Much uncertainty for NZ if Britain leaves Europe

As the vote on whether Britain will leave the European Union looms this week, the polls are now running neck and neck. Business editor Dene Mackenzie previews what some of the effects for New Zealand will be, if an exit transpires.

Financial markets around the world continued to fall last week as investors started to panic about the possible effects of Britain leaving the European Union.

The Brexit vote, as it has been named, continues to occupy the minds of politicians and market analysts. Its outcome will be known on Friday afternoon, NZ time.

All factions took a step back following the murder last Thursday of Labour Party lawmaker Jo Cox (41) in her electoral district in northern England.

The MP was a strong supporter of EU membership, but with the resumption of campaigning this week, the most recent polls were now showing an evenly split electorate.

British Prime Minister David Cameron left the debate after The Guardian published information showing the leave vote increased every time Mr Cameron spoke on the reasons for staying.

Labour leader Jeremy Corbyn was due to make a last minute weekend plea to supporters, trade unions and general Labour Party members in an effort to shore up support for staying.

Former prime ministers Gordon Brown, Tony Blair and Sir John Major have been wheeled out to support the vote to stay.

British Finance Minister George Osborne, battling to keep the country in the EU, warned voters that he would take new austerity measures if they decided to leave the bloc in next week's referendum.

As the opinion polls showed momentum swinging to the exit camp, Mr Osborne intensified the tone of his warnings about the consequences of a Brexit, saying he would respond by increasing taxes and cutting spending.

"Quitting the EU would hit investment, hurt families and harm the British economy. I would have a responsibility to try to restore stability to the public finances and that would mean an emergency budget where we would have to increase taxes and cut spending,'' he said, according to excerpts of the speech, which were sent to media by the Britain Stronger in Europe campaign.

Polls have shown the exit camp ahead, reducing the value of sterling and wiping billions of dollars off global stock markets. More than 100billion ($NZ205billion) had been wiped off the London Stock Exchange in the past week.

Mr Osborne detailed 30billion worth of fiscal measures, half from tax increases and half from lower spending, he said would be necessary to offset the impact on the budget as estimated by independent forecasters.

New Zealand Institute of Economic Research analyst John Ballinger said the post-Brexit picture was "horribly murky''. No-one knew how it might play out.

"There is no free lunch. The United Kingdom simply can't have all of the benefits of easy access to the EU single market without bearing the costs of the free flow of people across its borders.''

The most obvious impact on New Zealand of a Brexit vote would be on New Zealand exports to the UK, which could drop by $190million per year.

Brexit could also dampen investment flows from the UK, push up costs in global value chains and restrict the movement of people between New Zealand and the UK.

Brexit would be a further stinging slap in the face of ongoing economic integration initiatives at a time when the political discourse was already turning against deeper trade liberalisation, Mr Ballinger said.

"None of this is good news for New Zealand, but the overall economic impacts should be limited.''

In an ideal world for New Zealand, New Zealand and the UK could quickly negotiate a bilateral free trade agreement (FTA) that reduced tariffs on industrial goods and possibly expanded quota access for key agricultural products such as lamb.

But it was hard to see New Zealand being near the top of the UK's list of potential FTA partners, due to this country's limited market size, an export profile tending towards some of the UK's more "sensitive sectors'' and New Zealand currently seeking to open negotiations with the EU as a priority, he said.

"It would take a bold bid from New Zealand's politicians and officials to put a 'take it or leave it' agreement in front of their UK counterparts to secure a quick but high-quality deal.''

Alternatively, the UK could unilaterally lower or remove all of its tariffs to WTO members, including New Zealand.

While it was conceptually possible, it was unlikely to occur in practice. Even if the UK made those concessions, it would not be guaranteed any reciprocal market access for its exports, Mr Ballinger said.

Given the increasingly protectionist tone of much of the trade and foreign policy debate now, it would be hard to imagine UK politicians opening up its borders so brazenly. It would also make negotiating FTAs more difficult.

New Zealand would not have any better access than any of its competitors and it was difficult to see how such an outcome would make New Zealand exporters much better off.

What was more likely, although Mr Ballinger acknowledged his guess was as good as any other commentator's, was New Zealand's existing market access arrangements would not get better any time soon.

New Zealand's industrial goods exports would probably have no change, as most were already drafted across the UK's adopted EU MFN (most favoured nation) tariffs, which would be the likely default under that scenario.

The access arrangements for New Zealand's agricultural products would also fall under the UK's WTO commitments.

"The problem is, the UK doesn't have its own commitments. Its commitments were negotiated by the EU at the 1994 Uruguay Round of GATT.''

It was likely the UK and EU would have to negotiate how to divide up the EU's country-specific tariff quotas, following a Brexit win, he said. Both would then have to consult with other WTO members, including New Zealand, to negotiate any amendments.

Given the WTO focus on not making countries worse off after commitment renegotiations, New Zealand exporters would be expected to fare well. The New Zealand Government had committed to engaging in any necessary processes to safeguard New Zealand's interests, Mr Ballinger said.

In short, the theme of uncertainty shone through brightly for New Zealand exporters should Brexit occur. In theory, market access arrangements should be no worse than they were now. But in practice, it would depend crucially on the withdrawal agreement negotiations around agricultural benefits.

dene.mackenzie@odt.co.nz

 


At a glance

•Recent polls suggest the chances of Brexit too close to call

•New Zealand exports to the UK could drop by $190million annually

•New Zealand free trade agreement with UK best outcome, but unlikely

•Negotiations concerning agricultural exports the most crucial part of any future trade deals

 


 

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