BREXIT, USMCA

&
BIMSTEC
D R . S H E E TA L
GATT

• The General Agreement on Tariffs and Trade (GATT), begun in 1947, created a continuing
means for countries to negotiate the reduction and elimination of trade barriers and to agree
on simplified mechanisms for the conduct of international trade
WTO

• The World Trade Organization (WTO) replaced GATT in 1995 as a continuing means of trade
negotiations that aspires to foster the principle of trade without discrimination and to provide
a better means of mediating trade disputes and of enforcing agreements
REGIONAL ECONOMIC INTEGRATION

• Efforts at regional economic integration began to emerge after World War II as countries saw
benefits of cooperation and larger market sizes
• The major types of economic integration are:
– the free trade area
– the customs union
– the common market
THE EFFECTS OF INTEGRATION

• DYNAMIC vs. STATIC EFFECTS

• Once protection is eliminated among member countries, trade creation allows MNEs to
specialize and trade based on comparative advantage
• Trade diversion occurs when the supply of products shifts from countries that are not
members of an economic bloc to those that are
EUROPEAN UNION

• Regional, as opposed to global, economic integration occurs because of the

greater ease of promoting cooperation on a smaller scale
• The European Union (EU) is an effective common market that has abolished
most restrictions on factor mobility and is harmonizing national political,
economic, and social policies
• The EU is comprised of 27 countries, including 12 countries from mostly
Central and Eastern Europe that joined since 2004
• The EU has abolished trade barriers on:
– intrazonal trade
– instituted a common external tariff
– created a common currency, the euro
IMPLICATIONS OF THE EU FOR
CORPORATE STRATEGY

• Companies need to determine where to produce products.

• Companies need to determine what their entry strategy will be.
• Companies need to balance the commonness of the EU with national differences.
WHAT I AM GOING TO TALK ABOUT

• Why the UK voted for Brexit

• The Process
• Likely UK – EU relationship: hard or soft Brexit?
• Legal consequences
• Tax consequences
• Implication for India and Japan
WHY THE UK VOTED FOR BREXIT
• 23 June 2016 – Referendum: “Should the United Kingdom remain a member of the European
Union?”
• Result:
– Remain: 48.1% Leave
– Leave: 51.9% Remain

• A revolution
• Note – very little discussion before Referendum on what leave would actually mean
• Understanding the politics of why UK voted to leave helps to predict what the legal and tax
consequences will be
 THE PROCESS – SO FAR: 2016
• 24 June – Referendum result. Cameron resigned as
Prime Minister
• 13 July – Theresa May became Prime Minister: “Brexit
means Brexit”
• July – new ministries for Brexit and for International
trade set up
• November – legal case against Government’s attempt to
trigger Article 50 without Parliament’s approval
 THE PROCESS – SO FAR: 2017
• 17 January – first detailed speech from Mrs May
on Brexit
• 24 January – Supreme Court finds against the
Government: Parliament must vote on Article 50
• 1 February – House of Commons votes 498: 114
in favour of “European Union (Notification of
Withdrawal) Bill” allowing Government to
trigger Article 50
• 2 February – White Paper published
• March - Notification Bill passes through
Parliament
• March - triggering of Article 50 – notice to
withdraw
THE PROCESS – THE NEXT TWO YEARS
• Negotiations with EU of the Withdrawal Agreement to start the
“divorce”
• Summer 2017 – “Great Repeal Bill” to start passage through
Parliament
• By end of 2018 – Withdrawal Agreement in final form
• Early 2019 – Ratification of Withdrawal Agreement by member
states
• Early 2019 – vote on Withdrawal Agreement in UK Parliament:
Yes/No
• By March 2019 – Brexit (extended)
• October 2019- FINAL DECISION
WHY THE UK VOTED FOR BREXIT –
WHAT THE VOTE DID NOT MEAN
• NOT anti-free trade
• NOT anti-globalisation
• NOT isolationist
TALKING HARD BREXIT
SEEKING SOFT BREXIT
HARD, SOFT, ON HOLD OR NO DEAL:
BREXIT OUTCOMES EXPLAINED
• SOFT BREXIT:- To minimise the disruption to trade, to supply chains and to business

EU has demanded that access to the single market can only be granted if all its principles,
including the free movement of people, are respected.

