Brexit: Options beyond the EU

Aoraki Mt Cook, New Zealand. Photo / NZPA
Aoraki Mt Cook, New Zealand. Photo / NZPA

There is a country that fits over two islands lying off a major landmass. Its residents are known for their farming, love of beer and rugby, and their monarch, Queen Elizabeth II.

This nation has struggled with its place in the world. But now, with the chance to decide between greater integration with a larger free trade area, or going its own way, its economic success has made the option of operating more freely all the more appealing.

These are not the struggles of the United Kingdom, but New Zealand. The Commonwealth nation's experience may now provide a useful road map for the UK.

Ruth Richardson, a former NZ finance minister and economic reformer, says there is a clear parallel between the two nations, and the choice that each will face. "When Britain decided to become very closely connected [with the EU], Britain was regarded as the sick man of Europe," she says, with the UK "almost on the brink of the International Monetary Fund dictating policy [to it]." Similarly, "when New Zealand decided to explore closer economic relations with Australia, we were clearly the sick man of Australasia".

However, Richardson says, "Nations ought not to be trapped by historical perspective". She says the arguments behind a once-sensible decision may have shifted.

Both the UK and New Zealand have risen to become the strongest performer in their respective blocs, and the reasons to pivot towards emerging markets have become clear.

What are the alternatives?

To go it alone for the UK would mean giving up on the terms of trade it enjoyed as a member of a large customs union. Doubters have pointed to the UK's small size compared with that of the EU as a hindrance when it comes to arranging new trade arrangements.

Allie Renison, head of trade policy at the Institute of Directors, says that in a worst-case scenario, exporters would have to fall back on the UK's membership of the World Trade Organisation (WTO).

The UK's "Most Favoured Nation" (MFN) status would allow it to continue trading with other WTO members, albeit while facing tariff costs that would make UK exports less competitive. Economists at RBC Capital Markets estimate that the annual cost from higher tariffs would stand at around 7 billion ($13.23 billion).

However, given that WTO commitments were determined in 1994, when the UK was a member of the EU, hoping that a post-Brexit UK could maintain even that minimum of market access could become difficult, Renison suggests.

In the short term, she says, there would be no "huge change in trade flows overall, as geography and historical trade patterns are the most important drivers of the UK's economic linkages".

Brexit advocates argue that the UK is currently unable to forge trade deals of the kind that makes commerce easy with EU members, and other key economies. Despite the successes of the EU's negotiators with many nations, they have not been able to make much progress in dealing with China, the world's second-largest economy.

Even without free trade deals, Renison argues that exporters can be successful: "Germany has always been better at exporting to far-flung emerging markets than the UK because of its industrial base and consumption preferences in China and India."

New Zealand "was the first country in the world to sign a free trade agreement with China, and the first to sponsor China into the WTO," Richardson says. These ties have "been an unambiguous economic success for us".

It is hard to deny, however, that forging such agreements would take a great deal of effort. Debating new terms of trade would be so complex "it is hard to see the UK Government spending much time on anything else for at least two years", Renison says.

Ruth Richardson.
Ruth Richardson.

Agricultural disruption

One area that will face particular disruption is Britain's agricultural sector. Farmers look on EU subsidies "as a vital lifeline for their livelihood," Renison says, and combined with MFN tariff rates, "this is one sector where the worst-case scenario could severely weaken an industry".

But it is in this area in particular that New Zealand can shine a light on the potential for a post-EU future. In the 1970s, the UK shunned NZ's food exports. The country that had been referred to as the "offshore farm" of Britain lost one of its largest customers as it faced the tariff barriers erected by the then-European Economic Community.

From NZ's point of view, "Britain had a mid-life crisis, and jilted New Zealand," Richardson says. This development became "the real spur for us to get our house in order."

A pair of radical politicians helped New Zealand through this difficult period. Richardson was the finance minister in a Right-of-centre National Party Government from 1990 to 1993, and her efforts, combined with those of her predecessor, the Labour Party's Roger Douglas, transformed the economy from one at the bottom of the pile to something far more dynamic.

Shaun Goldfinch, a New Zealand-based academic, says the country moved from being "one of the most hidebound economies outside the former communist bloc, to among the most liberal in the OECD". An important plank of those reforms was the complete liberalisation of the agricultural sector, one that is world-leading even today.

Reforms implemented by Douglas, dubbed "Rogernomics", did away with government support for the agricultural sector. State assistance, which had risen to 39pc of pastoral output by 1984, disappeared.

The strategy appears to have reaped rewards, as New Zealand's farmers became more flexible, showing an ability to adapt to what consumers demand across the globe.

Philipp Aerni, director of the Centre for Corporate Responsibility and Sustainability at the University of Zurich, says that the sector has been transformed into one "that aspires to be competitive and sustainable without requiring any cumbersome planning bureaucracy."

In the EU, subsidies for farmers are huge, accounting for 38pc of the union's budget. Weaning British farmers off state life-support systems is but a taste of the reforms that a post-EU UK could implement.

- Daily Telegraph UK

Get the news delivered straight to your inbox

Receive the day’s news, sport and entertainment in our daily email newsletter

SIGN UP NOW

© Copyright 2016, NZME. Publishing Limited

Assembled by: (static) on production apcf03 at 25 Sep 2016 22:23:50 Processing Time: 723ms