Britain’s Not-So-Sweet Options for EU Trade Deal: QuickTake Q&A

“Our policy is having our cake and eating it,” British Foreign Secretary Boris Johnson declared in 2016. By that he meant the U.K. could strike a Brexit deal that freed it from the rules and responsibilities of European Union membership, but maintained free and frictionless trade with its biggest trading partner. Such ambition was always fanciful. It became more so when Prime Minister Theresa May’s hand was weakened by the results of a parliamentary election. The future trade relationship between the U.K. and EU still could take many different forms. Each one has pros and cons.

1. Which option would be best for U.K. exporters?

A U.K. deal that lets it enjoy similar terms to the EU’s customs union would spare U.K. exporters from paying duties on goods that would otherwise average 5 percent and up to double that for automobiles. There would theoretically be fewer checks at borders, and the issue of what to do with the dividing line between Northern Ireland and the Republic of Ireland would be solved. Britain would then be free to negotiate new trade accords on services with other countries, but not on goods.

2. Can the U.K. be in the customs union but not the EU?

Turkey, San Marino and Andorra are. They have customs agreements for most matters aside from agriculture and must abide by the trade deals the EU strikes with other countries. They don’t, however, have to accept the EU’s freedom of labor movement, which would be a major plus for hard-core Brexit supporters. But this arrangement would mean the EU’s remaining members “would set the common tariffs and Britain would have no say in how they were set,” Barry Gardiner, trade spokesman for the U.K. Labour Party, wrote in opposition to remaining in the customs union.

3. Could the U.K. keep the right to make its own trade deals?

In what would be perhaps the softest implementation of Brexit, Britain could join Norway, Liechtenstein and Iceland as non-EU members of the European Economic Area. Because the U.K. wouldn’t be in the customs union, it could strike commercial deals with other countries, though with exports subjected to customs inspections and compliance tests. This so-called Norway model would mean continued duty-free trade (of services, as well as goods) within the single market. Banks would be happy, since they could still service EU markets from London by using the financial passport they stand to lose.

4. Who would object to the Norway model?

The most dedicated backers of Brexit. Under this model, the U.K. would have no say on changes to market rules, which can be enforced by European judges. And Britain would have to accept free movement of labor, though there are some small ways to impose temporary restrictions on immigration. Then there’s the literal price tag: Norway pays almost as much into the EU budget in per-capita terms as members do.

5. What other models are there?

The Centre for European Reform said a deal resembling Switzerland’s is “Britain’s best hope,” since it “represents the limit of market access that the EU has been willing to accept without the full supremacy of EU law.” Switzerland is a member of the European Free Trade Association, which, thanks to about 120 bilateral accords, is a player in the single market for most goods. To the chagrin of some of its citizens, Switzerland, like Norway, has to accept free movement of labor, EU market regulations and annual payments to the bloc’s budget. (When the Swiss voted to restrict migration in a 2014 plebiscite, the EU was not happy, and the measure had to be implemented in a manner that sidestepped quotas.) But the Swiss model doesn’t include the unfettered EU access for the finance sector that’s so important to the U.K. And the EU might be reluctant to negotiate an even more complex version of Switzerland’s arrangement.

6. What happened to U.K. hopes for a ‘bespoke’ deal of its own?

The idea is still out there, but it’s up against the clock. Britain will leave the EU at the end of March 2019 regardless of whether it has an agreement. May has argued that a tariff-free, regulation-light EU-U.K. pact should be easy to strike, since it’s in the best interest of both parties. But Canada’s deal with the EU, the most comprehensive one out there, took seven years to negotiate, is still to be fully wrapped up, doesn’t fully exempt services from trade barriers and, because of geography, didn’t have to account for freedom of labor movement. The U.K. could seek a “Canada Plus” model that covers services such as finance.

7. Is the EU open to a special deal like May wants?

Maybe not. “You cannot leave the single market and then opt-in to those sectors you like most,’’ EU chief negotiator Michel Barnier said in June. Frictionless trade is “not possible” for a third-party country, and trade will “never be as fluid” as when the U.K. was a member, he added. While commerce may be duty-free it could still be snarled up by bureaucracy. Monique Ebell at the National Institute of Economic and Social Research reckons a free-trade deal with the EU would still cut trade by about 20 percent, an amount unlikely to be offset with accords elsewhere.

8. What’s the outlook?

Even if May lands a deal to her liking it will take time to negotiate and might still require paying money to the EU or accepting some of the bloc’s rules. May initially argued a trade pact could be struck by March 2019, but her team now says a transition of potentially as long as three years will be needed.

9. What if there is no deal?

A “very, very bad outcome,” in the words of Chancellor of the Exchequer Philip Hammond. The U.K. would regain control of laws, money, immigration and ability to negotiate trade pacts. If pushed it could even slash taxes and regulations to create a Singapore-style economy focused on drawing investment. (Embracing fully free trade could increase the U.K.’s long-term gross domestic product by 4 percent, according to Patrick Minford of Cardiff Business School.) But U.K. exporters would be subject to World Trade Organization duties and multiple non-tariff barriers. A hard border with Ireland would be needed, Britain-based airlines might not be able to land on the continent and the transportation of nuclear material would be impeded. The Center for Economic Performance estimated trade would fall 40 percent over a decade and average income by 2.6 percent in the no-deal scenario.

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