As David Cameron now leads the Conservative majority government few predicted, we dig deep into the details to show you what will really matter in the years to come for the UK’s two key relationships with Europe and the USA.
The UK and Europe
Membership of the European Union is set to dominate British politics, as the Conservative pledge to the electorate of an in-out referendum by the end of 2017 is on course to be delivered.
Lord Ashcroft’s polling company, one of the UK’s most respected, researched British opinion on Europe in its most comprehensive poll of over 20,000 people in 2014. It found that 41 percent of people favoured staying in the EU, and 41 percent wanted to leave. 49 percent of people believed the costs of staying in the EU outweigh the benefits, as opposed to 31 percent believing the opposite. Following the failure of polling companies to predict the 2015 general election result, it pays to take the figures with a pinch of salt.
Leaving the EU would have deep ramifications for the UK economy, particularly as regulation in the two economies would diverge, creating a drag on companies through additional compliance obligations.
The question of free movement of people between the UK and EU would dominate the debate, with the UK’s biggest party in the European Parliament currently agitating for an Australian-style points based immigration system. At present, UK employers are legally obligated to consider citizens of EU countries before hiring a non-EU citizen. As the UK never joined the Schengen Zone allowing visitors to the EU to use a single visa to travel across the continent, separate UK business visas would remain a headache.
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We must bear in mind that many Conservative MPs face pressure from within their own constituencies to win votes back from supporters of the anti-EU UK Independence Party (UKIP), who gained 12.6 percent of the vote this time around, and won the most UK seats in the EU parliamentary elections in 2014.
With a strong rural base, the Conservative Party also faces pressure from farmers who work under the EU’s Common Agricultural Policy (CAP). The CAP subsidies and programmes are a huge drain on EU resources, accounting for over 40% of the organisation’s budget. As the new government makes steps to renegotiate a new settlement with the EU, the interests of these local constituents will be at the back of the minds of many in the Party.
The debate often focuses on what leaving would mean for the UK, when we should put it in a wider context. For the EU, the loss of its third largest economy will be a big hit. The UK has been propping up flagging EU GDP growth, growing at 2.8% in 2014, over double that of the EU average. Fears abound of “Brexit” leading to a domino effect of countries fleeing the organisation. For those who stay, the upside will be the removal of the British obstacle to further integration.
A classic argument against EU membership is that member states lose the position to negotiate their own free trade agreements (FTAs). In recent years we have seen China pursue FTAs with Iceland and Switzerland, let the EU has been left out in the cold. When dealing with the EU, divide and conquer tactics have instead worked to other countries’ advantages, shown by China using its increases in wine tariffs as a tool to drive a wedge between France and Germany over a dispute over unfairly subsidised solar panels.
The USA and TTIP
The Transatlantic Trade and Investment Partnership (TTIP) between the EU and USA is not expected to be completed until at least 2016. TTIP presents an opportunity for the EU to show a united economic front that can deliver tangible results. If the deal is communicated effectively to the UK electorate, it could buoy the pro-EU referendum vote.
The USA is the UK’s biggest national trading partner, and bilateral trade amounted to over $200 billion in 2014. The UK is the top national destination for USA investment, accounting for 27% of all USA-invested projects in Europe. The UK’s desirable position is down to its utility a springboard to the wider EU Single Market, along with its own significant consumer market. The conclusion of TTIP will also have ramifications for UK-invested projects in the USA, which received £241.2 billion of UK investment in 2013.
The European Commission‘s negotiating position aims for progress on regulatory cohesion, with periodic review of existing regulations, and to establish a framework to identify areas for further such cooperation. Among the specific commitments affecting goods and services, the agreement will cover automobiles, chemicals, machinery, pharmaceuticals, medical devices, and textiles. The agreement would build on World Trade Organization agreements on sanitary and photo-sanitary measures, and technical barriers to trade, standarding requirements such as labeling or safety testing. This has knock-on repercussions for US businesses, as the EU position is to promote International Organization for Standardization measures are also used outside of the EU.
It has been a bumpy ride for some British-focused US investors of late. The UK’s Office of National Statistics found that from 2012 to 2013, earnings from US foreign direct investment in the production industry declined from £6.1 billion in 2012 to £3.4 billion in 2013. This figure should be seen in the context of the global commodities slump, as US earnings in the UK’s mining and quarrying industry fell from £2.4 billion in 2012 to £1.2 billion in 2013.
The balance of the UK’s position between Europe and North America remains crucial. The latest data show that Europe and the USA together received 74.4% of UK investment in 2013, receiving £241.2 billion and £528.9 billion respectively. The current balance has served the UK well; globally the UK and USA shared the top two positions for receiving foreign direct investment in 2013-14.
As we look out ahead, the picture is clear: be wary of the UK political scene, but not over-cautious. Do not let the spectre of Brexit haunt you. Instead, be prepared for the scenario and begin looking into how you may benefit from TTIP.
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