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Confusion over the future EU-Britain trade relations

Last year Britain voted to leave the European Union, there’s still nothing certain about what future trade relations between the UK and the EU will be like.

My London colleague Nick Jeffrey, public policy director for Grant Thornton International Ltd, notes that in principle, EU law requires separate trade negotiations to be held after the conditions of Brexit are agreed upon. He says “in principle”, because it is believed to be in the interests of both sides to work out an agreement on trade relations in parallel to the conditions for the departure.

Time-wise, however, it’s unlikely that a comprehensive trade agreement will be given final form in parallel with the exit talks. Just look at how long the talks for a trade agreement between the EU and Canada took - seven years. Only last October was that deal signed.

When will trade relations be agreed upon?

It is in the interests of both sides to achieve some kind of certainty as rapidly as possible. Uncertainty could prove costly for the Britain in particular, because major multinational corporations based in London and other parts of the country want a definite answer for making their future plans. For example, major American investment banks JP Morgan and Morgan Stanley announced already last summer that they would likely move their European headquarters out of London. The reason: they can’t wait for years until the clarity finally dawns in trade relations.

I would suggest that one way to overcome the time issue would be to establish transitional arrangements for EU-British trade relations.

One possibility that has been mentioned is that a memorandum of mutual understanding could be signed regarding trade relations, which would be negotiated on and effected in parallel to the exit conditions. The memorandum would lay down the framework for future trade relations and agreement on detailed arrangements would be reached later.

There could be a transitional clause that stipulates that after leaving the EU, the United Kingdom will temporarily join the European Economic Area while negotiations are still under way on trade conditions.

Do trade relations have to be endorsed by all member states?

In the case of a trade agreement, it may be a requirement for the other member states to approve it by qualified majority [1] or by unanimous decision and/or it may have to be ratified by the parliaments of the member states. The member states recently stated that the EU-Canada trade agreement includes some issues that are in the remit of the member states and therefore the deal must be ratified in the national parliaments.

Can trade be agreed on separately?

The other member states cannot allow the United Kingdom as a non-EU member to appear to enjoy a more favourable position than it was as a member state. German Chancellor Angela Merkel has said that the four fundamental freedoms are inseparable [2], which means that at trade talks, the United Kingdom will not be allowed to cherry-pick the freedoms that it likes and disregard the ones it does not. Current expectations are that the other member states will stick to this position for the entire duration of the exit and trade talks.

It seems UK Prime Minister Theresa May has also started to see the light, because in autumn 2016 she made several public comments that she would not rule out paying large sums of money to Brussels (similarly to the current budget contributions) to maintain access to the common market. But there is no consensus in the government on trade relations yet. Some would like to maintain access but there are others who prefer to cut all ties to Brussels and put effort on agreements with countries outside the EU.

What does the trade agreement cover?

Most of the trade agreements cover goods and related regulations on exchange of goods. Only a few of the EU’s existing trade agreements discuss services. The UK must account to the other member states as to why the exit agreement should include services, because the country doesn’t have an obvious need for them. The UK must also explain why London is beneficial to the other member states as well as a strong international financial centre. If it’s concluded that it is beneficial only to the UK, it won’t necessarily be included in the trade agreement.

Is Norway or Switzerland workable models for the UK’s agreement?

It currently seems that neither is a workable model in the long term. Since the 1970s, the EU has signed 120 trade agreements with Switzerland. EU members are generally not happy with the way the Swiss model works and have asked the European Commission to review its effectiveness. It follows that the other member states (possibly the UK as well) are not all that keen on implementing the Swiss model in future trade relations.

For the UK to follow the Norwegian model, it would have to join both the European Economic Area (EEA) and the European Free Trade Association (EFTA). In either case, the unanimous approval of all of the members of the respective organisation would be required. Getting Norway to consent may not be easy, as going this route could jeopardize Norway’s agreements with the EU. The crux of the matter is that access to the single market through EEA membership means accepting the four fundamental freedoms and implementing EU legal acts without decision-making power on those legal acts. A significant share of the support for Leave stemmed from the sovereign right to decide on national legislation and free movement of workforce.

Will the UK have access to other EU trade agreements?

The EU's trade agreements are between third countries and the EU as a bloc, not individual member states. The question has been floated as to whether the UK could be an additional party to the EU trade agreements like CETA and the Transatlantic Trade and Investment Partnership (TTIP)? The only countries that accede to these agreements after negotiations are the EEA countries. That means that in order to enjoy the benefits of the EU trade agreements as a state party to the agreements, the four fundamental freedoms of the EU’s single market would have to be accepted.

One thing is certain…

Brussels thinks that the UK is sure to get what it wants because the EU needs the British market just as much as the Britain needs the EU’s market. In figures, this means the British export 44% of their output to EU markets and goods from the EU account for slightly more than half of the island nation’s imports.

One certainty in the trade negotiations is that the UK has to persuade its EU partners that trade is truly mutually beneficial for the Britain and the European Union. However, British negotiators should be under no illusion that the EU’s shock over the referendum results means that it will curry favour with the UK. Making exceptions for the UK is in no way beneficial for the EU – we can only imagine what sort of snowball effect that could set off.

[1] Qualified majority: number of votes is proportional to the population of the member state, tilted in favour of smaller member states.

[2] The four fundamental freedoms of the European single market are the free movement of people (including workers), capital, goods and services