The UK-EU future trade relationship: a new model agreement?

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 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. This leaves much less policy space in shaping 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.

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. The UK-EU trade model should not be the result of copying and pasting current EU FTAs. Trade agreements are the result of historical, geo-political, legal and economic factors. The future UK–EU trade model is likely to take into account the current level of liberalisation, convergence of legislation and geography. This is why I believe that the future trade relationship between the UK and the EU 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.

Trade agreements are the result of historical, geo-political, legal and economic factors.

What type of EU agreement should be the reference? First, the European Economic Area (EEA) is not a political viable option because it would mean that the UK had accepted to the ‘four freedoms’, made substantial contributions to the EU budget, accepted the supremacy of the EU law and the rulings of the European Court of Justice. Second, 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 to 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 integration free trade agreement (FTA) similar to CETA would probably be the easiest negotiation (an almost copying and pasting exercise) but will 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 potential higher prices of goods in the UK domestic market.

With this in mind, I believe that the only available and achievable trade model that the UK has at its disposal to maintain the best possible access to the single market, and at the same time one which could allow the UK in achieving its role as a global leader in world trade, is a bespoke ambitious deep integration trade agreement. I believe the 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 liberalize (zero import tariff) cross-border trade in agricultural, fishery, 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.

On balance I believe the benefits of deep economic integration with the EU market outweigh the costs.

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 sector-specific customs union-type where both sides would maintain the same tariff towards third countries in order to get full access to the UK market. This means that 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 freedom 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 I believe the benefits of deep economic integration with the EU market 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 supply under the GATS).

Transitional arrangement

I believe that the UK will 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 would thus be necessary to avoid trade disruptions. The transitional arrangement would be different for goods and services.

For trade in goods, I believe a comprehensive customs union with the EU should be put in place for three years to allow:

1. A complete review of the UK’s industrial, agricultural and fisheries policies and regulations;
2. 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;
3. Set up the UK’s international trade defence authority and, potentially, initiate trade defence investigations;
4. The UK to conclude interim trade agreements with EU trade partners; and
5. 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. This means that EU workers should retain the right to live and work in the UK post-Brexit. This is crucial to facilitate a smooth Brexit transition on trade and services.

This article was originally posted on the Matrix Brexit Hub. Part two of this series, entitled Brexit: UK Trade Relations with Third Countries, will be available on Tuesday 13 December.