Brexit Divisions

The challenges of negotiating a post-Brexit FTA with the EU

While an UK-EU free trade agreement (FTA) may seem the best way forward, the scope of a comprehensive agreement along with the time and capacity needed to conclude it makes that a difficult sell. 

Magdalena Frennhoff Larsén
15 December 2016
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USDA/Flickr. (CC 2.0 by)

Article 50 of the Lisbon Treaty, which sets out the mechanisms for how to withdraw from the EU, has generated much debate ever since the UK voted to leave the Union on 23 June. Can it be triggered without Parliamentary approval? Is it reversible once triggered? What happens if an exit agreement is not reached within the two-year time limit?

One section of the article, which has caused a particularly heated debate, is the reference to the ‘framework for [the UK’s] future relationship with the Union’ – a framework that has to be taken into account when negotiating the exit agreement, but which will be negotiated separately. Even if the prime minister recently agreed to give some indication of the government’s Brexit plan prior to triggering article 50, the government has so far chosen not to disclose any information about how it envisages this future relationship between the UK and the EU. As a result, plenty of speculation has taken place about potential options or models, with a particular focus on trade – the area most affected by the UK leaving the EU.

A quick look at the EU-Canada negotiations, however, confirms that the FTA option is not without its challenges.

One option would be for the UK to pursue the so-called Norway model, which provides access to the single market, with its free movement of goods, capital, services and people. Yet, given the EU’s repeated emphasis on the indivisibility of these four freedoms – i.e. no free movement of goods without free movement of labour – this option would be difficult to reconcile with the referendum result, which arguably reflected a vote for greater control over immigration.

Another option would be to follow the Turkey model and remain in the customs union. This would allow for free trade between the two parties while the UK would still be able to control EU immigration. However, this option would limit the UK’s ability to strike its own bilateral trade deals with third parties, something to which the government is highly committed, as the creation of the new Department for International Trade proves. A third option would be to rely solely on WTO provisions, which would offer no preferential access to the EU market, making British exports subject to the EU’s common external tariffs.

Against these alternatives, the option of negotiating an UK-EU FTA seems to be gaining ground, as it would allow the UK to restrict freedom of movement while still being able to forge a close trading relationship with the EU and strike its own trade deals with other countries. The recently signed Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada has been highlighted as a possible model. A quick look at the EU-Canada negotiations, however, confirms that the FTA option is not without its challenges.

Time

First, concluding an FTA with the EU takes time, much longer than the options mentioned above. It is still unclear whether an FTA could be negotiated in parallel with the exit agreement, and thus start after the triggering of Article 50. Brexit Minister David Davis and International Trade Minister Liam Fox argue that this is possible, but Michel Barnier, the European Commission’s chief Brexit negotiator, recently echoed EU Trade Commissioner Cecilia Malmström’s claim that the exit and FTA negotiations must be sequential. Only when the UK has left the EU would it be able to negotiate an FTA with the EU. However, even if the FTA negotiations did start in parallel with the Brexit negotiations, it is unlikely they would be concluded within the two-year time frame set out by article 50. In either case, then, a transition agreement may need to be set up as an interim measure.

All told, CETA will have taken over 10 years to create.

The CETA negotiations are instructive in this context. They officially started in 2009 but were only signed seven years later. And these seven years do not include the upcoming ratification process. In addition to receiving the European Parliament’s consent, CETA, as a mixed agreement, must be ratified by each EU Member State.

Neither do they include the two-year pre-negotiation phase where the Canadian government and the European Commission collaborated to examine and assess the costs and benefits of an economic partnership. This work helped to identify common ground, and resulted in a joint study that provided the basis for the negotiation directives. After being debated and adopted by the member states, these directives set the parameters for the Commission in the negotiations with Canada. As a result, the full process will exceed ten years. Of course the UK could aim for a shorter process, but that might prove difficult without compromising on the scope of the agreement.

Scope

Second, in terms of scope, both the EU and the UK would have an interest in negotiating an extensive and ambitious FTA. Through CETA almost 99% of all tariffs will eventually be scrapped and it is the most far-reaching agreement that the EU has concluded with a third party to date. However, it includes a number of market access restrictions, particularly in agriculture, and in terms of services – an area of key concern for the UK – there is only limited liberalisation.

The EU will be wary of agreeing to particular demands by the UK that it would be unable to offer to future negotiating partners.

The UK could of course push for an even more far-reaching FTA. But every FTA concluded by the EU is embedded in a process whereby previous FTAs are often used as templates, and as a result every new FTA is likely to create precedents for future negotiations. Member states, the European Commission, and the European Parliament have all been able to reverse undesired proposals by referring to previous FTAs and the need to ensure consistency and external coherence. And although a particular offer or concession might not be of great concern when negotiating with one country, the same offer or concession might have a much greater impact if adopted vis-à-vis another country. This would inevitably make the EU wary of agreeing to particular demands by the UK that it would be unable to offer to future negotiating partners.

Nevertheless, the UK would be expected to push for greater liberalisation in services. It will likely find support for this, not least in the Commission, which is often acting as a pro-liberalisation ally of the UK in the Council. But even if the EU as a whole is keen to establish a close trading relationship with the UK, cities like Frankfurt and Paris could seek to exploit Brexit and pressure the EU to resist British demands to include banking and other financial services.

In addition, some member states would be expected to have strong political motivations in an FTA deal with the UK, and the relative autonomy given to the Commission in many other trade negotiations would be significantly reduced. The challenge of reaching internal agreement between all the member states and the European Parliament could thus be even bigger than what we witnessed in the case of CETA, which exposed great uncertainties until the very end with the delayed adoption by the Parliament of Wallonia.

Negotiating capacity

Third, unlike the Norway, Turkey and WTO options, which would pose less of a negotiating challenge for the UK, concluding an FTA requires significant negotiating capacity in order to engage with the powerful machinery of DG Trade of the Commission. Given the wide sectorial scope of CETA, hundreds of skilled negotiators were involved in the negotiations on both sides. Although the UK has the advantage in comparison with other third parties facing the EU by knowing the nature, interests, and strategies of its negotiating opponent after more than 40 years of EU membership, it still lacks the administrative resources in terms of negotiating personnel.

Trade policy has always been a competence of the EU, and the European Commission is responsible for negotiating trade agreements on behalf of the EU. As a result, the role of the UK and the other member states has been limited to monitoring and advising the Commission during the course of trade negotiations, as well as ratifying the final agreements. Given this limited role, it is logical that the UK’s domestic resources have been allocated away from trade policy in times of budget cuts and austerity.

Following the referendum, the lack of professional trade negotiators in the British civil service became apparent, and consequently a strong recruitment push will be required by Whitehall, not only to be able to negotiate this FTA with the EU, but also to engage in renegotiations with the 50+ countries with which the EU has concluded trade agreements, and to which the UK is likely to lose preferential access upon Brexit. In addition, it will have to negotiate the terms of its new, non-EU bound membership of the WTO, as well as all the new deals that the UK will be free to strike once it has left the EU. Identifying, recruiting, and retaining such large numbers of negotiators is a challenge that should not be underestimated.

It is clear that the FTA option would require time, resources and political will, and it needs to be weighed carefully against the other options. The decision about the future relationship between the UK and the EU is of huge significance, and needs to be debated properly both within government and parliament, ideally before the triggering of Article 50.

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