In this note we summarise the models for a trade relationship with the EU which are most likely to inform the UK/EU negotiations following the Brexit vote.
The Government’s objectives
After many months of uncertainty and speculation, Theresa May confirmed in her speech on 17 January that the UK would not seek to retain membership of the EU single market. She has now conceded that the terms currently on offer for continued access would not be compatible with controlling immigration from the EU and removing the UK from the jurisdiction of the European Court of Justice. This position has been confirmed in a White Paper published in February 2017 which sets out the Government’s negotiating objectives more formally, though still with little concrete detail.
It is now clear that the Government’s objective is to negotiate a comprehensive free trade agreement with the EU, possibly combined with some form of customs union. Existing arrangements are not necessarily a guide to what can be achieved in these negotiations, but they do provide a useful reference point. If all else fails, there remains a possibility that the Government will have to fall back on WTO rules.
The Canada model (bilateral free-trade agreement)
Canada has recently concluded a comprehensive bilateral trade deal with the EU which covers most goods and a number of services. Like other EU trade deals, there is no provision for passporting financial services.
Although the most comprehensive bilateral deal the EU has negotiated to date, the Government’s assessment prior to the referendum was that it offered “significantly less access to the Single Market” than the UK currently enjoys, particularly given the size of the UK’s services sector. The obligations Canada has agreed to accept to the EU in return are more limited than those currently required for full access to the single market, though they are still significant. In particular, as with most trade deals, it will need to comply with EU safety and other standards in relation to goods it exports to the EU. However, Canada is not expected to sign up to freedom of movement, though it has accepted some obligations around mutual recognition of professional qualifications.
The Turkey model (a customs union but outside the single market)
This has not previously been regarded as a front-runner, but the White Paper suggests that a bespoke agreement for a customs union between the UK and the EU is still under consideration, probably as part of a wider bilateral trade agreement.
The customs union with Turkey is not complete (for example it does not apply to services and tariffs are still applied on unprocessed agricultural goods). In addition, even though it abolishes tariffs, it does not abolish “technical barriers” to trade, such as the need to inspect goods for conformity with EU standards. Finally and crucially Turkey has to apply the same external tariffs as the EU, meaning this places severe limitations on its ability to negotiate its own bilateral trade agreements where the EU already has an agreement in place.
The WTO fall-back
If it was not able to negotiate a satisfactory bilateral agreement with the EU prior to exit, then, subject to any transitional provisions, the UK would have to fall back on its membership of World Trade Organisation. This provides an international framework for the trade in goods between over 150 member countries. Its coverage of services is much more limited. This is a significant drawback since according to Government figures services compromise almost 80 per cent of the UK economy.
The essential premise of the WTO rules is that a member (which for these purposes includes the EU) must offer the same trade terms to all other members, in the absence of a separate bilateral trade agreement. That means that the UK would not be able to set differential tariff rates for its trade with the EU as against the rest of the world. Conversely, the EU would have to set the same rates for trade with the UK as it does for those countries with which it currently does not enjoy a separate bilateral agreement.
As the EU has bilateral trade agreements with over 50 countries, and the UK has none, this situation is likely to put the UK at a significant disadvantage at least in the short term. But apart from separate agreements it chooses to make (for example with regard to cross-border security) the UK would have limited legal obligations to the EU following exit. In particular, it would not have to accept freedom of movement or make a contribution to the EU budget, although it would need to continue to apply EU standards to exports of goods or services it makes to the EU.
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