• Staying within both the EU’s single market (like Norway) and its customs union (like Turkey)
HARD OR NO DEAL

• HARD BREXIT:- To escape burdensome EU regulations and tariffs, so as to be able to draw up

rules and customs arrangements of Britain’s own choosing
• Leaving both the single market and the customs union.
• NO DEAL

The Bank of England warned that a no deal Brexit could shrink the U.K. economy by 8% in a
year and lead domestic house prices to fall by a third. British and European stock markets
will certainly be punished, as will the U.K. currency.
THERESA MAY ‘ HARD EXIT

• To leave both custom union and single market

• To guarantee that there will be no hard border between Northern Ireland and the Irish
Republic, she has also accepted that there must be a “backstop” solution that keeps Britain in a
customs union and in close regulatory alignment with the EU for some years
REASONS

1. Migration
2. Contribution to UK budget
3. Failures of EU
4. Sovereignty issue
5. Dominance of Germany
6. Economic model
ARGUMENTS/ IMPLICATIONS

• IMAGE OF UK
• TRADE
• SECURITY---------------FOREIGN COMPANIES
• WEAKENING OF POUND
• TRADE AGREEMENTS
• THE BREAKUP of UK
• IRISH QUESTION (NORTHERN IRELANDP&UK TERRITORY& IRISH REPUBLICC& INDEPENDENT)

NO HARD BORDER IN SHORT TERM

 LIKELY UK – EU RELATIONSHIP POST-BREXIT

Context:
• UK imports from EU - €341 Billion
• UK exports to EU - €260 Billion
If there is no agreement, everyone suffers: UK is third biggest export
market for each of France, Germany and Holland. About 50% of UK
exports are to the EU.
 “WE ARE IN THE MIDST OF
AN AGE OF COMPETITIVE
D E VA L U A T I O N A N D B E G G A R -
T H Y- N E I G H B O R P O L I C Y.
W H E N E L E P H A N T S F I G H T,
THE GRASS SUFFERS.”-MR.
RAGHURAM RAJAN
IMPLICATIONS FOR INDIA & WORLD

• TRADE
• INDIAN COMPANIES IN UK
• TOURISM & IMMIGERATION
• INDIAN STUDENTS IN UK
WORLD
FINANCIAL AND POLITICAL UNCERTAINITY
 Share of
Company revenues Note
from EU
Almost half of these revenue
Tata motors 31%
come from UK
Almost 15% revenue from
TCS 11%
UK
Share prices dropped
Tata steel 52% by 6.37% (on 24th June
2016)
Share prices dropped
Infosys 23% by 1.41% (on 24th June
2016)
Share prices dropped
TechM 28.5%
by 4.7% (on 24th June 2016)
DETAIL OVERVIEW

• India is one of the top investors in the UK.

• There are about 800 Indian-owned companies in the country employing roughly 110,000 people. (Eg: Jaguar Land Rover is owned by
the Tata group)
• Many of these firms made investments with the wider European market in mind.
• Together, the UK and Europe account for over-a-quarter of the country’s IT exports, worth around $30bn.
• The UK is the third largest source of foreign direct investment in India and India’s largest G20 investor.
• India is the third largest source of FDI to the UK in terms of numbers of projects. India invests more in the UK than in the rest of
Europe combined, emerging as the UK’s third largest FDI investor.
• The key sectors attracting Indian investment include healthcare, agritech, food, and drink.
• In November 2015, Prime Minister Modi has said, ”As far as India is concerned, if there is an entry point for us to the EU, that is the
UK.”
• But, the UK is only India’s 12th largest trade partner, well behind other European countries such as Germany and Switzerland.
• Interestingly, the UK is also among just seven in 25 top countries with which India enjoys a trade surplus.
 LEGAL CONSEQUENCES –
“GREAT REPEAL BILL”
• Until Brexit, EU law still applies
• Great Repeal Bill likely to be passed Summer 2017 conditional on Brexit
• Two purposes:
– Repeal the European Communities Act 1972 – return sovereignty to UK Parliament and UK
Courts
– Preserve and convert EU law into UK law: in principle, no change
• More complicated than it sounds:
– Will need consent in some areas from the devolved authorities in Scotland, N.Ireland and Wales
– Many laws depend on EU bodies – what will happen?
– Many won’t make sense once UK has left
At the moment of Brexit, EU and UK law will be essentially the same, but will then inevitably diverge
 LEGAL CONSEQUENCES – IPR
• National IPR: (UK patents, UK registered designs, UK unregistered designs, UK trade
marks, copyright):
– will initially remain the same but is likely to diverge over time.
• Corresponding EU wide rights: (EU registered designs, EU trade marks):
– likely to be converted into equivalent UK national rights.
• Protected Geographical Indications (“AOC”) (foodstuffs):
– Likely that the UK will implement and equivalent with
mutual recognition with EU PGI system
TAX CONSEQUENCES – POSSIBLE CHANGES
Corporation Tax
• Political factors – Government wants to:
– Encourage business
– Attract investment
– Attract holding companies
– Combat tax avoidance and aggressive tax planning
• Trajectory is already down – from 20% to 17% by April 2020
• Mrs May: Brexit gives UK “the freedom to set the competitive tax rates and embrace the policies that would attract
the world’s best companies and biggest investors to Britain”
• Chancellor Hammond: wants UK to stay “in the mainstream of European economic and social thinking”…but “if we
are forced to be something different, then we will have to become something different” – Singapore of the North?
• Government will “continue to consider the balance between revenue and competitiveness with regard to bank
taxation, taking into account the implications of the UK leaving the EU” – tax cut for the banks?
 THE EUROPEAN PARLIAMENT: BAD COP
Negotiation
 A time limit of 3 years on any
After notification, the UK and
transitional deal which should be
the other states have a two-
limited in scope.
year window in which to
negotiate a new relationship.
 The European Court of Justice
(ECJ) will be responsible for
settling any legal challenges during
the transition period.

