By Anton Muscatelli, professor of political economy and Principal of the University of Glasgow
The Prime Minister has announced that Article 50 will be invoked by March 2017. What Brexit will mean is still unclear. Statements by the Government suggest we are heading for a “hard” Brexit. But we have also been repeatedly told that we are seeking a different model to those already in existence: a bespoke UK agreement.
Unfortunately, Britain faces severe obstacles in negotiating a bespoke model. First, the EU insists that membership of the single market requires accepting its “four freedoms” of movement: of goods, services, capital and people. Secondly, it correctly points out that the single market is a unique construct in international trade. Markets require regulation, and if you have a single market between many countries then it has to operate by a single set of agreed rules.
Such rules allow the EU and the European Economic Area (EEA – the 28 EU states plus Iceland, Liechtenstein and Norway) to operate seamlessly. Importantly for a service exporter like the UK there is freedom to establish companies and provide services in any EU country, though there are limited non-tariff barriers (such as quotas). Over time the EU updates regulations and directives to reduce non-tariff barriers to trade between EU member states. But EEA member states benefit automatically as the EU-EEA deal is automatically updated in response to new EU legislation and regulation. In other words, the EU-EEA agreement is dynamic.
By contrast any bespoke bilateral free trade agreement – such as that between the EU and Switzerland – is founded on a complex set of treaties. It is static. For this reason the EU-Swiss model is under strain. It may not survive disputes over freedom of movement, and it also suffers because it cannot readily handle changes to intra-EU non-tariff barriers.
None of us know what type of bespoke model the Government is aiming for, and whether it is ultimately achievable. There appear to be major differences of view within the Conservative Party and even within the Cabinet.
The CBI and other business groups have urged the Government to negotiate free access to the single market. They express severe concerns around the disruption which a harder Brexit will mean for both UK importers and exporters and the whole UK industry value chain. They also rightly have doubts about the ability to complete a transitional arrangement with the EU, let alone a comprehensive agreement, in the maximum two-year period envisaged by Article 50. Britain also has the difficult task of resetting its independent place at the World Trade Organisation before leaving the EU.
So the most immediate constraint is one of available time. Article 50 is constructed so that the leaving country is on the back foot. The prevailing mood in Brussels is that the EU stands more to gain in a negotiation against the clock.
This is why Britain’s best negotiating stance is to suggest to the EU that the current arrangements between the EEA and the European Free Trade Association (EFTA, whose members are Iceland, Liechtenstein, Norway and Switzerland) could be seen as a stepping stone for the UK. In my opinion, the process of leaving the EU should end there. But if the Government seeks to take Brexit beyond membership of the EEA, this could be an interim position on the path to a more bespoke agreement.
The advantage of such a strategy is that it provides a “truce” position for the UK and EU-27 beyond the expiration of Article 50, which would do least damage to UK-EU trade. It would also allow the UK to conserve its energies for negotiation because current EU-third country Free Trade Agreements (FTAs) could be accessed during this interim step. Meanwhile, Britain could start negotiating FTAs with third countries as it would be outside the customs union. And emergency brake provisions on freedom of movement are already part of the EEA-EFTA arrangements.
The disadvantage is that the Government might not be able to sell this politically to the Conservative Party. It would also need approval from the four EFTA countries, and the EU might not readily agree on a tactic designed to redress the balance of power in the Brexit negotiations. There are other complications for the EU. The EFTA countries, for example, might suddenly want a similar deal.
The main attraction is the (potentially) dynamic nature of the final agreement, though the UK would have no say in new or changing regulations drawn up by the EU. A solution to this might be a bilateral UK-EU judicial structure to monitor the deal and sanction UK agreement to certain regulations (an alternative to the EFTA Surveillance Authority and the EFTA Court).
Any bespoke deal for the UK will involve concessions and budgetary contributions. But whatever the final destination for Britain outside the EU, an interim “truce” position is worth having. At this point in the Brexit process, implementation time is a valuable commodity.