The witches’ brew of Brexit

In the wake of the Brexit vote, economic and political uncertainties abound in the UK, the EU and beyond. Amid all the noise and confusion, what is needed, contends Chakravarthi Raghavan, is a measure of calmness and consideration to negotiate the complications that invariably lie ahead.

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The outcome of the non-binding referendum on Brexit in the United Kingdom on 23 June, with a clear majority for the UK to exit the European Union, is creating a veritable witches’ brew – with the cauldron still on a fire that is being stoked and everyone adding their own “herbs” to the brew and none the wiser as to whether it will be a potion to cure or kill.

There are various forces at play – of politics and the political economy of the UK, of Europe, of democracy spreading in varying hues across much of the world and spawning fragilities, national and international, in the wider world. Analyzing these forces, even in broad brushstrokes, would need the genius of British Marxist historian Eric John Ernest Hobsbawm (1917-2012).

The Brexit outcome has evoked some violent reactions from Brussels, and an element of panic is also evident in other capitalist centres, in particular the US and its financial centres. There is panic over the possible collapse of laissez faire economics and “globalization” – the “market fundamentalism” that Margaret Thatcher unleashed in the UK in 1979, was picked up and pushed by Ronald Reagan as US President from 1981, and was enforced on the rest of the world, in particular the developing world, by the IMF and World Bank, US “free trade economists” (theologians rather than theorists with facts backing their theories), and step by step by the GATT and then the WTO, and the EU and its executive Commission inside Europe and through its web of free trade agreements (FTAs) including with the African, Caribbean and Pacific economies.

This neoliberal economics, pushed by these economic “gurus”, soon proved to be global neo-mercantilism and trickle-up economics, creating and accentuating vast inequalities within and amongst nations, enriching the top 1% globally while the middle classes find living standards falling and the underclass find themselves impoverished and marginalized. This is being driven by financial globalization, with finance no longer merely “oiling the wheels of industrial capitalism” but replacing it. It is an upside-down pyramid structure, inherently unstable.

The UK electorate’s reaction against this elitist neoliberalism resulted in the “enough is enough” vote for “leave” in the referendum. It is this that has sparked the panicky reactions in the centres of financial capital and among the elites who benefit handsomely from “globalization”. No one should be under the illusion that they will all just roll over.

In contrast to Marxian dialectics of accentuated class conflicts and predictions of revolutionary upsurges of the working classes, however, the alienation is also throwing up fascist tendencies a la Marine Le Pen in France (though there appears lessening support for a French exit from the EU).

Uncertainties and complexities

In opening the Scottish Parliament on 2 July, Queen Elizabeth (who has seen 12 Prime Ministers in the UK during her reign so far) spoke some words of wisdom: “We all live in an increasingly complex and demanding world, where events and developments can and do take place at remarkable speed and retaining the ability to stay calm and collected can at times be hard ... one hallmark of leadership in such a fast-moving world is allowing sufficient room for quiet thinking and contemplation, which can enable deeper, cooler consideration of how challenges and opportunities can be best addressed.”

Such leadership capable of “quiet thinking and contemplation” is perhaps a missing element in the post-referendum state of affairs.

Brexit has raised questions of whether the three-century-old United Kingdom can or will survive in its current shape, and whether it will continue in the EU (despite the referendum, as elite financial media and columnists are still preaching) or in fact will exit by invoking Article 50 of the EU treaty. And if separation does take place, there is uncertainty over the future relationship between the UK and the EU, and over the direction of an EU where Germany is the dominant, almost hegemonic power – a hegemony which it failed to achieve in the last century in two wars but which is now evident, whether sought or not – an EU partially knit together in a web of integrated and evolving trade and other economic links, and by preferential accords with nations outside the bloc, an effort almost to replicate the colonial-era economy.

In this context, also coming to the fore are issues of democratic governance in the EU or, as civil society often complains, the EU’s “democratic deficit”; and similar deficits in the world beyond the EU, including in the centre countries and in the various intergovernmental organizations, such as the so-called “rules-based” World Trade Organization (WTO).

