By Professor Anton Muscatelli, writing ahead of an expert panel discussion on Brexit on Friday 18th November, hosted by Policy Scotland in association with the Conversation
Nearly six months after the UK’s vote to leave the EU, the path to Brexit is still uncharted. All we know is that because the UK government wants to maximise single market access without accepting the free movement of people, it is looking for a different arrangement to any that currently exists.
Representatives of the EU institutions and the other 27 member states have rejected the idea of a bespoke free-trade agreement with the UK. They argue that the single market is defined by the four freedoms – free movement of goods, capital, services and people – and that they cannot be unpicked.
They also argue, quite correctly, that no country can have full unfettered access to the EU single market without also agreeing to abide by a single set of rules governing that market. With multiple red lines on both sides, the margins for negotiation seem very limited.
I have argued elsewhere that the UK should seek to remain in the single market by joining the European Economic Area (EEA) and European Free Trade Association (EFTA), which incorporate Norway, Switzerland, Liechenstein and Iceland. This would be subject to agreement by EFTA and the EU.
My reasoning is that the costs of leaving the EU will be considerable – cutting 1.8% to 7.8% from annual GDP by 2030 depending on the trade deal, according to independent analysts. Some counter that there is no evidence of such economic dislocation in the British economy but they are missing the point. We will only experience lower trade, investment and GDP growth after we leave the EU.
The current sterling depreciation is the financial markets’ closest estimate of the damage to come. Remaining in the single market through the EEA/EFTA while negotiating free-trade deals with non-EU countries is the UK’s second best option. And in an era where isolationism in trade looks set to be increasing following the victory of Donald Trump in the US presidential election, the last thing you want is to be outside a major trade bloc.
The UK government may prefer a better deal than EEA/EFTA membership, for example by remaining in the EU’s customs union, since it imposes single EU tariffs on all outside countries and would therefore keep UK trade much simpler. But it is difficult to see how the UK can achieve what it wishes within the two-year time limit for negotiations after Article 50 of the Lisbon Treaty is triggered – due by the end of March.
With the UK in a very weak bargaining position, EEA/EFTA membership would be a “truce position” that would ensure an arrangement was in place within the two years. Remaining in the single market through EEA/EFTA but outside the customs union would also increase its margin for negotiation with non-EU countries – as Norway has done.
There have been indications that the UK is trying to chart an alternative Brexit course. It may want to reach an agreement with the EU on tariff-free trade as a transitional arrangement while leaving the single market, for example. The obvious problem is this would not allow the UK to overcome potential non-tariff barriers to the EU, such as the “passporting rights” that allow financial services companies to operate across the union from a single country.
Such an arrangement also runs the risk of falling foul of World Trade Organisation (WTO) rules on free-trade deals, unless it were seen as an interim agreement leading to a more comprehensive deal within ten years. This would require an agreement to that effect with the EU, which adds a level of complication.
A variation is that the UK could pursue a “sector-by-sector” deal that goes beyond tariffs to retain full trading privileges for priority sectors – financial services and motor manufacture for example. The problem is that the EU would want concessions in return, for example in agriculture and fisheries. The UK would have to favour some sectors at the expense of others, which wouldn’t be popular, particularly as the vote to leave was particularly strong in the sectors the EU would want to protect.
The EU might also demand other concessions such as requiring the UK to contribute to the EU budget, as Switzerland has to, or to compromise on freedom of movement. A sector-by-sector deal also seems to flout WTO rules that in free-trade agreements, the two sides’ duties and restrictive regulations have to be eliminated on “substantially all the trade” between them.
The Brexit negotiations also involve an important intra-UK dimension. Two of the UK’s constituent nations, Scotland and Northern Ireland, voted to Remain, as did London, whose economy depends critically on financial and other services exports to the EU. Scotland’s first minister, Nicola Sturgeon, has argued forcefully that in the absence of a commitment to keep the whole of the UK in the single market her government will seek to explore ways of implementing an alternative plan for Scotland to protect its interests: what has been dubbed a “flexible Brexit”.
The EU and EEA certainly already display a number of legal models which have been developed over time to deal with different territories’ specific needs. The situation of Northern Ireland will also require the exploration of a bespoke solution as it seeks to maintain free movement across the Irish border as per the Good Friday agreement.
The question remains whether the UK as the member state will choose to agree to build in these intra-UK dimensions to the Brexit negotiations. The UK has so far provided little insight as to its strategy, albeit Theresa May, the UK prime minister, has said publicly there will be no Brexit opt-outs.
One irony is that if early next year the UK Supreme Court upholds the recent High Court decision that there must be a parliamentary vote ahead of triggering Article 50, it might actually strengthen the government’s hand. Suppose parliament stipulated it would only authorise triggering Article 50 if the government didn’t negotiate anything which imperilled full unfettered access to the single market, for example.
By imposing this limit on the Brexit negotiations, parliament may remove a key red line on the government’s side and widen its room for negotiation. This would also bring the UK government closer to the positions of the devolved administrations in their pursuit of single market participation and freedom of movement.