What should a future UK-EU trade deal look like? Recently, there has been an attempt from the EU side to contrast a ‘bare bones’ free trade agreement with something deeper and more comprehensive. If the UK wants a ‘quick’ deal, the EU argues, it will have to be of the ‘bare bones’ kind: a simple no-tariff and no-quota deal. A deeper and more comprehensive deal will take much longer, we are told, and require many potentially uncomfortable compromises on the UK side. So, the EU argues that the UK must be prepared to extend the ‘transition’ period, perhaps for many years, if it wants the supposed greater benefits of a deep and comprehensive free trade deal.
Don’t be fooled. The EU’s intention here is the same as it has been from the start of the Brexit process – to attempt to trap the UK into a subservient economic status and preserve it as a ‘captive market’ for EU goods. The potential extra benefits of a ‘deep and comprehensive’ trade deal versus a more basic one are quite limited and in any case the EU has no real intention of negotiating such a deal – at least as understood from the UK side.
Let’s first look at the EU’s motives. In the abstract, it would appear to make sense that the future relationship between the EU and UK preserves as much freedom of trade as is sensibly consistent with separate legal orders and independent trade and regulatory policies.
But from the EU perspective, that is not what the future relationship talks are about. As former Dexeu special advisor Raoul Ruparel has recently revealed, the EU has said to UK negotiators that the future relationship is ‘nothing to do with economic rationality’. Rather, the EU’s main aims are as follows –
• To extract as many financial resources from the UK as possible. Either through making the UK continue to contribute to UK coffers as part of a trade deal or extending the ‘transition’ period as long as possible. Or, ideally, both.
• To tie the UK into dynamic and permanent regulatory alignment with the EU. Looking at EU discussions on the future relationship, one is struck over and over again by the fact that EU governments (chiefly, but not exclusively, France) appear to be terrified that a UK free to set its own regulations will out-compete the EU, taking jobs and investment away. Locking the UK into the EU’s regulatory system – without a say ¬– heads off this perceived problem and also allows the EU to use regulatory changes to turn the tables and undermine UK businesses.
• To preserve the UK as a captive market for EU goods. Currently, the EU runs a massive trade surplus with the UK (£94 billion in goods trade in 2018). This results from the UK’s membership of the EU customs union and single market, which grant EU producers large trade preferences over other suppliers to the UK market – especially in areas like agriculture. A UK with a truly independent trade policy would be likely to sign deals that greatly eroded these preferences, leading to EU suppliers losing market share in the UK to suppliers from the rest of the world.
• To maintain the EU’s free access to UK fisheries. The EU benefits from a grossly unequal distribution of fishing resources under the current EU Common Fisheries Policy: EU catches in UK waters massively outweigh UK catches in EU waters. While fishing is not hugely significant economically, it is a very sensitive area for a number of EU member states.
• Broadly, to establish the UK as an EU client state. As well as trying to make the UK subservient in economic terms, the EU seeks to lock the UK into political subservience as well, for example by tying it into the EU’s rapidly developing common defence and security structures and maintaining the control of the European Court of Justice (ECJ).
The EU is already attempting to link a future trade deal with the UK to some of these goals such as fishing and security and has repeatedly demanded regulatory alignment to be part of the deal as well (ideally overseen by the ECJ). It has also emphasised the preservation of protectionist elements such as its system of geographical indications for agricultural goods, and most recently has linked a trade deal to continued freedom of movement of persons also. Science and transport cooperation are also in the mix.
The ideal endpoint for the EU would be to have the UK locked into the EU’s customs union and regulatory system, with no meaningful say in either. But if this can’t be achieved, the next best thing is to a have a future relationship that preserves as much EU control over the UK economy as possible and by doing so makes it very hard for the UK to have a genuinely independent trade policy. Elements such as keeping the UK aligned to EU agricultural (SPS) rules and other restrictive regulations will go a long way to frustrating the UK’s ability to sign meaningful trade deals with third countries as well as blunting UK efforts to make its economy more competitive.
The EU will also seek to make the trade relationship interdependent with other bilateral relationships, so that if it doesn’t get its way on trade cooperation in other fields will be hit too. This will be sugar-coated as providing an ‘overarching framework for cooperation’ but in reality it will be a way of trying force the UK into accepting a subservient economic relationship. In addition, if such an agreement is deemed ‘mixed’ by the EU it will need unanimous ratification by members states, potentially dragging the process out further with attempts by small countries and regions to blackmail the UK over specific issues. A pure trade deal, by contrast, can be ratified by qualified majority vote.