Within the EU, member states with duly elected parliaments and governments accountable to their parliaments have ceded some powers to the Union by treaty, and created EU institutions of governance: a European Council, which comprises heads of state or government of EU members and which defines the EU’s general political direction and priorities; the Council of the EU, where the relevant ministers from member states meet to discuss and adopt decisions on specified policy areas; an executive in the shape of a European Commission, with a President and Commissioners from each member, and under them a sprawling bureaucracy, to initiate and, after approval, put in place EU-wide policies and regulations in some areas (and in other areas where national parliaments have to act); and a European Parliament, with Members elected by direct vote and with powers to approve or veto initiatives or proposals of the Commission before the Council of the EU for adoption.

The presidents, prime ministers and ministers of member states negotiate and do some hard bargaining on individual issues, often well into the night, and take decisions. Back home, if some particular interests or the public get upset or dissatisfied, the member governments do not own up to responsibility (since those heading their governments had collectively taken the decision) but take shelter behind the country having to abide by the decisions of an external authority, the EU.

All this is so complex that it is confusing even for experts dealing with the EU. The functioning of various EU institutions, purportedly on a democratic basis, is so non-transparent and opaque that it is little understood by the EU public or even in many parts of the media or their parliaments. This adds to the perception amongst the public, as reflected in the Brexit vote, of non-accountability and rule by some external colonial-type authority which is depriving a nation of its sovereign rights of democratic decision-making and governance.

In sum, it is a mess, needing careful handling and explaining at every level, and the cool heads and calm thinking which Queen Elizabeth called for but which are in short supply everywhere.

Such complexities are also evident in decision-making mechanisms at international organizations, including the WTO. The WTO’s administrative head, the Director-General, and the secretariat have even less powers than their counterparts at the UN and other international agencies; for example, they cannot initiate or make any proposals on their own but can only carry out tasks they are asked to do by the WTO legislative bodies. Nevertheless, the WTO secretariat and its various wings act on their own, promoting from behind the initiatives and interests of the dominant member states, and pronouncing themselves.

In a treaty organization like the WTO, where the functions, remit and jurisdiction of its various bodies are laid out in its founding treaty, no functionary bodies or officials discharging functions laid out in the treaty can claim inherent powers and the right to do what they have not been expressly forbidden to do. (The WTO’s Appellate Body made such a claim in one ruling, in accepting a brief from a non-governmental organization when even WTO member states that are not parties or third parties to a dispute cannot file a brief!) This claim of ability to do what is not prohibited is a proposition unacceptable in any system of law or public international law codified in the Vienna Convention on the Law of Treaties.

External advice

In the Brexit context, before the actual vote in the UK, something that was exclusively within domestic jurisdiction saw many non-British persons giving advice. Given the wider effects of an UK-EU rupture on other nations and the global economy, various foreign leaders (including President Obama) went to the UK to publicly voice their advice, while some (like President Xi of China) did so from their capitals.

Several international organizations, including the International Monetary Fund (IMF), joined the debate to warn the UK voters of serious adverse consequences to them; and so did the WTO Director-General in some ill-advised remarks, interpreting provisions of the WTO agreements, in London on 7 June. These remarks related to the UK’s complex web of trade relations at the WTO and with the EU and the EU’s various preferential trade relationships through FTAs with non-EU countries.

Even normally, the public of any nation would not like outsiders to intervene and inject themselves into a sensitive and politically charged domestic issue. It is more so in the case of the insular UK, where the purported lack of control of the citizens over their destiny and grievances over the alleged external elements running the country were a major issue in the referendum.

After the vote, some wisdom has dawned on some external actors and institutions. For example, the IMF head Christine Lagarde intervened after the referendum merely to ask the UK and EU political leaders to discuss and reach arrangements without delay to end uncertainties – she did not venture any view on the nature of the detailed accords that should ensue.

Relations with the EU

Within the UK itself, the political process is in a shambles. Within the EU (minus the UK), the German Chancellor is playing a statesman-like role in public and speaking in terms of keeping the EU together and not showing undue haste or encouraging extreme hostility to the UK. Others, in particular European Commission officials, are talking tough – and loosely – about a messy divorce and threats of the UK’s trade relations with the EU being in limbo while it brings up the rear of a long queue of nations seeking trade accords with the bloc.

Many on the EU side, though, are forgetting that the UK is still a major economy, even if it be correct that after the vote, its position has slipped from being the world’s fifth largest economy to sixth spot. And if relations of the UK with the EU will be in limbo, so will it be, reciprocally, for EU members with the UK; and some of the EU’s trading partners, which might have agreed to an FTA in the event that the UK were still part of the EU single market, may have second thoughts.

