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Brexit, multilateral trade and Bangladesh

CThe United Kingdom’s (UK) decision to quit the European Union, known as Brexit, has spurred a new wave of debate on its impact on multilateral trading regime. Immediately after the referendum on June 23, 2016, when the majority wanted Britain to leave the EU, policymakers, experts and businesses across the world are getting increasingly engaged in the debate. Analysis of the consequences, however, started long before the referendum took place.

Multilateral trade regime overcame a critical hurdle in December last when members of the World Trade Organisation (WTO) sealed a deal, though it was far less than expectations. Nairobi ministerial conference somehow managed to survive against the incremental pressure of mega regional trading arrangements. Brexit is not such a kind of pressure for the multilateral trade arrangement, but it increased the load of work in global trade negotiations which may appear unnecessary.

COMPLEXITIES AHEAD: A week before the referendum, Director General of the WTO Roberto Azevêdo warned that a vote in favour of Brexit might have implications for the UK’s goods and services trade, and would require a series of negotiations to confirm its new terms within the global trade body.

“The UK would also need to re-establish its terms of trade within the WTO,” said Azevêdo. “The UK, as an individual country, would of course remain a WTO member, but it would not have defined terms in the WTO for its trade in goods and services.” The WTO chief also made it clear that there is a complexity of trade negotiations and such a process may take several years.

The UK has been a WTO member since 1995 and a member of GATT since 1948. So, it is one of the founder members of the multilateral trade body. Again, all EU members are WTO members in their own rights.

As the EU is a Customs Union also, any of its members can’t set its own tariffs, formulate own trade policy or strike separate deal with third countries. Under a Customs Union, any product for which uniform tariff has been paid has the legal right to move freely across the territory of the member-states. It is not like North American Free Trade Area (NAFTA) or South Asian Free Trade Area (SAFTA) which are free trade blocs. In free trade areas, only the products of the member-countries enjoy tariff-free movement across their territories. Different members can, however, set different tariff or preferential market arrangements for the products of non-member countries.

It is to be noted that free trade area is the earlier stage of Customs Union in the process of economic integration. The later three stages are: common market or single market, economic union and monetary union. Being the only economic union of the world, where member-countries sacrifice their own monetary policies, it is also the common or single market. EU member-states are, thus, not allowed to strike their own trade deals with other countries. So far, the UK was also in the same status. Now it is free to negotiate and sign deals with other countries. But things are not as easy as anticipated by many.

UK’s Uruguay Round goods’ schedules are included in those of the European Community (EC) or EU. It is to be noted that EU was known officially in the WTO as the European Communities until November 30, 2009 for legal reasons. UK’s service schedule is also similar. WTO’s trade policy review report includes UK’s trade policy review in the trade policy review of EU.

Brexit will force the UK to renegotiate terms for WTO membership, as mentioned by Azevêdo. One way to skip the renegotiation is rejoin the EU customs union which is unlikely. So, the UK has to submit its own new schedules of tariff commitments and these will also have to be formally accepted by all WTO members.

Regarding the UK’s involvement in other EU trade deals, Azevêdo earlier mentioned that this would similarly prove complicated, and that during the negotiation process of new arrangements, UK would likely face greater costs in dealing with the same markets.

UK currently has preferential trade deals with the EU, and with 58 countries with which the EU has free trade agreements. All of these deals will need to be re-established. One tricky thing is that UK will not be able to strike any separate deal with any EU members.

An EU Law Analysis brief, prepared by a Cambridge University law teacher few months back, said:  “UK’s continued WTO membership as such is not doubtful but the UK alone cannot fulfill all the obligations that the EC (now the EU) entered into on behalf of its then member-states. This would require, at the very least, a separate submission of a tariff schedule which could be subject to negotiations with all other WTO members. Even if the UK just copied and pasted the existing tariff commitments of the EU, the formal act of re-issuing the schedule could give rise to negotiations.”

BANGLADESH’S CONCERN: Renegotiation is also applicable for Bangladesh. As the UK is no longer within EU, market access facility under the common market is also no longer applicable for the trading partners of UK. So, exporting to UK will require new terms and conditions for Bangladesh.

UK is the third largest export destination of Bangladesh after the United States (US) and Germany. Annual export earnings from UK is over $2 billion. Being a least developed country (LDC), Bangladesh is eligible for tariff-free access into the UK market but can’t demand for continuing the EU facility without a formal negotiation or arrangement. UK can, however, simply declare continuation of the market access facility for the LDCs following the WTO decision of the Hong Kong ministerial meeting.  It will save additional time and effort. If Bangladesh has to go for re-negotiation, there is, however, a scope to press for more flexibility including relaxation of rules of origin as per the Nairobi decision. But, the country’s foremost effort should be to withstand any preference erosion due to Brexit. It means, Bangladesh must work hard to ensure that no fresh deal with UK is less favourable than that of the EU.

With Brexit, the UK will no longer be obliged to offer job quotas to the citizens of the other 27 member-countries of the EU. This may widen the labour market for Bangladesh. The challenge here is to compete with other developing countries like India which has some comparative advantage on skilled workforce over Bangladesh. Currently, UK is an important source of remittance for Bangladesh.  The country received some $758.62 million as remittance from UK in July-May period of the current fiscal year, FY16.

The UK is the second largest source of foreign direct investment (FDI) in Bangladesh after the US. In 2015, net inflow of FDI from UK stood at $300 million which was 13 per cent of the total annual foreign investment. Brexit is unlikely to have any impact on the FDI flow from UK to Bangladesh.

As UK will no longer be required to tie-up its official development assistance (ODA) to the EU rules and directions, it may provide more assistance to Bangladesh. Though ODA from UK came down to $79 million in the last fiscal year, some opportunity is still there to enhance the aid flow through better bilateral negotiations.