Will UK Become a ‘Singapore-on-the-Thames’ Rival to Europe?

“It could lower its tax rates, standards and become a kind of direct challenge to the EU,” said Johan Bjerkem, a trade expert with the European Policy Centre, a Brussels-based think tank, in a telephone interview with Courthouse News. “There is a possibility for it to happen. It depends on how [the U.K.] leaves.”

He said Europe has to prepare for the possibility that the U.K. will not sign onto EU rules, especially in the wake of Johnson's major electoral win.

“He is strengthened; he is in a more powerful position to dictate what we wants to do,” Bjerkam said. “He is more his own man.”

For now, many academics and experts are skeptical of the vision promoted by Johnson and his allies that portrays a post-Brexit U.K. as “unleashed,” as Johnson liked to say during the election campaign.

“This is one of the main illusions behind Brexit for the right-wingers,” said Anastasia Nesvetailova, an international political economist at City University of London, in a telephone interview.

She said that once the U.K. is outside of the EU it will find itself forced to comply with EU rules and regulations to maintain the robust trade it does with Europe.

“The rules will be set by the EU, China and the U.S., and everyone else will have to follow,” she said. “Britain absolutely has no way of escaping it.”

She said the Singapore-on-the-Thames comparison is “an illiterate analogy” because Singapore's system of government and economy are so different from the U.K.'s.

For example, Singapore, a tiny country in Asia, is run by an authoritarian and illiberal government where much of the real estate is owned by the state and the economy depends on manufacturing and state intervention. As for low taxes and weak regulation, that might work for tiny Singapore, but applying the same model to the U.K. with its 67 million people and its expensive public health system doesn't work, skeptics say.

“It sounds fantastic,” Nesvetailova said. “As an economic concept it is nonsense. ... It's all very fake promises.”

In many areas — importantly in financial services, where the U.K. is a world leader — Britain will have to follow EU rules, she said.

Moreover, once the U.K. is out of the EU, European regulators could pressure Britain and its island territories, such as the Cayman and British Virgin islands, to adopt its rules or face being blacklisted as tax havens. As an EU member, the U.K. is protected from such a threat.

The U.K. may enjoy more leeway in setting its own standards in the manufacturing sector, but even here it will be constrained by the need to comply with EU rules, she said.

Michael Vincent, a financial regulation expert with the Jean-Jaurès Foundation, a think tank affiliated with France's Socialist Party, said Johnson and other right-wing Tories will be tempted to follow the Singapore model.

“It is well known that a certain group of political leaders are considering turning London into a tax haven/deregulation of sorts after leaving the union,” he said in an email.

He said Tories who favor looser financial regulation may find it easier to achieve outside the EU. The financial sector is pushing the case for banking deregulation in the United States and may seek to do the same in the U.K.

“In leaving the European jurisdiction and common safety nets, Brexit is for them an opportunity to reshape the financial regulatory agenda,” he said.

Regardless of how feasible it will be for the U.K. to pursue such an agenda, Vincent said he expects Johnson to use the threat of an unrestrained U.K. as a bargaining chip in negotiations.

“So I would at least expect this possibility to be, if not realistic, mentioned a lot in 2020,” he said.

Companies in Europe are required to follow strict rules on sustainability, safety and recycling, among other areas. Imported goods must meet minimum standards set by the EU. For example, U.S. corporations can sell their goods on the EU market but must do so following World Trade Organization rules. When a U.S. company wants to sell its products in the EU, it must comply with EU standards on sustainability, safety and the environment. The EU also sets tariffs on many goods coming from outside the union. There are no tariffs between EU members.

In trade negotiations between the EU and the U.K., the big question will be over whether the U.K. will accept EU rules and regulations in return for gaining free access to the EU's single market, the largest in the world.

European officials have insisted since the December election that any trade agreement with the U.K. will be based on a “level-playing field.” In other words, the U.K. must adopt EU rules and regulations, EU officials insist. Norway does this: It is not an EU member, and has no vote on EU affairs, but it adheres to the bloc's rules and regulations and in turn has access to the EU market.

The U.K. could opt for such a relationship, or it could enter into a loose free-trade agreement whereby it agrees to certain rules and not others, such as complying with EU rules on goods and services. Canada signed such a deal with the EU in 2016. Or the U.K. could leave the EU without a trade deal and face a raft of tariffs and trade barriers in the EU but be free, in theory, to set its own agenda.

While negotiating with the EU, Johnson's government also is working on a wide-ranging trade deal with the United States, and his Tories may be eager to adopt less-stringent U.S. rules in many areas, such as on food products and digital privacy, to accomplish such a deal.

Nesvetailova said it was more likely that the U.K. will agree to a trade deal with the EU before it signs one with the U.S. The U.K.'s trade with the EU is much greater than it is with the United States, accounting in 2018 for roughly half of the U.K.'s foreign trade, compared to 15% with the United States.

