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Sitting in the departure lounge – the Brexit negotiation strategies

 

Sitting in the departure lounge – the potential Brexit negotiation strategies

It is difficult to feel at ease in an airport departure lounge. The uncertainty on whether the plane will leave on time and the fear that you will miss your flight. Similar feelings of ill-ease are likely to permeate throughout the UK with the potential of spending 2 years in an EU departure lounge, as negotiations are held on how trade and immigration will be structured post-Brexit.

The current situation

There are economic benefits from European integration, but obtaining these benefits comes at the price of giving up some sovereignty. The EU Single Market has reduced barriers between member states by removing tariffs and customs procedures, and harmonising regulations and product standards. Each country does retain some control and the UK’s labour and product markets are substantially less regulated and more flexible than those of other EU countries. However, as an EU member the UK has had to follow the four ‘freedoms’, freedom of movement of goods, services, people and capital. The crucial issue in the coming negotiation will be to what extent the UK can curtail freedom of movement of people while still enjoying the other three.

Negotiation strategies

Britain is a large market and advocates of Brexit argued that it would be in the EU’s interest to maintain as much free trade as possible. There is plenty of evidence to support this. The UK would be one of Europe’s largest export markets, worth £289bn in 2014, one in five cars made in Germany goes to Britain and the UK is Ireland's largest trading partner. In addition to trade some countries will seek to preserve the security role Britain has played, others such as Poland will look to minimise the impact on their citizens that live in the UK.

In the other direction, the EU represents 47% of UK exports, facilitates an additional 13% through non-EU trade deals, and currently negotiates with countries worth an additional 21% of UK exports. Sectors with significant influence such as the UK’s financial sector will be lobbying hard to maintain their access to the European market. In 2015 almost 40% of UK services exports went to the EU.

Even without the UK, the EU is the world's second largest exporter behind China and the world's second largest importer behind the United States. This makes the EU a desirable trade partner and gives the EU an important voice in trade negotiations. Since the UK is a much smaller market than the EU, the country alone would have less bargaining power in international trade negotiations than the EU currently has. On the other hand, Brexit would enable the UK to seek trade agreements tailored to the interests of UK businesses and consumers rather than having to make compromises to meet the needs of other EU countries. Whether the benefits from greater autonomy in trade negotiations would outweigh the costs from reduced bargaining power is hard to predict.

There are 22 trade agreements between the EU and individual countries, and five multi-lateral 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 have to renegotiate trade deals with all of them. While the UK would need only eight bilateral trade agreements to cover 80% of its current exports, there is a long tail of 18 additional countries worth more than $1 billion in UK exports and an additional 132 countries to cover all existing exports.

The European Union will head into the negotiations with the preservation of the European project in mind. Domestic elections are set for 2017 in France, Germany and the Netherlands. It is likely that a hard approach to negotiations with the UK will be indicated in the lead up to these elections as a counter to the populist or protest parties that will promote anti-migrant and EU sentiments.

The point on which negotiations are likely to hinge is the trade-off between free movement of people in the EU and access to the single market for services as well as goods. You can learn more about the immigration policy options in this post.

 

What are the post-Brexit options for the UK?

The UK's options will refine themselves into considering relationships in line with existing templates such as a Norway or Switzerland-style package that keeps Britain within the single market, or a bespoke "third country" deal similar to one completed with Canada.

 

1. The Norway model

One possibility is the so-called “Norway option” which is also used as a basis by Iceland and Lichtenstein. This would involve joining the European Economic Area with free movement of goods, services, people and capital, and accepting EU laws in areas such as employment, environmental policy, energy, and competition. EEA membership does not oblige countries to participate in monetary union, the EU’s common foreign and security policy or the EU’s justice and home affairs policies. EEA members also do not participate in the CAP. While there is free trade within the EEA, EEA members are not part of the EU’s customs union, which means that they can set their own external tariff and conduct their own trade negotiations with countries outside the EU. Albeit at a much different scale, Liechtenstein has imposed restrictions to limit the number of new residents, with this side agreement being reviewed on a rolling five-year basis.

The Norway model would minimise the trade costs of Brexit, but it would mean potentially paying about 83% as much into the EU budget as the UK currently does. The EU can also use antidumping measures to restrict imports from EEA countries, as occurred in 2006 when the EU imposed a 16% tariff on imports of Norwegian salmon. It would also require keeping current EU regulations, without having a seat at the table when the rules are decided. This arrangement has often been termed “regulation without representation” although in practice Norway has inputted into policy formulation. For a relatively large country such as the UK, which is accustomed to having a prominent voice in European and world affairs, this is likely to be a difficult position to accept as there would be no opportunity to block proposals that it believed harmed the UK’s national interest or to drive forward policies it generally supports. It would also be the best chance to preserve the union with Scotland and Northern Ireland, both of which voted Remain.

