May's Brexit speech - What could it mean for the Channel Islands?

Theresa May’s most eye-catching comments this week were that the UK would be leaving the European single market. Ordinarily that might have hurt the pound but a weekend of leaking and briefing was sufficient to mean that sterling moved higher as the Prime Minister spoke – a deft feat indeed.

We also learnt that she is planning for the UK to leave the European Customs Area. The customs area is an arrangement whereby there is a common tariff on goods coming from outside that area, unless alternative free trade arrangements are put in place. In a speech which the Prime Minister said focused on “the ends as much as the means”, there were uncertainties remaining on both topics, and this is a key point.

There was very little revealed in Prime Minister Theresa May’s statement on Tuesday 17th January about how the UK will trade with Europe between the departure from the EU and the agreement on new trading arrangements. Trade deals typically take a long time to agree. We know we are now on track for a “hard Brexit”, but we are not much wiser about how we will get there.

In a speech that was both conciliatory and confrontational, May seems to be relying on other British contributions to Europe aside from trade, namely British armed forces on the continent, intelligence services that feed into EU member states and the joint fight against terrorism to highlight the UK’s on-going contribution to the EU and shared values. All the while she remained light on detail on the economic aspects and the mechanics of departure, which for the Channel Islands could mean a protracted period of uncertainty.

 

Success or Failure: The Channel Islands’ perspective

Ultimately what will make or break the Brexit deal will be the willingness of business to invest in Britain. For all the better UK economic statistics which the government can trumpet, it is businesses which create most jobs, not government. So businesses need to be assured it is in their interests to invest in Britain and, by extension, that includes the Channel Islands.

The ‘special relationship’ the Channel Islands have enjoyed with Europe since the UK’s accession to the EU in1972 will have to be redefined post-Brexit and the islands’ governments will be keen to know at the earliest opportunity what support we can expect from Mrs May’s negotiating team.

While there were encouraging words about the government’s commitment to free trade, Channel Island businesses will be looking for clarity and certainty, in particular the financial services, agriculture and fishing sectors. Equally these industries, along with the resurgent tourism sector, are dependent on migrant labour because there is a limited domestic supply pool to satisfy demand for either specialist knowledge or seasonal peaks.

The experience of the last decade and different recovery trajectories of economies has revealed that flexible labour markets are what encourage companies to invest. Conversely, tougher employment legislation and the threat of tariffs on trade are fairly significant potential barriers to investment and so these elements will not be music to businesses’ ears.

The factor which might be encouraging to business is the prospect of a European corporation tax war. It is a lure for countries to offer competitive tax rates to attract companies to invest and create more jobs - and that may be necessary if negotiations become sticky. However, if Britain decides it will become a low tax jurisdiction what impact might that have on the competitiveness and USP of the Channel Islands and other Crown Dependencies? Our current tax structure is based on the EU-enforced ‘zero/ten’ policy but will that, indeed should that, remain policy in the wake of a Europe-wide corporate taxation Armageddon sparked by Britain?

One other cause for concern that perhaps wasn’t addressed by Theresa May directly was the potential relocation of financial services’ institutions from the City of London to Europe. The Channel Islands’ status as well-regulated and highly sophisticated offshore finance centres, but with close links to the City, is a significant tool in the box when it comes to attracting new business.  Over the coming months (and likely years) of negotiation, some early comfort for the City would not go amiss from a Channel Islands perspective.

 

The great sticking point?

Ultimately, Britain wants to create a free trade deal with the EU, and generally speaking trade deals can be concluded if they provide mutual benefits. What matters from a local viewpoint is that we are able to feed into, and benefit from, the deals that are achieved. But the UK’s plan to stop paying into the EU budget yet still conclude a free trade agreement which provides much of the benefit of membership may be a stretch. 

European partners will be aware that maintaining a single market is something which they had agreed to do together with Britain and with everybody making a financial contribution. Allowing the UK something which looks a lot like free access may be viewed with extreme caution by some EU countries, because if more members want to have a similar deal (i.e. free access to the single market), then the costs will continue to rise for those remaining states until such time as the arrangement becomes uneconomical. 

We should not be surprised if we hear sceptical noises from Europe in response but, perhaps, the one thing we should not lose sight of is that the Channel Islands are well-regulated highly reputed jurisdictions which, free from the hawkish eyes of an increasingly challenging European legislature, are in a strong position to benefit from a new ‘Euro-conomic’ landscape. 

 

By Mark Miles, Divisional Director at Brewin Dolphin. 01534 703000. www.brewin.je