefer to ‘stay in the EU’:

  • 73% of 18-24 year olds wanted to stay

  • 60% of those over 65 wanted to leave

  • The inactive (unemployed and retired) wanted to leave.

No party logic:

  • Among those who voted to leave: 40% are Tories and 20% are Labor.

  • Among those who voted to stay, 30% are Tories and 40% were Labor.

3 things to remember:

  1. Rising inequality

  2. The rise of populism

  3. A (lonely) journey into the unknown

5.4.1 The reasons for Brexit

  • Globalization is costing jobs

  • The United Kingdom is not a European economy

  • Immigration

  • The UK’s contribution to the European Union is unfair

5.4.1.1 The UK White Paper 12 Principles

5.4.1.2 Globalization is costing jobs?

Dani Rodrik, The Globalization Paradox (2011)

“Markets are most developed and most effective in generating wealth when they are backed by solid governmental institutions.”

5.4.1.3 The United Kingdom is not a European economy?

5.4.1.3.1 Total UK Exports by Destination (2019)





5.4.1.3.2 Total UK Imports by Origin (2019)





5.4.1.3.3 UK FDI inflows by partner country (millions of US dollars)





5.4.1.3.4 Outward FDI flows from the UK by partner country (millions of US dollars)





  • Multinational companies

  • European value chains

  • Europe’s place in the world

  • the English language

  • The finance industry

  • The EU is the most important destination market for British products and services.

  • The UK is also highly dependent on the EU: a trade deficit of US$ 151 billion in 2015.

  • Exports to the US are 1/4 of the exports to the EU.

  • US imports are 1/6 of EU imports

  • The United Kingdom accounts for 4.9% of US merchandise exports (20.8% to the EU-27).

5.4.1.4 Immigration

5.4.1.5 The UK’s contribution to Europe is unfair

5.4.1.5.1 Total expenditure in 2019 (millions of euros)





5.4.1.5.2 National contribution in 2019 (millions of euros)





5.4.1.5.3 Budget balance in 2019 (millions of euros)





5.4.1.5.4 British correction in 2019 (millions of euros)





5.4.2 The British economy

5.4.2.1 GDP growth (annual %)

5.4.2.2 Inflation, consumer prices (annual %)

5.4.2.3 EUR vs GBP Foreign Exchange Reference Rate

5.4.2.4 Economic activity: sales

5.4.2.5 Unemployment, total (% of total labor force) (modeled ILO estimate)

5.4.3 The Future of the United Kingdom

5.4.3.1 The political future

  • Article 50 of the Treaty on European Union

  • Relations with members in the United Kingdom

  • Relations with the EU-27

  • Free trade agreements with the EU

  • Free trade agreements with the USA and other countries

  • Adapting to European regulations

  1. The Norway option: almost like the Common Market (products, services, finance and people), without the right to vote and the budgetary impact.

  2. The Canada option: CIG (products, services, finance)

  3. the WTO option: tariff and non-tariff barriers

  4. The Turkey option

  • Living without the European institutions

  • Living without European programs (ESA, etc.)

5.4.3.2 The economic future

5.4.3.2.1 Total Exports in 2019 (US$ billion)
5.4.3.2.2 Total Imports in 2019 (US$ billion)

The finance industry:

  • 1970s: development of international money markets

  • 1980s: Mr. Thatcher’s deregulations

  • 1990s: a concentration of the wholesale market in London (American banks)

  • 2000s: euro markets

  • 15 to 20% of banking activity to the Common Market

  • £66.5bn in taxes (2/3 of the education budget)