However, it would entail a continuation of free movement with the EU that could be viewed as a betrayal of what the referendum had promised.

 

2. The Switzerland model

The “Swiss option” negotiates new EU legislation and agreements on a case-by-case basis with a series of bilateral agreements that give access to the internal market for goods but not most services, an area where the UK is a major exporter. As a member of the European Free Trade Association but not the EEA, (the Swiss voted against joining the EEA in December 1992), Switzerland still faces regulation without representation and pays about 40% as much as the UK to be part of the single market in goods. Switzerland sells over 50% of its exports to the EU.

Adopting the Swiss model could be appealing if the UK is looking for an ‘à la carte’ approach however this requires fresh negotiations whenever a change in EU legislation occurs which leads to uncertainty for businesses. An agreement on the free movement of citizens was also in force until recently, but has been limited after Switzerland launched an anti-immigration referendum in 2014. While no restriction in the movement of people has yet been implemented recent trade deals have been blocked, and the EU refuses to give Switzerland further access to the internal market until a framework agreement is established. It is therefore doubtful that the EU would be willing to establish a similar relationship with the UK.

 

3. The Canada option

The Comprehensive Economic and Trade Agreement (CETA) is a free trade agreement between Canada and the European Union. The negotiations have been over a period of seven years and were concluded in August 2014 but CETA is not yet in force awaiting ratification by the various EU bodies and member states.

CETA gives Canada preferential access to the EU single market without all the obligations that Norway and Switzerland face, eliminating most trade tariffs other than some agricultural goods. The agreement does not require Canada to accept freedom of movement or observance of all EU rules and would involve no contribution to the EU budget. Canadian exporters will have to prove that their goods are entirely "made in Canada", which imposes customs checks and extra costs, to prevent imports entering the EU through a "back door". It would also mean that firms who export to the EU would have to comply with EU product standards and technical requirements without having any say in setting them.

It is still some way from replicating the level of access to the single market the UK currently enjoys as a member of the EU, particularly in services and financial services. The single market allows a bank based in one member of the EU to set up a branch in another, while being regulated by authorities in the home country. This “single passport” means that a Swiss or an American bank can supply services from a branch or subsidiary established in the UK. It is unclear how passporting rules for financial services might apply if an approach similar to CETA was proposed by the UK.

 

4. The Turkey model

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. 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 they are not involved in setting policies or regulations.

 

5. A hybrid model

It may be tempting to try to combine the best aspects of both the Norway and the Canada models, in the interests of achieving the continued certainty and market access afforded by the former along with the greater sovereignty and flexibility of the latter. These are unlikely to be simply a copy and paste exercise and the EU is unlikely to accept a form of “cherry-picking”.

It is possible that the outcome of negotiations might be a compromise solution, with the UK formally leaving the bloc and accepting partial restrictions on services and trade, and smaller contributions to the EU budget, in return for partial control over EU migration, via something like an emergency brake when inward migration breaches a specified threshold.

 

6. The default World Trade Organisation rules

A further option is going it alone as a member of the World Trade Organization. As of 2015, the WTO has 161 members. Under WTO rules, each member must grant the same ‘most favoured nation’ (MFN) market access, including charging the same tariffs, to all other WTO members. The only exceptions to this principle are that countries can choose to enter into free trade agreements, such as the EU or EFTA, and can give preferential market access to developing countries. As a WTO member, the UK’s exports to the EU and other WTO members would be subject to the importing countries’ MFN tariffs and would mean reduced access to EU markets for UK services.

Under this scenario the UK and EU would apply to each other the tariffs and other trade restrictions they apply to the rest of the world. Trade in services would be restricted but there would be no free movement of people or financial contribution, and no obligation to apply EU laws, although traded goods would still have to meet EU standards.

 

7. Britain could decide to retain full EU membership.  

This would be very difficult to sell politically, however, it may be promoted two years down the road when the options available have become clear. A deal like this may require a further public vote, either a general election or a second referendum, to create a mandate for its implementation. This would come at the price of intense disaffection with mainstream politics and is potentially too risky for either the conservative or labour parties to promote.

 

There is a wide range of negotiation paths that the UK might take and it will not be easy to negotiate an elegant exit. The EU needs to ensure that other countries are not tempted to follow a similar path and this is likely to be given a higher priority than being flexible with countries that have decided to leave. It is possible that the UK would be able to get a better deal than any current models in existence because it is such a big customer of European products. However, a sizeable portion of UK voters will view any compromise on total control of migration policy as betrayal of promises to restore national sovereignty.

The UK will have to wait in the EU departure lounge for at least two years, creating a period of uncertainty for businesses and investment. Reverting to the airline analogy, severe turbulence is possible, and while there is a chance of an upgrade, fears will prevail that the UK might end up in an uncomfortable middle seat.

 

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