Brexit: The Trade Fallout

Brexit: The Trade Fallout

Life after Article 50: What are the UK’s international trade options after Brexit?

After the political turmoil of the last few days, Paul Clarke from Wolters Kluwer’s Croner-i International Trade, examines the options open to the UK negotiating team now being put together by the Cabinet Office. What are the pros and cons of the Norway option, the realities of the Swiss alternative and the benefits or otherwise of using the World Trade Organisation (WTO)?

Incompatible demands

Article 50 of the Lisbon Treaty is not a pre-nup. While it provides for the outgoing Member State to establish legal grounds for a future relationship with the Union, it has nothing to say about the form of that relationship.

European leaders have made it clear to their British counterparts that the coming negotiations, to be set in motion by the next Prime Minister, will not be an exercise in cherry-picking: The UK will not get a deal which includes only the bits of the EU it likes (mainly the Single Market) while avoiding the parts that encouraged many people to vote ‘Leave’ (the free movement of people).

This is the dilemma faced by both sides in the coming negotiations: Many now agree that staying in the Single Market is crucial, but the UK wants to do so at the same time as securing an as yet unspecified degree of relief from the effects of economic migration – while the EU sees freedom of movement as one of its untouchable founding principles. It is hard to see how the next Prime Minister could sell a deal to the UK which did not allow it to control the number of migrants. Equally, the European Commission and Council must know that, if they allow such restrictions to be imposed by the UK, then they are opening the door to similar demands from other Member States who will want to know why a non-member enjoys privileged status.

It is inconceivable that the UK will get its ideal solution: Full access to the Single Market coupled with ‘control of its borders’ so that it need only accept those migrants who offer the skills needed in particular sectors. Nor is it likely that too many will agree that no deal is better than the deal we have now – as one UK MEP said. So what can it realistically bid for?

The Norway option

Expressing his irritation at the lack of a plan from the UK, Commission President Jean-Claude Juncker said: “Either you are in or out. If you are out, you have to negotiate access to the market like the Swiss or Norway.” Xavier Bettel, prime minister of Luxembourg, added that the UK could not have a Facebook-style ‘it’s complicated’ status with the rest of the EU: Britain could have “marriage or divorce, but not something in between.”

Meanwhile, Health Secretary Jeremy Hunt said the UK should negotiate a ‘Norway plus’ option with Brussels, which would see “full access to the Single Market with a sensible compromise on free movement rules.” So what exactly is Norway’s position vis-à-vis the Union?

On the plus side, it has access to the Single Market as a member of the European Economic Area (EEA) which comprises, as well as the EU Member States, two other countries in a similar position to Norway – Iceland and Liechtenstein. They all have to comply with EU legislation designated by the Commission as being relevant to the Single Market, playing no part in formulating these rules but simply having them sent through from Brussels – hence the Norwegian description for their system ‘Government by fax.’ In addition all three contribute to the EU budget and, crucially, have to comply with the rules concerning the free movement of workers.

This explains Mr Hunt’s interest in the idea of ‘Norway plus’ where the other Member States would somehow be persuaded that it is worth breaching their Treaty-based belief in the need for freedom of movement in order to give the UK some relief from immigration. Otherwise, those who voted leave would be entitled to ask two questions: Has a Norway-style deal cut the amount of money we pay to the EU; and have we regained control of our borders? The answer to both questions would be no.

Essentially, the UK wants a better deal than Norway and the Vote Leave camp argued during the referendum that it has the trading muscle to force the necessary concessions from the other Member States. That remains to be seen but after the first post-Brexit meeting of the Council, its President, Donald Tusk said that that the 27 leaders had made it ‘crystal clear’ that access to the Single Market “requires acceptance of all four EU freedoms – including freedom of movement. There can be no Single Market à la carte.”

The Swiss option

Switzerland sits at the heart of Europe, surrounded by EU Member States and trading with many of them while maintaining its independence – so has it laid down a path that the UK can follow? Rather than joining the EEA, it opted to use its membership of the European Free Trade Association (EFTA) – to which the UK used to belong – as the basis for agreeing well over 100 bilateral agreements with the EU. It pays less into the Union’s budget than Norway but then its agreements (which took years to set in place) do not cover the same breadth of trade sectors. For example, it does not have full access to the Single Market for its banking sector.

It is in the middle of a dispute with the EU because the Swiss have voted for something similar to the stance adopted by Vote Leave: They want to accept only skilled migrants rather than applying full freedom of movement. In retaliation the EU has withdrawn some of the benefits enjoyed by Switzerland, including the right to export services, and has frozen research grants for Swiss universities worth hundreds of millions of euros. It has also suspended the involvement of Switzerland in the Erasmus student exchange programme.

The Swiss government took a step back and decided to postpone the imposition of restrictions on EU workers in the hope that a way could be found that would not invite further punishment from Brussels. The implications for Switzerland are serious: As well as the stalled participation in education and research projects, key trade agreements on electricity and financial services have been frozen. Nor does the dispute bode well for the UK: If the EU is prepared to crack down hard on a (relatively small) non-member country reneging on its agreements, how likely is it to look benignly on the UK trying to both have its cake and eat it?

Stick with the WTO

It is clear that some tricky negotiations lie ahead for the UK team if they are to retain access to the Single Market and at the same time gain some concessions from the other Member States with regard to freedom of movement.

It has been suggested that the UK should rely on the fact that it is already a member of the World Trade Organisation (WTO) and could trade on that basis with countries both in the EU and outside. However, although it went largely unremarked at the time, the WTO Director General, addressing the World Trade Symposium on the state of global trade in early June, took the opportunity to issue a strong warning on the dangers of Brexit. Roberto Azevedo said: “I have received many, many questions on the issue of the hour – the UK’s membership of the EU. So I think it would be remiss if I didn’t share some brief comments with you.”

He then went on to explain that the UK currently has preferential trade relationships with the EU and with the 58 countries with which the Union has free trade agreements (FTAs). In the event of a British exit, all of these relationships would need to be re-established to maintain the same preferential access the UK currently enjoys via the EU.

Lacking any precedent, even the process for conducting possible negotiations in this regard is unclear at this stage. However, the Director General warned, “negotiations merely to adjust members’ existing terms have often taken several years to complete – in certain cases up to 10 years, or more.” In his speech he also warned that UK exporters could risk having to pay up to £5.6 billion each year in duty on their exports as a result of Brexit.

European flag jigsaw piece with British flag missing piece