“Europe will be first and probably easier,” she said, “simply because the Americans will be asking for a lot of concessions.”

Bjerkam said the Tories will face opposition to attempts to lower standards, such as on workers’ rights and the environment. That opposition will come from within the U.K. and from the EU, he said.

“It will be pretty tough negotiations for the U.K. because the EU is arguably in a stronger position,” he said.

Niclas Frederic Poitiers, a research fellow at Bruegel, a Brussels-based economic think tank, said the U.K. is unlikely to adopt lower regulations. Regardless of the political posturing by Johnson and other pro-Brexit Tories, he doubted “the political debate is going into that direction.”

He also doubted that Britain will pose much of a threat to the EU when it comes to the British government investing in British companies to make them more competitive. Under EU rules, member states are forbidden from providing state aid that gives companies an advantage over competitors.

Poitiers said Britain would be restrained by World Trade Organization rules that also limit the amount of state aid countries can spend. More significantly, he said Brexit itself will cause so much damage to the U.K. economy that there will be little the government can do to compensate for that.

“I think that even very generous state aid will not make up for the negative shock of Brexit to the competitiveness of U.K. industry,” he said in an email.

He added that the EU will not be willing to sign a trade agreement with the U.K. that undermines the EU's strong regulations, which are supported by a majority of Europeans. He also doubted that the U.K. could take advantage through lower taxes.

“With regard to taxes, the EU already has a number of corporate and capital tax havens among its ranks (Ireland, Luxembourg, and the Netherlands),” he said. “Therefore I don’t think that there is the risk for more tax avoidance than is already happening.

“After the whole Brexit drama, I also don’t see a lot of goodwill on the EU side,” he said. “Since the EU is its biggest market, the U.K. will have to subscribe to a lot of EU regulation in order to export.”

There are, of course, others who see it differently.

Pieter Cleppe, head of the Brussels branch of the think tank Open Europe, said there are opportunities for the U.K. to seize after Brexit.

He said in an email that Britain may be able to reduce its taxes because it will no longer be bound by the EU's value-added tax rules, and may “be able to deregulate and increase state aid, even if that's likely to lead to reduced market access” in the EU.

“The U.K. may also negotiate to be able to increase state aid, even if this would not benefit its own economy, given how it would distort fair competition,” he said.

He expects the U.K. to align closely to EU rules in the short term but eventually will seek to move farther away from the EU's strict regulatory regime.

“Due to the EU's zeal for regulation, however, the U.K. will request to be able to diverge more in the future, as it will prefer losing market access to having to implement the EU's ever more burdensome regulations,” he said.

He said Brexit gives the U.K. “the opportunity to change its regulations” in certain areas, which may allow Britain “to exploit market opportunities.” He said one example may be the burgeoning field of gene editing.

“Prominent European researchers have warned that an ECJ ruling on gene-editing ‘will end innovation,’” he said, referring to the European Court of Justice. “Here, the U.K. could, for example, make regulation more innovation-friendly, so to attract researchers.”

Also, he said, the U.K. may not adopt EU regulations to protect digital data, which he called burdensome and unpredictable. In turn, he said, this could prompt European companies to push the EU to drop the rule, “in case the U.K. offers digital service providers a more comfortable regulatory environment.”

He believes that over time European companies will face more regulatory restrictions before they can trade with the U.K. and that this will lead to “more regulatory competition.”

“European companies may urge the EU to abandon burdensome regulations,” he said.

He said some EU countries may be tempted to follow the U.K.'s example and exit the EU. He cited Denmark and Sweden as potential candidates.

These are examples of why some experts believe the U.K. may become a kind of Trojan horse when it leaves the EU, by undermining the European bloc's single market and regulatory regime.

But Bjerkam dismissed this risk, saying the U.K. won't be able to exert much influence on the EU once it is out of bloc.

“When you are outside, you are much more isolated than you originally think,” he said. “You are either in the [EU's single] market or you are not.”

Vincent doubted that Tory leaders will pursue their low-tax and low-regulation dreams because a large portion of Brits are opposed to reduced standards. He said such policies might spark popular backlash, including from residents in Scotland and Northern Ireland, who oppose Brexit and are backing independence drives.

“Lowering standards and taxes sounds unlikely in the current political landscape,” he said. “Unless something drastic happens, the trend of our time is toward more tariffs (trade war), more standards and taxes to finance/enable the Green Deal/Green Transition,” he said.

Still, he said it was far from clear what direction the U.K. will take.

“I would argue that in the past five years, a lot of voters and politicians have preferred intuition, gut feeling behavior rather than rational thinking,” he said. “So don't necessarily expect the most logical thing to happen.”

(Courthouse News reporter Cain Burdeau is based in the European Union.)

Follow @cainburdeau

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