Brexit: what are the trade options?

With the date for the UK’s exit of the EU now less than a year away, pressure is mounting on the government to find a trade arrangement that works

By Tim Gibson

 

When the British people woke up on the morning of Friday, 24 June 2016, there was an overwhelming sense of history in the making. Whether they voted to leave or remain in the European Union, the die was cast. A new era of UK-EU relations was on the horizon.

At that time, the major milestone ahead was the triggering of Article 50, which formally signalled our nation’s intention to withdraw from the EU within a two-year period. Prime Minister Theresa May set that process in motion in March 2017, meaning the UK leaves the EU on Friday, 29 March 2019.

Before the distractions of a general election, it must have seemed to Mrs May and her colleagues as if there was plenty of time to negotiate a graceful exit from a trading bloc of which the UK has been a part since 1973. But now, with just 10 months to go until Brexit Day, and little sign of consensus even in her own cabinet about the best deal, the pressure is on.

Part of the problem is that the very disagreement that prompted the referendum in the first place has now been transferred to the question of the UK’s trade relationship with the EU. Do we surrender control over our borders and laws for the sake of free trade with EU member states, or find an arrangement that gives us control, but at the cost of trade tariffs? And which approach will be best for the long-term economic vibrancy of the UK?

With so much at stake, it’s easy to feel overwhelmed by the arguments on either side. So here, to soothe your worries, is a summary of the options currently under consideration, along with their with pros and cons.

 

1. Full customs union and single market

The customs union ensures all member states impose the same tariffs on goods imported from outside the EU (this is known as the Common External Tariff, or CET), and that no tariffs are levied on goods bought and sold within the union.

The single market commits members to the free movement of labour, and to free trade in services as well as goods throughout the EU. Membership also involves making a financial contribution to the EU.  

Thanks to the Brexit vote, the UK has effectively committed to leaving either the single market or the customs union, or both.

If we didn’t, we’d have to adhere to EU rules and regulations governing trade, and retain an open border. These are precisely what Brexiteers are eager to avoid: the whole point of leaving, they say, is to be free of EU governance, control immigration, and stop paying into EU coffers.

Pros: minimal disruption to UK-EU trade relations; ease of transition

Cons: UK sacrifices control over trade, tariffs and rules and regulations; a very soft version of Brexit; no reduction in immigration from EU member states

 

2. The Norway model

So called because it replicates the relationship between Norway and the EU, this trade arrangement involves the UK withdrawing from the customs union, but staying in the single market.

Norway belongs to the European Free Trade Association (EFTA), which in turns facilitates membership of the European Economic Area (EEA), but not to the customs union. In effect, that gives Norway full membership of the single market. But it retains the right, along with other EFTA members (Switzerland, Lichtenstein, Iceland and Norway), to negotiate free-trade deals with non-EU countries, including Canada.

If the UK pursued a similar model, it would be free to negotiate its own trade arrangements with non-EU countries, and enjoy tariff-free trade within the EU. But it would remain subject to EU regulations, and the free movement of people, and would continue to pay into the EU’s budget.

Pros: gives the UK some freedom when it comes to international trade deals; facilitates easy and free ongoing trade with EU member states; a ‘tried-and-tested’ model

Cons: UK doesn’t regain control of product and service regulations; UK required to retain open borders for migrant workers due to free movement of people in EEA; continued contribution to EU finances

 

3. Talking Turkey

Turkey has the exact opposite of Norway’s relationship with the EU, in as much as it does not belong to the single market, but does have a customs union. This means that only goods (not services) can be traded freely with EU member states, and that the country levies the EU’s Common External Tariff on imported products.

Not joining the single market ensures the country does not make a financial contribution to the EU, and, crucially for many Brexiteers, it removes the commitment to the free movement of people. So it is a means of controlling immigration.

That said, a customs union makes it difficult to negotiate separate trade deals with non-EU members, because of the CET, so would tie the UK’s hands in international trade.

Pros: capacity to control immigration from within the EU; no budget contributions to EU

Cons: no free trade agreements possible beyond EU; continued adherence to many EU regulations; no free trade of services within EU

 

4. The Canada model

Often spoken of by hard Brexiteers like Boris Johnson as a potential model for the UK, Canada has a bilateral trade deal with the EU. This ensures free trade on the vast majority of goods bought and sold between the countries, and mutual acceptance of one another’s product standards and regulations (rather than wholesale adoption of one set over the other, as happens in a single market).

The arrangement leaves both parties free to negotiate trade deals with other nations, but involves a hard border. In other words, goods and people do not pass seamlessly between the countries; custom controls would remain in place, even at the Irish border (though a solution such as “Maximum Facilitation” could ease these processes).

The Canada model delivers a lot of what hard Brexiteers desire, in terms of control for the UK over borders, laws and international trade. But Canada’s trade deal with the EU took a long time to negotiate, and the EU may not be as eager to play ball with the Brexiting UK as it was with our Commonwealth contemporary.

Pros: delivers a hard Brexit, giving the UK control over borders, laws and international trade; removes commitment to free movement of people; retains free trade with EU member states

Cons: lengthy negotiation may exceed Brexit timetable; a hard Irish border poses a challenge

 

5. No deal

No deal is better than a bad deal. That’s pretty much what Theresa May said in her first major speech about Brexit, back in January 2017. And while she has rowed back from that rhetoric in more recent speeches, no deal remains an option – especially as March 2019 draws nearer.

Under this option, the UK would revert to World Trade Organisation (WTO) tariffs on trade with the EU. It wouldn’t be the case that the EU could be especially punitive in its dealings with the UK, but nor would we receive any special treatment.

The impact of WTO tariffs on trade with the EU is likely to push prices up for UK consumers. By way of illustration, KPMG says the cost of a traditional English cooked breakfast could go up by as much as 12.8pc. So while the country would regain control of its borders, trade policy and regulations, there would be an immediate impact on the cost of living.

Moreover, UK food producers may find that EU buyers favour other suppliers, because their exported goods are no longer subject to free trade and therefore seem more expensive.

Pros: gives Brexiteers exactly what they want in terms of sovereignty and control over trade, immigration and laws; negotiation is straightforward – the UK simply walks away

Cons: puts a giant full stop at the end of the UK’s relationship with the EU; no opportunity for ongoing free trade; could lead to increased prices in UK, and less demand for our products in the EU; could leave the UK isolated on the world stage

 

© 2018 Just Recruitment Group Ltd.

Posted on Tuesday May 29