What Are the Possible Future EU-UK Trade Agreements?

This article was originally posted on The Market Mogul here: https://themarketmogul.com/possible-future-uk-trade-agreements/

Reports are swirling around British media currently that an agreement has been made with the European Union over the total fee Britain should pay in order to cover the obligations it agreed to prior to voting to leave the European Union.

It is expected that the fee, in the region of €40bn to €50bn, will make European leaders more likely to agree to move talks onto the second stage of talks which include the future trading arrangement.

European Free Trade Association Membership

The European Free Trade Association (EFTA) is a group of four countries: Norway, Iceland, Liechtenstein and Switzerland who share a common trade policy with the goal of liberalising trade between the core nations of the group and nations around the world. With respect to the UK, most importantly, it has an agreement on the European Economic Area (EEA) (Switzerland has its own agreement) which allows it to trade with the wider single market. Through the EEA, the EU’s four freedoms — goods, services, persons and capital — are protected, but there are many areas the EEA does not cover: the Common Agricultural and Fisheries Policy, the Customs Union, Foreign Policy or the Monetary Union.

The British position on future trade talks has always been that the UK will be leaving both the customs union and the single market in order to forge a new relationship with the EU and create free trade deals with the rest of the world. But at the same time, it wants tariff-free access to the single market and regulatory divergence. The British demands do not fit what is feasibly possible. Regulatory divergence would mean that British goods would not be sold into the EU unless they met both British and European Standards. It is unlikely that the British standards would be stricter than the European ones — after all, one of the arguments for Brexit was being able to deregulate the economy. This would automatically mean that British goods for export would be made in accordance with European Standards as 44% exports go to the EU.

With this in mind, would joining the EFTA be a bad idea? No, it would not, but it would require the British government to concede on some of their objectives such as regulatory divergence. This is unlikely to happen as the Brexiteers within the government are keen to try and keep their word on as many promises as possible, no matter how outlandish they may sound.

Canada Style Agreement

On the 30th of October 2016, the European Union and Canada signed the Comprehensive Economic and Trade Agreement (CETA), an agreement that, according to the EU, will cut 98% of tariffs. Among other things, it protects EU standards and opens routes. It also opens up the Canadian market in financial services, telecommunications and transport while recognising each other’s qualifications in some sectors such as accountancy and law.

It is often said that the CETA will be the model that the UK is going to base its plans for UK-EU trade on when talks eventually make it there. One of the key aspects of CETA, and most EU trade agreements, is safeguards for European Union members. The CETA agreements have various safeguards built into them, among which there is the protection of agriculture sectors and the right to regulate. This means that all Canadian imports will have to meet EU regulations, meaning the UK is back to the same old problem of regulatory divergence. Not only this but the EU retains the right to tighten standards if it so wishes.

WTO Rules

The World Trade Organisation is a global group that helps agree on the trade rules for nations that do not have free trade agreements so that trade can take place in an orderly way. A trading relationship with the EU on WTO rules would hinge on the ‘most-favoured nation’ principle, which says that one cannot discriminate between trading partners. That means that if one lowers a tariff for one nation, that then applies to all other WTO members. The exception is that if one is a group of trading nations, such as the EU is, one can discriminate (set higher tariffs) against members outside the group.

WTO rules are only likely to apply to the UK if the negotiations collapse and no deal can be agreed. In this scenario, the UK would face the common external EU tariff. If this happened, then the British economy would be severely affected. A tariff of 22% on food would accelerate the increase in the cost of living for millions of British citizens, at a time where wage growth is slowing.

The Path Ahead

It is likely that the trade relationship will drag on for a lot longer than the next year, potentially taking the next three years. Yet, there are hurdles before this can begin. Negotiations surrounding the border with the Republic of Ireland need sufficient progress before talks on the trade relationship can begin.

This is a tricky subject to sort out as one cannot begin to agree on the border without an idea of what the future trade relationship will be. For example, if Britain is going to leave the single market and customs union, then there would have to be a hard border in order to check that duty fees have been paid and that items meet regulations. But Britain does not want a hard border, and so would need to have a trade agreement that keeps Britain within the regulatory framework of the EU.

Out of the options above, joining the European Free Trade Association would be the best choice. It would allow the UK to seamlessly transition to a trade agreement with the EU which gives business the same level of access to the European market while giving the government scope to forge more trade deals with the rest of the world with the help and collective power of three other strong European nations. Nevertheless, the trade relationship with the European Union will be the most complex issue for the British Government to negotiate.