 No UK attempts to negotiate free

trade deals with other countries
while it is still an EU member state.

 “Full involvement” of the European

Parliament
DIVORCE IS A MESSY
BUSINESS
Terms of Departure
• Ending the UK’s contribution to the
EU budget and winding down
spending programmes in the UK.
• Division of assets and pension
liabilities.
• Acquired rights, healthcare and
other social obligations for
nationals living in other Member
States.
• Residence status of EU nationals
living in UK, and UK nationals
living in EU.
• Border arrangements – Northern
Ireland, Gibraltar.
• Extent to which UK can “cherry
pick”.
Trade Negotiations
• UK willingness to make a financial
contribution to the EU budget in
return for market access
concessions.
• Pas “No country can get a better
deal outside the EU than inside.”
• sporting and financial services.
• Terms of any Free Trade
Agreement and Customs
Agreement.
• Length of time it could take to
negotiate a deal – requires support
from remaining 27 Member States.
• Defence and security
commitments.
BREXIT - CONCLUSION

• UK will leave EU
• Brexit will be “Hard”
• Relationship with EU will take years to agree
• UK law will be the same on Brexit but…
• …will gradually diverge over time
CASE
WHAT JAPANESE COMPANIES SHOULD
STRATEGIZE IN CASE OF BREXIT
• HONDA- SUNDERLAND
• NISAAN- SWINDON
• TOYOTA
• SONY
• PANASONIC
BIMSTEC
THE BAY OF BENGAL INITIATIVE FOR MULTI -SECTORAL
TECHNICAL AND ECONOMIC COOPERATION

• Neighbourhood First Policy/ opportunities must be realised through SAARC or

outside it"
• BIMSTEC had emerged as an alternative regional platform where five SAARC (Bangladesh,
Bhutan, India, Nepal and Sri Lanka) countries could gather and discuss sub-regional
cooperation.
WHY NOT SAARC?

• India had long felt that the vast potential of SAARC was being under utilised and opportunities
were being lost due to either lack of response or because of obstructionist
approach from Pakistan.

– Trade agreement like SAFTA (SAARC Preferential Trading Arrangement) that came into force in 2006
and is currently not fully operational.
– SAARC Motor vehicle agreement also failed to reach its final conclusion, as Pakistan opted out of it
and India had to look for BBIN (Bhutan, Bangladesh, India and Nepal) agreement in 2015.
– Withdrawal of Pakistan from SAARC satellite compelled India to rename it as South Asia Satellite.
• Asymmetrical power balance: Intraregional trade is just 5%.
• Mistrust and suspicion among the members not only hinders bilateral growth and development
but also made SAARC as dysfunctional grouping.
STRATEGIC IMPORTANCE OF BIMSTEC

• Geographical relevance: The Bay of Bengal is the largest bay in the world.

