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The UK – EU future trade relationship: a new model agreement?
The UK wants to get the best possible access for goods and services to the European market. At the same time it wants greater regulatory space in shaping its own trade policy. Yet, there is a problem, because the more access to the European single market, the more the UK has to align its legislation to EU law, which results in much less policy space to shape its own trade policy and regulations. How to find the right balance between maintaining flexibility in UK policy space and reducing it through a deep integration model with the EU is likely to be the UK’s most challenging aspect in shaping its negotiating position.
“If to do were as easy as to know what were good to do, chapels had been churches and poor men’s cottages princes’ palaces”
—W. Shakespeare, the Merchant of Venice
The question, then, is which trade model provides the best possible balance between these two competing aspects? In this article I suggest that most of the current EU trade models are either politically unviable or likely to cause serious trade disruptions with the EU and third countries. The discussion regarding the future trade model should not be limited to the so-called ‘hard’ and ‘soft’ Brexit. Nor should the UK-EU trade model be the result of copying and pasting current EU FTAs. Given that trade agreements are the result of historical, geo-political, legal and economic factors, the future UK-EU trade model should instead take into account the current level of liberalisation, convergence of legislation and geography. This is why I believe that it is likely to have elements of a free trade area, customs union and the single market. I also suggest that, although tension exists between deep integration and reduction of policy space, any weakening of the UK regulatory space must be weighed against the gains from more access into the EU market.
EU a la carte?
What type of EU agreement should be the reference point for the future UK-EU relationship? There is considerable uncertainty over what kind of agreement is desirable or even possible. The European Economic Area (EEA) is not a politically viable option because it would require the UK to accept to the ‘four freedoms’ (including freedom of movement), make substantial contributions to the EU budget, and accept the supremacy of the EU law and the rulings of the European Court of Justice.
The second possibility, a comprehensive customs union with the EU, is not an optimal solution in the long term because the UK would be required to align itself with the EU’s common commercial policy (CCP), including the EU’s external tariff, customs legislation and trade defence instruments. In addition, the UK would not be able to participate in the EU’s decision-making process in trade matters. This means that the UK would have to accept the supremacy of EU law and the almost monopoly of the EU Commission in shaping trade policy. As a result, the UK would not have a say on the future shape of the CCP and have little flexibility in the negotiation of trade agreements with third countries.
Finally, a simple free trade agreement (FTA) similar to CETA would probably be the easiest negotiation (almost a copy-and-paste exercise), but would certainly not serve the UK’s interests in maintaining the best access possible for UK goods and services to the EU. In fact it would be a profound regression of economic integration with the EU which could lead to trade disruption requiring UK companies to modify supply chains with potentially higher prices of goods on the UK domestic market.
How simple or complex the negotiation is likely to be will depend to a large extent on the reasonableness of the UK’s WTO proposal and its diplomatic skills.
With this in mind, I believe that the only available and achievable trade model with which the UK could maintain the best possible access to the single market and at the same time achieve its role as a global leader in world trade is a bespoke, ambitious, deep integration trade agreement. I believe such a future UK-EU trade model could incorporate elements of the EU Association Agreements and the EU’s most recent FTAs. In my view, the UK and the EU could establish a free trade area with the objective to liberalise (through a zero import tariff) cross-border trade in agricultural products, fisheries, and industrial goods. This trade model (or any other single market model), however, means that UK exporters would have to comply with the administrative burden of rules of origin.
The scope of liberalisation under the proposed model would vary depending on the sector and discipline. For trade in goods, the UK could, for example, seek a sector-specific customs union where both sides would maintain the same tariff towards third countries in order to get full access to the UK market. This means that the UK would agree to replicate the EU most-favoured nation tariff schedule it maintains on certain sensitive goods.
A sector-specific trade regime would secure the best possible access to the EU market and at the same time give the UK considerable freedom of manoeuvre in the negotiation of FTAs with third countries. This, however, would come at a cost. The UK would have to align itself with parts of the customs regime and technical regulations of the EU. On balance, however, the benefits of deep economic integration with the EU market would likely outweigh the costs.
For trade in services, I expect an almost perfect liberalisation (deeper than current EU FTAs and GATS) given the complete regulatory convergence, mutual recognition, regulatory transparency and cooperation of both sides. I use the word ‘almost’ because under EU trade practice, liberalisation of services goes hand-in-hand with harmonisation of legislation, free circulation of capital and persons. This means that the UK would have to accept the obligation of complying with EU legislation and free movement of skilled workers, and independent professionals (mode 4 of the GATS).
The UK will probably have less than 14 months to negotiate its future trade relationship with the EU. Given the complexity and scope of the negotiations this is likely to be insufficient time to conclude a comprehensive trade agreement. A transitional arrangement will thus be necessary to avoid trade disruptions, and this would be different for goods and services.
