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Imagine Me and EU: Possible Models for Post-Brexit Trade

15 August 2016

"Cross purposes"

Soon after entering Downing Street, Prime Minister Theresa May broke with the principle laid down under her predecessor of not creating new Government departments and created both the Department for International Trade (DIT) and Department for Exiting the EU (DExEU).

The new International Trade Secretary, Dr Liam Fox, was quick off the mark in beginning his task of in negotiating new trade deals with various countries, and made his way to the United States in a three-day trip intended to emphasise that the vote to leave the EU, which he had supported, would leave Britain more outward-looking and engaged with the world.

However, he returned to London with his wings clipped. Having suggested to an audience in Chicago that the UK would leave the EU customs union, reports suggested that he was “slapped down” by Downing Street and told that the issue of Britain’s future relations with the EU lay with ‘Brexit’ Secretary David Davis and the Prime Minister herself.

While Dr Fox’s tactics clearly backfired, his actions may be forgiven to some degree. Should the UK remain part of the customs union, it would not be able to make independent trade deals. His very appointment implied that Ms May intended to pull the UK out of the customs union.

This now appears less certain, with the Independent suggesting that both Ms May and Chancellor Philip Hammond favour a “soft” Brexit which emphasises close economic ties to the EU.

Decisionmaking

Though the Financial Times previously reported that the Government planned to have informal trade deals established before Brexit began, the paper later suggested that Ms May had yet to make a decision on the nature of Britain’s relationship with the EU. Indeed, it attributed Dr Fox’s appointment largely to “the political imperative of installing Brexiters in senior posts in the Government.”

The debate has now died down, but it helped to bring to highlight the vital importance of settling the question of Britain’s relationship with the EU before any attempts to reach out to the wider world can credibly begin. At the same time, it brought to light the clear disparities within the Government over how the relationship could progress, and revealed a Cabinet working at cross purposes.

Several papers have been produced discussing the potential options available to the May Government, with notable examples including analyses from the LSE and House of Commons Library. The Centre for European Reform has highlighted seven potential options:

The options

1.The UK negotiates a withdrawal treaty that provides a customised relationship with the EU

Reports suggest that this is the kind of relationship that Ms May currently favours, with close economic ties combined with limits on freedom of movement. This option of a bespoke relationship has obvious benefits for the UK, allowing it to tailor relations to its needs without accepting all of the EU’s rules and regulations.

However, it is far from clear that the European institutions would support such a move, while the relatively sympathetic German Chancellor Angela Merkel has previously rejected the suggestion of the UK being able to access the single market while having limitations on freedom of movement.

Until the framework for the negotiations is decided upon by the European Council, it is unclear what the process for a specific withdrawal treaty would be and what it could realistically cover.

2. The UK joins the European Economic Area (EEA)

While similar to the above option in that both would likely include access to the European single market, this option has the distinct advantage of offering a clear and established framework for a future relationship along the lines of the relationship with Norway, Iceland and Liechtenstein.

However, this would also mean having to follow EU legislation on the Single Market without having any say in its development. It would also be forced to accept the powers of the EFTA Surveillance Authority in ensuring that the UK complied with EU laws in full.

Given much of the discomfort over the powers of the European Commission and European Court of Justice, this option will likely give the tabloid press a new bureaucratic ogre to blame for robbing Britain’s sovereignty.

Worse still in terms the logic of the Brexit campaign, it would likely oblige the UK to continue to allow free movement to and from the EU.

Furthermore, joining the EEA poses its own challenges, as it requires ratification of an accession treaty by all 30 EEA countries.

3. The UK rejoins the European Free Trade Agreement (EFTA)

A step down from full membership of the EEA, this option allows for some free trade but is relatively limited in nature.

The Centre for European Reform argues that the agreement is now “almost an empty shell” and does not contain any free trade for services, which is naturally key for the UK economy.

There have been also reports that Norway would oppose Britain’s membership of the EFTA, as the entrance of such a big country could affect the balance among states who have Single Market access without being members of the EU.

4. The UK follows the Swiss model

Although only officially a member of EFTA, Switzerland has developed a series of bilateral agreements with the EU that allows the country to access the Single Market.

Similar in some respects to the option of a bespoke withdrawal treaty with the EU, this option allows for greater flexibility for a future relationship. Furthermore, Switzerland retains the ability to make free trade deals with other countries.

It is worth noting, however, that Switzerland continues to have freedom of movement with the EU.

5. The UK negotiates a free trade agreement with the EU

This option has been mooted by Dr Fox, and the Centre for European Reform argues it is also the most likely option.

Other countries that have attempted to develop a free trade relationship with the bloc have faced problems. TTIP, the Transatlantic Trade and Investment Partnership, which has been in negotiations for several years, may no longer proceed, while CETA is facing serious opposition within the European Parliament.

The Centre for European Reform has argued that:

“No existing EU free trade or association agreement could serve as a template for the new relationship between the EU and the UK, for none of them are as ambitious in scope as the one that the British would seek”.

It adds that the imbalance in the partners involved in these negotiations would mean that the UK would still have to abide by EU rules.

6. The UK seeks a customs union with the EU, along the lines of the customs union between Turkey and the EU

Under this model, the UK would not have to pay tariffs on trade with the EU, but also would not be free to set its own tariffs.

In addition, it would not have full access to the EU’s internal market, and would lack control over several key issues.

This model would thus mean the UK would both lack full access to the Single Market and also be unable to make any other trade deals.

7.The UK does not conclude any trade agreement with the EU and relies on WTO rules to manage trade

The most basic of all possible trade relationships, this would limit trade ties between Britain and the UK to the basic WTO agreements.

Probably the most drastic of all the options facing the country, this does not currently appear to be an option favoured within the Government or among commentators.

Should negotiations on all other possible relationships fail, however, then this would be the default option facing both parties.

This blog post is an excerpt from DeHavilland's informative briefing on the UK's post-Brexit trade links. Click here to read the whole briefing today for free.

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Madhav Bakshi, Political Analyst
Madhav Bakshi
Political Analyst

Madhav Bakshi is a Political Analyst within DeHavilland’s Editorial Team and leads on Energy policy. He is a graduate of King’s College London, where he studied International Politics.