– Over one-fifth (22%) of the world’s population live in the seven countries.
• Average annual rates of economic growth between 3.4% and 7.5% from 2012 to 2016.
– They have a combined GDP close to $2.7 trillion.
– The Bay of Bengal is the route for about 25% of global trade.
– One-fourth of the world’s traded goods cross the Bay every year.
– In the era of growing protectionism there is a need for India to diversify its export market.
• India's robust relation with BIMSTEC will ensure its access to huge untapped resources especially in
the energy sector in the form of massive reserve of natural gas in the Bay of Bengal region over
China and other major powers.
AREAS OF WORK
• Trade and Investment
• Technology
• Energy
• Transportation and Communication
• Tourism
• Fisheries
• Agriculture
• Cultural Cooperation
• Environment and Disaster Management
• Public Health
• People-to-People Contact
• Poverty Alleviation
• Counter Terrorism and Transnational Crime
• Climate Change
SAGAR

• The FICCI report points out that intra-regional trade among BIMSTEC countries was about
$40.5 billion in 2016 (about 6 per cent) with India having 50 per cent share ($21 billion).
FICCI reports endorse BIMSTEC as the most active trade-driven regional blocs of the
world in terms of huge export and import statistics.
• SAGAR (Security and Growth for All in the Region), articulated by India‘s Prime
Minister in 2015.
• SAGAR meaning that ― All boats (regional countries) rise with the rising tide
(together)
• Inconsistency in Meetings
• Broad Focus Areas
• Bilateral Issues between Member Nations
• No FTA
USMCA

• Harmonization of regulatory systems

• E-commerce
• Protection of intellectual property.
 USMCA – Sunset Clause

• USMCA was proposed September 30, 2018 and signed November 30, 2018
• USMCA still needs to be ratified by all three governments
• U.S. Congress will not consider the USMCA until 2019, when the Democratic
Party has control of the House of Representatives
• If the USMCA is signed into force, a joint review will be conducted every
6 years thereafter
• If, as a result of a review, all parties don’t wish to renew the agreement it will
expire 10 years after the review
• To prevent effective balance of payments adjustment or to gain an unfair
competitive advantage, each party agrees to be bound under the International
Monetary Fund (IMF) Articles of Agreement to avoid manipulating exchange
rates or the international monetary system

1/13/2020 41
 USMCA – Automobiles

• To receive duty free access under the proposed USMCA, the rule
of origin requirement for automobiles will be raised to 75%, up
from 62.5% under NAFTA
• 45% of an automobile must be produced in factories where
workers are paid at least $16/hour or it will not receive duty free
access to North American markets
• Increased transparency in import and export licensing
• Extends copyrights from 50 to 70 years
• Extends the period that a pharmaceutical drug can be protected
• Prohibits duties on music and e-books
• Exempts internet companies from certain liabilities for user
content

1/13/2020 42
 USMCA – Agriculture

• The USMCA will have a non-trivial effect on a small subset of agricultural

goods traded among the United States, Mexico, and Canada
• Annex 3-A of the proposed USMCA provides specific details regarding
agricultural trade between the United States and Mexico
• Annex 3-B provides specific details regarding agricultural trade between the
United States and Canada.
• Section C of Annex 3-B contains provisions for dairy pricing and exports
• Section D contains specific provisions related to grain
• Section E contains provisions related to Canada’s Duties Relief Program and
Import for Re-export Program
• Section E also includes a provision that will allow access for sugar that is the
product of Canada to any within-quota quantity of the refined sugar TRQ that
is not allocated among other supplying countries

1/13/2020 43
REGIONAL ECONOMIC INTEGRATION IN THE
AMERICAS

• Caribbean Community (CARICOM)

• The Southern Common Market (MERCOSUR)
• Central American Common Market (CACM)
• Central American Free Trade Agreement (CAFTA-DR)
• Andean Community (CAN)
• The proposed South American Community of Nations.
REGIONAL ECONOMIC INTEGRATION IN ASIA &
AFRICA

• Association of Southeast Asian Nations (ASEAN)

• Asia Pacific Economic Cooperation (APEC)
• The African Union
FORMS OF INTERNATIONAL COOPERATION

• The United Nations is comprised of representatives of most of the countries in the world and
international trade and development in a number of significant ways
COMMODITY AGREEMENTS

• Many developing countries rely on commodity exports to supply the hard currency they need
for economic development
• Instability in commodity prices has resulted in fluctuations in export earnings
• OPEC is an effective commodity agreement in terms of attempting to stabilize supply and price