For example, there have been for some time now off-and-on negotiations for an FTA between the EU and India (stuck apparently on issues of investment and intellectual property rights). More recently, there was talk of accelerating the talks and concluding the FTA. However, after the Brexit vote, Indian officials have been quoted as saying that they might have to revise their market access offers, which were initially based on assumptions of meeting UK requests in terms of its EU membership, and that if the UK exits the EU, they no longer would need to provide the same access to the EU minus the UK.

There has been other negative fallout too. Switzerland has been having a series of bilateral arrangements with the EU in specific areas of the single market. These talks have stalled for the last two years over the issue of free movement of EU nationals – precisely the major sticking point in any post-Brexit EU-UK trade arrangements.

Two years ago, in a binding referendum, the Swiss voted (by a thin margin of 50.3% in favour) for a constitutional amendment to restrict foreigners moving to Switzerland and working. The Swiss Confederation has to give effect to the referendum outcome by enacting laws by a February 2017 deadline, and Swiss authorities have been negotiating with Brussels (and getting desperate). They have now been told that there can be no access to the EU single market if there is no free movement of EU citizens.

And Switzerland is far more dependent on the EU than the other way round. The Swiss export 56% of their goods to the EU. While some extreme right-wing parties are talking of going it alone, other Swiss parties are asking the Berne government to re-run the referendum to annul the previous one.

In the Swiss system, such binding referenda on specific issues can be at the instance of the Confederation government or by popular initiative. An impasse on the immigration issue threatens hundreds of other EU-Swiss bilateral agreements as well as the imposition of tariffs. Further talks were due recently but were postponed by the European Commission, which claimed that it was too distracted by Brexit.

The president of the European Parliament, Martin Schulz, has said the talks will not get easier because “free movement of people now plays a bigger role, in light of the imminent Brexit negotiations”.

Swiss President Johann Schneider-Ammann has been quoted in Swiss media as saying that his efforts to press the EU for talks have met with the following response from European Commission President Jean-Claude Juncker: “If there is Brexit there would be no more time to deal with Switzerland.”

The EU has previously shown its negotiating muscle by freezing research grants for Swiss universities worth hundreds of millions of euros and suspending the involvement of the Swiss in the Erasmus student exchange programme. The EU acted after the Swiss refused to sign a free labour market access deal signed by the EU in Croatia. Swiss authorities, students and research scholars are worried about future access and scientific research contracts of Swiss institutions with the EU.

If and when the UK invokes Article 50 of the EU treaty, the Article prescribes negotiations on separation arrangements which are to conclude with an agreement within two years (unless an extension is agreed upon by both the EU and the UK). This is to define and set out detailed provisions of EU-UK accords on various issues, including trade relations.

At the moment, UK and EU leaders are all engaged or indulging in some public discussions and negotiating postures, creating some uncertainty among their own enterprises, investors and public, but also among others outside. This uncertainty may or may not have an effect on the actual Article 50 negotiations when they begin. Crucial as this is, though, it is just one more imponderable in the uncertain and fragile world of international political and other instruments and organizations. And whatever pressure and influence external parties want to exert, it needs to be done more discreetly, from behind the scenes, than the ham-handed interference in the pre-referendum campaign.

Even if there is no agreement at the end of the two-year period after the UK invokes Article 50, it does not equate to a vacuum. UK-EU relations in such a situation will be decided according to applicable principles of international law (as would be the situation for any member of the EU exercising its international rights and giving notice and withdrawing from the EU treaty).

Any negative impacts on the UK – as laid out, for example, by the EU Trade Commissioner in an interview with the BBC – will have a mirror effect on EU members vis-a-vis the UK. It may be viewed calmly by the Commissioner but not by the member states themselves.

Position in the WTO

As for the UK and the WTO, there has been huge concern (or the impression to that effect) that, like in the case of new applicants for accession to the WTO, a whole lot of complex arrangements, including tariff schedules, will have to be renegotiated by the UK. However, the UK talks at the WTO will in fact be less complex than the talks with the EU. With some goodwill, and flexibility that the WTO and GATT have shown in the past, it is more easily solvable, and in mutual interest.