For trade in goods, a comprehensive customs union with the EU should be put in place for three years to allow:
- a complete review of the UK’s industrial, agricultural and fisheries policies and regulations;
- the private sector to adjust supply chains, accountancy and financial operations, and customs authorities to prepare for the administrative burden of having to handle a mountain of customs declarations and certificates of origin;
- set up the UK’s international trade defence authority and, potentially, initiate trade defence investigations;
- the UK to conclude interim trade agreements with EU trade partners;
- the UK to conclude negotiations regarding its WTO agricultural commitments with WTO members.
For services, the UK should be allowed to continue participating in the EU’s single market for services under the same conditions as the EU Member States. Finally, EU workers should retain the right to live and work in the UK post-Brexit.
Trade agreements with third countries
Once the UK exits the EU, the existing EU FTAs will no longer be applicable to the UK. In addition, the territorial scope of the EU FTAs means that the UK territory will be excluded once Britain leaves the EU. Whether or not the FTAs are classified as mixed agreements is of little relevance. The core disciplines covered in the EU FTAs (and likely to be the cause of trade disruption) are those considered to be of exclusive competence of the EU, including the CCP. The scope of the CCP is the cause of much controversy, but there is no doubt that the essential elements of the EU FTAs – trade in goods and services, the commercial aspects of intellectual property, foreign direct investment and trade defences – are all areas covered by the CCP.
It is also worth noting that a UK unilateral declaration or even an agreement between the EU, the UK and the third country to allow the UK to continue exercising its rights and obligations under the EU FTAs would not resolve the problem of trade disruption. Certain protocols would need to be put in place to cover the practicalities of dealing, for example, with tariff quotas or any alleged breach of the treaty.
From a practical perspective, the UK would need to negotiate new FTAs. Given the limited human capabilities to negotiate a considerable number of trade agreements with third countries in a short period of time, the UK could negotiate interim agreements (on very similar terms as the EU FTAs) with a number of like-minded EU trade partners during the two-year period. This will be crucial for minimising disruption and ensuring British companies can continue to benefit from existing EU FTAs.
UK businesses would continue to trade with the rest of the world under WTO rules as soon as Britain exits the EU. To be clear, the UK does not need to negotiate access to the WTO. Like the EU, the UK is an original member of the General Agreement on Tariffs and Trade (GATT) and a founding member of the WTO. The UK thus has rights and commitments in the WTO.
UK industries exporting to the EU could also be subject to EU trade defence measures after Brexit.
These rights, however, are combined with those of the EU. This means that the UK and the EU would need to agree on how to disentangle their respective WTO rights, concessions and commitments. Ideally this process would be part of the Brexit negotiations under Article 50.
Once the distribution of these commitments has been agreed on, the UK and the EU would need to embark on what should be a relatively straightforward negotiation with the members of the WTO, who would need to agree to the UK-EU allocation of their WTO commitments. How simple or complex the negotiation is likely to be will depend to a large extent on the reasonableness of the UK’s WTO proposal and its diplomatic skills.
Generalised system of preferences (GSP)
To avoid trade disruption with the least developed countries, the UK could continue (or even improve) the EU’s unilateral tariff preferences to ‘countries-most-in-need’ under the GSP, which would allow tariff free and quota free treatment to the UK market to all least developed countries (LDCs). This is arguably the easiest of the UK’s trade tasks post-Brexit since no negotiation is required to implement the market access for LDCs. It is also a trade action which is and should continue to contribute not just to the GDP, investment and employment in the developing world but would also bring tangible benefits to British consumers by having access to a wide variety of high quality and cheaper products.
After Brexit, the EU’s trade defence measures will no longer be applicable to the UK. This means that UK industries, like the steel industry, could potentially suffer material injury from dumped imports. There are three main trade defences: antidumping, countervailing and safeguard actions. Today, antidumping is the EU’s most important trade defence measure. It prevents dumped imports from causing injury to domestic EU industries.
Currently, the EU has 93 antidumping cases. Most of the antidumping measures have been imposed on products originating in, or imported from, Asia (mostly China). To minimise a negative impact on the UK industries, the UK will need to quickly develop its own trade defence mechanisms and impose its own antidumping, countervailing or safeguard measures in accordance with WTO law.
UK industries exporting to the EU could also be subject to EU trade defence measures after Brexit. To minimise the risk of trade wars between the UK and the EU post-Brexit, the two sides could agree not to initiate any trade defence investigation or measure against each other. For this to happen, the UK would have to accept the obligation of complying with the relevant parts of EU competition law aimed at eliminating predatory practices.
The trade implications post-Brexit will be determined by the ability of the UK to retain access to the EU market and new trade relationships with third countries. The main priority of the UK’s trade policy post-Brexit should be to avoid, as much as possible, any trade disruption with the EU and the EU’s trade partners.
Given the political factors surrounding Brexit, the only practical model available seems to be a bespoke comprehensive trade agreement which reflects not only the current level of economic interdependence but also the legislative convergence between the two sides. Although the level of economic integration will largely depend on the UK’s willingness to be subject to EU law, I conclude that a weakening of the UK’s policy space must be weighed against the gains from more access into the European market.