5.4.3.2.3 General government debt (% GDP)
country 2013 2014 2015 2016 2017 2018 2019
Germany 78.7 75.6 72.3 69.3 65.1 61.8 59.6
Euro area - 19 countries (from 2015) 92.6 92.8 90.9 90.1 87.7 85.8 84.0
European Union - 28 countries (2013-2020) 86.3 86.9 84.9 83.8 82.0 80.3 79.2
France 93.4 94.9 95.6 98.0 98.3 98.1 98.1
Italy 132.5 135.4 135.3 134.8 134.1 134.4 134.7
United Kingdom 84.2 86.1 86.7 86.8 86.3 85.8 85.4
5.4.3.2.4 Net lending (+) / net borrowing (-) (% of GDP)
country 2014 2015 2016 2017 2018 2019
Germany 0.6 0.7 0.7 0.6 1.1 0.9
Euro area -2.1 -1.8 -1.4 -1.3 -0.8 -0.8
European Union -2.0 -1.7 -1.3 -1.2 -0.7 -0.7
France -3.7 -3.6 -3.8 -3.0 -2.4 -3.0
United Kingdom -5.6 -4.5 -2.9 -2.0 -1.9 -1.9
Italy -3.2 -3.0 -2.6 -2.6 -2.4 -1.6
  • The EU accounts for 30% of world trade in goods and 45% in services (16.9% of its GDP).
  • The USA represents 23% of the world trade in goods and 25% of services (14.5% of its GDP).
  • China accounts for 23% of world trade in goods and 16% in services (22.3% of its GDP).
  • The United Kingdom accounts for 6.4% of world merchandise trade and 11.75% of services (29.4% of its GDP).
  • Germany accounts for 14% of world merchandise trade and 11.5% of services (42.4% of its GDP).
  • France accounts for 6.5% of world trade in goods and 10% in services (30.8% of its GDP).

5.4.4 The consequences for the rest of Europe

5.4.4.0.1 EU Members’ Positions on Key Brexit Issues
Country Flexibility on Trade Flexibility on FDI & financial services Flexibility on Labour mobility Kinship on liberals views Concern about UK’s budget contribution
Austria Yes Yes Some
Yes
Belgium No No No
Finland No No No Yes
Germany No No No
Greece Yes Yes Yes
Yes
Hungary No No No
Ireland No Yes No
Italy No Some No Some
Netherlands No Some Yes Yes
Poland Yes Yes No Yes Yes
Portugal No Yes No
Yes
Slovakia No Yes No Yes Yes
Spain Yes Yes No
Sweden No No Yes Yes
Source: What To Do With the UK? EU perspectives on Brexit.
  • Fracture of the EU-27
  • Legitimization of the populist vote (see Mateo Renzi, Donald Trump)
  • Slowing down European integration or speeding up European integration?
  • Detour of European resources in the next 2 years
  • 5.4.5 UK-EU Trade and Cooperation Agreement (TCA)

    5.4.5.1 What’s in the deal: Goods trade

    • Level playing field: UK agrees to maintain non-regression on labour, environment, state aid. Targeted tariffs can be imposed if regulations diverge sufficiently, after arbitration period.

    • Industrial goods: zero-tariff, zero-quota access, although rules of origin means complex declarations. No mutual recognition of product standards

    • Agriculture: sanitary and phytosanitary checks necessary for all animal products

    Fishing: 25% decline in EU quota, and 5.5 year phase out of common fisheries policy, followed by annual renegociations

    5.4.5.2 What’s in the deal: Services trade

    • General services: agreement to honour some professional qualifications but varies significantly by member state - short-term business travael rules are vague

    • Financial services: negotiations ongoing on regulatory equivalenece, but loss of passporting access guaranteed

    • Data: Right of UK individuals and firms to access EU data extended for six months. Data adequacy decision to follow in 2021 (to comply with GDPR)

    • Legal: Still some lack of clarity, particularly on whether judgements in one jurisdiction will be honoured in the other

    5.4.5.3 What’s in the deal: Other issues

    • Border infrastructure: some rules of origin declaration have been suspended for 6 months, but total time for implementation will increase. Northern Ireland under special arrangements

    • Migration: UK has implemented points-based system emphasising skilled workers, with limited provisions for unskilled agricultural workers

    • Participation in EU programmes: UK will buy into most EU scientific research schemes (Horizon 2020). Participation in Erasmus programme will be discontinued.

    5.4.5.4 Impact of Covid and Brexit will slow UK Growth

    5.4.6 Conclusion

    The reasons for Brexit:

    • Dissonance between political institutions and the economic reality of the 21st century

    • Inequalities

    The future of the United Kingdom:

    • economically uncertain

    • politically uncertain

    The future of Europe:

    • Brexit reinforces populism and anti-European sentiment

    • economically uncertain

    • politically uncertain

    5.5 Data Challenge

    5.5.1 Political Risk

    You are an analyst for an international company and the CEO would like to open a British subsidiary. Aware of the possible political risks, he asks you to determine what British population think about Brexit. Based on the concepts currently being discussed and the data available to you, create a graph and explain a district’s position on Brexit.

    5.5.1.1 Polarity evolution by UK district