British Prime Minister Theresa May has triggered the formal process for leaving the EU, paving the way for two years of negotiations, with the country expected to be out of the bloc by the end of March 2019.
From Malta’s perspective, despite the global crises, the past 10 years have been a period of sustained fast economic growth. To what extent will Brexit be a threat to continuity?
If the final agreement were to treat the UK as just another third-party country, World Trade Organisation (WTO) rules would apply by default, implying heavy tariffs for traditional industries, including agro-industrial products, which could hit some countries hard. In addition, trade disruption would have redistributive effects along the lines of traditional trade models. So if no trade agreement is in place by 2019, or the final agreement treats the UK as a third-party country, will the application of WTO tariffs be harmful to Malta-UK trade?
The EU has a large trade surplus with the UK (approximately £70 billion in 2015), but the share of UK’s total economic output destined for Europe is far greater than the other way round. This suggests the UK would face far greater disruption than the EU from the introduction of barriers to EU-UK trade.
At a country level, however, the UK has a trade surplus with Malta and several other small EU member states. Despite being net importers of UK goods, these markets are almost insignificant for the UK.
The UK, however, is an important merchandise export market for Malta and a number of other small EU countries. Malta is exposed to any barrier to exporting to the UK, with goods worth 9.1 per cent of its GDP destined for the UK. Other countries particularly exposed to the UK for exporting goods are Ireland (14.1 per cent of GDP), Luxembourg (10.1 per cent), Netherlands (7.6 per cent), Belgium (7.3 per cent) and Slovakia (5.2 per cent).
Despite large trade surpluses, the largest EU economies are much less reliant on the UK as a market than smaller economies: Germany exports goods worth 3.5 per cent of its GDP (€89 billion) to the UK, France 2.1 per cent (€32 billion), Italy 1.6 per cent (€22 billion) and Spain 2.4 per cent (€19 billion). Together, these countries buy goods worth around six per cent of UK GDP.
How countries would be impacted by the introduction of WTO tariffs and, therefore, how eager they will be to reach a more generous agreement, will depend on the significance of the UK economy as an export market to their economies, the rate of tariffs that could come into effect (determined by their export product mix) and the response to any tariff-induced increase in costs by UK customers (their sensitivity to price rises).
Malta largely exports medicines, vehicles and parts, and electrical and electronic equipment to the UK, while imports principally comprise boats, vehicles, medicines and industrial supplies. Assuming that WTO tariffs are levied as from 2019, the variation in the composition of merchandise trade (and associated tariff rates) across countries translates into different shares of tariff revenues owed to the UK and due from the UK.
Malta would probably face some degree of tariff exposure on the UK’s imports from the EU – Malta makes up 0.05 per cent of the UK’s imports from the EU but would be charged close to 0.31 per cent of the total EU tariff. Germany, on the other hand, would be liable for just under 18 per cent of the tariff owed to the UK, despite accounting for over 28 per cent of the trade flows.
Data on aggregate trade in services is less reliable, but OECD data indicates that the UK runs a trade surplus in services, offsetting in part the deficit on trade in goods. Malta’s exports of services to the UK (which includes tourism) are significant, but Malta suffers a material trade deficit on services with the UK.
In relative terms, Malta’s exports of services to the UK are equivalent to 6.4 per cent of GDP, while imports of services from the UK, although significant in absolute terms, are just 0.1 per cent of UK GDP. It is clearly in Malta’s interest to protect and grow its exports of services to the UK.
Malta, together with Ireland, Cyprus and Luxembourg, may have a lot to lose from a deterioration of relationships between the UK and the EU. The potential impact of a ‘hard’ Brexit on exports of goods and services could be high, apart from the separate consideration of the significant number of Maltese living in the UK, and the important community of British citizens living and working in Malta. It is surely in Malta’s interest to work within the EU to avert the potential negative consequences of Brexit.
Malta’s long-term interest should surely be to prevent any additional negative shocks. In this regard, preventing the total dismantling of the EU should surely take precedence. This context mandates that the process should not be combative, and the final package agreed with the UK should not act as an incentive for further exits. Indeed, the final package should not be as advantageous as membership, even if this comes at the cost of some short-term pain for Malta and other EU member states.
Mark Bamber works in advisory services at KPMG Malta.