ECJ EUROPEAN Cleaning Journal

For better or for worse – or, more pertinently perhaps, for richer or poorer – the Brits have defied their leaders’ dire warnings and given the EU the ‘big E’, writes Hartley Milner.

The Brexit vote, though not wholly unexpected, sent a shockwave through the world’s financial markets. But the doomsayers warn this was merely a ripple in the pond compared to the tsunami that will hit the UK’s shores after the Article 50 mechanism for leaving the union is triggered, probably before next year.

But are they right? The truth is no one really knows – it all rests on the trade deal David Davis, secretary of state for leaving the EU, comes away with from negotiations with the bloc in the run-up to the formal exit in two years from now. That and how successful a solo Britain would be in striking trade agreements with countries beyond the EU, including more than 50 that have strong trading links with the union.

Davis, a long-time Eurosceptic, has said the “ideal outcome” for negotiations is continued free-tariff access to Europe. However, he has also written: “Leaving the EU gives us back control of our trade policy. We can do deals with our trading partners, and we can do them quickly.

“I would expect the new prime minister to trigger a large round of global trade deals with all our most favoured trade partners. I would expect the negotiation phase of most of them to be concluded within between 12 and 24 months.”

To maintain access to the single market (European Economic Area), the UK will need to negotiate an agreement that in some ways may not be so different from the one it has with the EU now. The deal could include terms that will not deliver all the promises made by the leave lobby during the referendum campaign, notably limiting free movement between borders.

Individual deals

As a member of the EU, Britain is included in the 22 trade deals the union has negotiated with individual countries, and five multilateral agreements covering multiple countries. This means that if the UK wants to retain preferential access to the markets of the 52 countries covered by these agreements, it would need to renegotiate trade deals with all of them.

Britain is a large market, so there is a clear incentive for other countries to negotiate a deal. The BDI, the German industry association, has said that creating trade barriers would be “very, very foolish”.

Non-EU countries have agreements with the bloc that could provide a base model for a UK agreement.

Norway. Model: Membership of European Economic Area (EEA), full access to single market, obliged to make a financial contribution and accept majority of EU laws, free movement as at present.

Norway is a member of the EEA, along with the 28 current EU members, Liechtenstein and Iceland. In return for access to the single market, it pays a contribution to the EU budget and
has to sign up to all the rules of the club, including its common regulations and standards.

People from across the union are free to live and work in Norway too, but the country is exempt from EU rules on agriculture, fisheries, justice and home affairs. The downside for Norway is that it has no say over how the rules of the single market are created.

Ireland’s finance minister, Michael Noonan, has said the UK is unlikely to secure full access to the single market unless it continues to allow free movement of labour.

Switzerland. Model: Membership of the European Free Trade Association but not the EEA, access to EU market governed by series of bilateral agreements, covers some but not all areas of trade, also makes a financial contribution but smaller than Norway’s, doesn’t have a general duty to apply EU laws but does have to implement some of its regulations to enable trade, free movement applies.

Switzerland has a free trade deal with the EU and a number of agreements that give it access to the single market for most of its industries. But it does not have full access to the single market for its banking sector and other parts of the services sector, which together make up almost 80 per cent of the UK economy. Its agreement also requires the free movement of people.

The Swiss voted against joining the EEA in December 1992. Instead the country, which sells more than 50 per cent of its exports to the EU, has agreed more than 120 bilateral agreements with Brussels, designed to secure Swiss access to Europe’s markets.

Switzerland contributes billions of dollars to EU projects. Its bilateral deals are now in danger of unravelling over the question of free movement of people, after a referendum two years ago went in favour of restricting the number of workers arriving from the EU.

Turkey. Model: Customs union with the EU, meaning no tariffs or quotas on industrial goods exported to EU countries, has to apply union’s external tariff on goods imported from outside the EU.

Turkey is not part of the EEA or the European Free Trade Association. but does – like tiny Andorra and San Marino – have a customs union with the EU. This means it faces no tariffs (taxes or duties on imports and exports) or quotas on industrial goods it sends to EU countries. The customs union does not apply to agricultural goods, or services.

Tariff-free trade deal

Turkey also has no say on the tariffs it has to impose on goods it imports from non-EU countries, as it has to apply the EU’s common external tariff to those goods (and is not involved in setting it).

The UK’s current tariff-free, unrestricted trade deal with the EU would remain in place for at least the first two years of negotiations. No non-EU countries have negotiated tariff-free unrestricted trade with the union without contributing to its budget and allowing unlimited EU migration.

Canada. Model: Currently negotiating CETA (Comprehensive Economic and Trade Agreement), gets rid of most tariffs on goods but excludes some food items and services and stipulates need to prove where goods are made.

CETA gives Canada preferential access to the EU single market without all the obligations that Norway and Switzerland face, eliminating most trade tariffs. However, some ‘sensitive’ food items, including eggs and chicken, are not covered by it.

Canadian exporters will have to prove that their goods are entirely made in Canada, which imposes extra costs, to prevent imports entering the EU through a back door. The services sector is only partially covered by CETA.

Crucially, a CETA-type deal would not give UK financial services the EU market access that they have now. It would be hard for London-based banks to get passporting rights for their services in the EU – rights that they value hugely now.

It would also mean firms that export to the EU would have to comply with EU product standards and technical requirements without having any say in setting them. And critics of such a plan point out that the UK has a complex web of ties to the EU – many more than Canada.

Singapore/Hong Kong. No import or export tariffs at all – a unilateral free trade approach.

Some advocates of Brexit have said the UK should adopt a unilateral free trade policy, dropping all tariffs and relying on the World Trade Organisation’s framework.

For example, Hong Kong’s free trade policy means the Chinese special administrative region maintains no barriers on trade. The Hong Kong government says it does not charge tariff on importation or exportation of goods. Import and export licensing is also kept to a minimum.

Negative effect

This approach may have some appeal to Brexiteers, whose ideology favours no trade restrictions. It would be likely to gather less support from disaffected Labour voters and left-wing critics of the EU in Britain.

No tariffs of any kind could have a strongly negative effect on the UK’s agriculture and manufacturing sectors, as importing goods such as food and steel would in many cases be cheaper than producing them in the UK.

Default World Trade Organisation (WTO) rules. WTO rules for international trade apply to all – no free movement between borders or financial contribution and no obligation to apply EU laws, although traded goods would still have to meet EU standards, some tariffs would be in place on trade with the union and trade in services would be restricted.

If talks with the EU and others do not reach a deal before Brexit takes effect, trade regulations would default to the WTO rules. The UK and EU would be obliged to apply to each other the tariffs and other trade restrictions they apply to the rest of the world. That is because the WTO rules allow countries to discriminate in favour of a trade partner only in a limited number of circumstances, including a full bilateral trade deal.

Whether the UK seeks an agreement based on one of the above, or a very different model, what is certain is that there are some extremely tough talks ahead.