With or without any Article 50 agreement with the EU, the UK will continue as a founding member of the WTO. For, the UK was a founding contracting party of the General Agreement on Tariffs and Trade (GATT) 1947 and, after it joined the European Communities (EC), as part of the EC common market. The UK as such signed the Marrakesh Agreement Establishing the WTO in 1994, and as of that point with its tariff schedules in GATT 1947 (as the UK, and then as the EC, with a common external MFN tariff schedule). Those schedules were withdrawn and substituted by the common MFN external tariff schedule of the EC, as of 1 August 1994, by a 4 August 1994 notification of the EC to the Director-General of GATT 1947.

As a result, on the entry into force of the WTO on 1 January 1995, by virtue of Article XI:1 of the Marrakesh Agreement, the UK became a founding WTO member, and the UK’s (the EC’s MFN external common) tariff schedule of GATT 1947 became the UK’s GATT 1994 schedule.

In his 7 June remarks in London, the WTO Director-General seemed to suggest that the EU’s MFN external tariff schedule, which is the schedule of the UK as an EU member, cannot be mechanically transposed post-separation as the UK schedule. Such a reading of WTO law would lead to the absurd legal situation of the UK as a WTO member enjoying all the membership rights (flowing out of WTO treaty provisions and the schedules of commitments of other WTO members, including the EU) but having no obligations at the WTO.

Another, more credible reading is supported by former Indian Ambassador to GATT B.K. Zutshi, who negotiated the final stages of the Uruguay Round and signed the Marrakesh Agreement in 1994 as plenipotentiary of India, as well as academic Brett Williams. In posts on the International Economic Law and Policy Blog and comments by Williams and the writer, there is confirmation of the writer’s view. (See: worldtradelaw.typepad.com/ielpblog/2016/06/whats-the-answer-to-the-variable-geometry-test-brittip.html; and Chakravarthi Raghavan, “Brexit overshadows BIS, world central bankers meet”, SUNS, No. 8271, 28 June 2016.)

In this view, post-separation, in terms of WTO relations, the UK will continue to remain a WTO member. As a WTO member, the UK will have all the rights and obligations spelt out in the Marrakesh treaty and its annexed agreements.

The UK will also have rights arising out of the commitments of other WTO members, including the EU members, as set out in their various schedules of commitments. These commitments of other members will, post-Brexit, automatically be obligations of theirs to the UK.

As mentioned above, the UK was a founding member of GATT 1947 (with a tariff schedule, and when it became part of the EC customs union, the common external tariff schedule of the EC was thus the UK schedule too) and became a founding member of the WTO and its GATT 1994, with a GATT tariff schedule that was the common MFN external tariff schedule of the EC customs union notified by the EC to the GATT secretariat on 4 August 1994 as effective from 1 August 1994. The other common schedules filed by the EC also became schedules of the UK as a member of the customs union. If the UK separates from the EU without a separation agreement, all these schedules will continue to be UK schedules of commitments vis-a-vis other WTO members, including the EU.

If the UK then wants to reduce the tariff on any product line, it may do so like any other member, through an applied MFN tariff, and may even, after going through the needed procedural notification, amend its tariff schedule downwards and bind it.

However, if the UK wants to raise the level of its bound tariffs, it would need to invoke Article XXVIII of GATT 1994 and undertake renegotiation. Although such a procedure is not envisaged in respect of, for example, minimum imports in terms of the WTO Agreement on Agriculture (AoA) or its commitments under AoA schedules, it might still have recourse by invoking GATT Article XXVIII. For its GATS (General Agreement on Trade in Services) schedule, the UK will have to follow a similar procedure in terms of the equivalent GATS Article XXI, which in some respects is simpler.

The legality, and the balance of rights and obligations, if the issue arises in any future dispute, will be judged, not by the WTO secretariat but through the WTO’s dispute settlement processes – by a dispute panel and, on points of law, by the Appellate Body.

The Brexit vote and its aftermath bristle with complications, but the leadership and decision-makers on either side, and international organizations and their leaderships, would do well to exercise patience and goodwill and help in resolution rather than add to the complications and confusion. (SUNS8276)                                                                            

Third World Economics, Issue No. 619/620, 16 June – 15 July 2016, pp26-28