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If there is a Brexit deal - what trade agreements can UK businesses expect?

Norway plus, Canada plus plus, or no-deal rules?

The London headquarters of Goldman Sachs on Fleet Street.
The London headquarters of Goldman Sachs on Fleet Street.
Image: Empics Entertainment

THE UK AND EU have been in the process of negotiating the terms in which Brexit will happen on 29 March.

The proposed deal (called the Brexit Withdrawal Agreement) is due to be voted on in the House of Commons in mid-January, and doesn’t look likely to pass.

But if we do get approval on this proposed Brexit deal – and that’s a massive if – what trading agreements can the UK expect to ask for, and get?

The Norway option

Energy-rich Norway opted against EU membership in 1994 and instead chose to join the European Economic Area (EEA), enjoying all the benefits of the EU’s single market without having a say in the rules that shape it.

As a member of the EEA, which includes all EU countries as well as Iceland and Liechtenstein, Norway must allow the free movement of goods, capital, services and persons with its fellow members.

These are the EU’s four fundamental freedoms as set out in the Treaty of Rome, the cherished accomplishment of Europe’s drive towards peace and unity after World War II.

EEA members must accept EU rules in many important sectors, including competition, consumer protection and the environment, with rules updated automatically in line with EU legislation.

The big advantage for Britain in the Norway model is that its financial hub in London would remain undisturbed. By remaining in the single market, the City of London would keep its unfettered access to Europe and remain the launching point for US and Asian banks into the EU.

But Norway, with just 5.2 million people, is a far smaller player than Britain, and its model of ties with the EU is a no-go for Brexiteers.

Fuelled by anti-immigration sentiment, Britain’s vote to ditch the EU seemed to be a rejection in particular of freedom of movement, making the Norway option untenable as long as Theresa May’s conservative, pro-Brexit government remains in power.

The Single Market is based on four freedoms: the free movement of goods, services, people and capital. The EU has repeatedly said that it would not separate these four freedoms, meaning the UK would have to choose between limiting the free movement of people and protecting London’s thriving financial sector.

Staying in the single market would be challenging for a pro-EU government in Britain given the loss of sovereignty involved.

The pro-Brexit camp also rejects any involvement of the EU’s European Court of Justice, which holds the ultimate authority over the EEA.

Canada ‘plus plus plus’

Barring the close alignment of the single market, Britain is keen to strike a trade deal even more ambitious than the EU’s recent accord with Canada, known as the Comprehensive Economic and Trade Agreement (Ceta).

That treaty is considered a blueprint for the EU’s trade deals going forward and was a model for the most recent talks with Japan.

UK Brexit negotiator David Davis has called for a “Canada plus plus plus” while Belgian Prime Minister Charles Michel advocated the same, albeit with only two pluses.

Unlike classic trade deals of old, the Ceta pact touches on all aspects of the economy, including health and safety norms, and not just the usual cuts to tariffs and import quotas.

Both parties negotiate, sector by sector, an agreed level of regulatory cooperation, with London especially keen for closely aligned norms for finance, aviation and autos.

While they are ambitious for far-off Canada or Japan, an EU-UK trade deal would in fact mean a significant distancing between the UK and Europe, which are now perfectly aligned with zero tariffs.

In a Brexit twist, the trade talks would decide where to impose barriers and division – known in trade parlance as divergence – instead of the usual practice of trying to remove them – known as convergence.

These future trade barriers, which may require customs checks, pose a daunting problem with regards to EU-member Ireland, which insists on maintaining a frictionless border with the UK’s Northern Ireland – and has the backing of Brussels to defend this point.

But some have seen a back door to a possible “soft Brexit” through a provision in last week’s Brexit divorce deal which says that if London fails to come up with a better idea, there should be “alignment” between Britain and Ireland.

WTO rules

If neither of the above options prevails, Britain will inevitably revert to “third country” status in the eyes of the EU, with trade relations administered according to the rules of the World Trade Organisation.

The EU’s default position at the WTO involves tariffs and increased barriers that could cripple the seamless supply chains that connect Britain and the EU.

While the EU’s average tariff rate for third countries is low – around 1.5% – they are bigger in certain strategic sectors: for cars, the rate is 10%.

Moreover, under WTO rules, also known as “hard Brexit”, it is unlikely that British products could enter the EU without further checks at the border.

The situation would grow worse as regulatory differences widened over time – a prospect Ireland would surely refuse.

Researchers at the London School of Economics predict that the “WTO rules” scenario is underestimated by hard Brexit proponents and would slash Britain’s trade with the EU by a catastrophic 40% over ten years.

 © AFP 2018 

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