UK negotiators should thus strongly resist any attempt by the EU (and UK business interests) to tempt them into a lengthy negotiation for a ‘deep and comprehensive’ trade deal. The EU will string such negotiations out endlessly, demanding a range of unpalatable concessions in line with the goals above and linking progress to concessions on a wide range of non-economic issues.
And crucially, it’s not worth it. The additional economic benefits to the UK from a ‘deep and comprehensive’ deal are just not that large. Both ‘deep’ and ‘basic’ trade deals would remove tariffs from bilateral trade, but supposedly a ‘deeper’ deal would have extra benefits such as reducing non-tariff barriers and extending trade liberalisation to services. However, the extra economic benefits that might accrue from these additional deal elements are hugely exaggerated:
• Costs related to border processes (e.g. customs) will be similar in the case of a WTO exit, basic free trade deal or more sophisticated trade deal. Even a new EU-UK customs union would not eliminate these. Moreover, in contrast to some claims (including those of the UK HMRC) such costs are not high: they are likely to be at most around 1% of the value of consignments.
• Technical barriers to trade, which are the largest potential source of non-tariff barriers as shown by OECD work, are not going to be huge. The UK and EU will start with identical regulatory systems and many UK firms are likely to continue to keep the distance modest by for example manufacturing in accordance with e.g. CEN/CENELEC standards. They are already set up to do so, minimising additional costs.
• Many UK firms have already taken the necessary steps to avoid non-tariff barriers. Much has been made of the problems of ‘conformity assessment’ i.e. UK firms needing to have products tested by EU approved bodies to be allowed into EU markets. But for most products this isn’t necessary (self-certification can be done) and where third-party testing is needed, a simple transfer to using EU-based bodies or UK ones acting as subcontractors for EU testing/certification bodies is possible. Many firms have already done this.
• Independent studies such as that by Kee & Nicita show EU non-tariff barriers against the rest of the world are modest at perhaps 3-4% of export values. Even if a ‘deep and comprehensive’ deal could reduce these by say one-third, the economic impact would be tiny: prices of exports worth 13% of UK GDP might perhaps be 1 to 1.5% lower, so even if the price elasticity of demand for these exports was 2, they might rise 2-3% and UK GDP might be 0.3-0.4% higher. This is very small beer.
• Large-scale studies of many trade arrangements show the differences between free trade deals and deeper trade relationships are not large. The study by Cippolina and Salvatici found no evidence that even customs unions (very ‘deep’) outperform free trade deals, while a more recent study suggests the EU customs union has a smaller trade creating effect than free trade agreements such as NAFTA (which covers North America).
• For service industries, free trade deals tend to provide only limited liberalisation even in the most advanced cases. But the key point here is that the EU single market in services is very limited and incomplete, and a variety of studies suggest it has had at best a small impact on raising UK services trade with the EU. So big new trade barriers to UK services exporters are not going to emerge after Brexit, even in a WTO exit.
• A key example here is financial services. Early on in the Brexit debate, we were told the financial services industry would be crippled by the loss of ‘passporting’ rights in EU markets, with hundreds of thousands of UK job losses. In fact, the industry has long since given up trying to preserve passporting rights and has discovered it can easily enough live without them: actual job losses/transfers have been tiny compared to the lurid early predictions.
Overall then, the marginal benefits from pursuing a ‘deep and comprehensive’ trade deal, as opposed to a very simply deal just removing tariffs and quotas on goods trade, are small. And doing so would risk the UK becoming tied into a very lengthy negotiation process where tiny economic gains would be bartered for severe restrictions on the UK’s freedom of action which would negate many of the potential economic upsides of Brexit.
This latter point is crucial. The EU is right to be concerned about the scope the UK has to boost its economic performance through smarter regulation, freeing itself from burdensome EU restrictions and re-orienting its trade towards faster-growing parts of the world. The trade deal the UK pursues with the EU needs to preserve the maximum amount of freedom in these areas and as such should be – in the first instance at least – as basic as possible. If need be, any EU trade deal can always be upgraded later, when the EU is likely to be less dogmatic than in the immediate future.
Indeed, the UK needs to go further and make clear to the EU from the outset that attempts to link fisheries, security, freedom of movement, regulatory alignment or other elements to a basic trade deal won’t fly and that the UK will respond to such attempts by (i) intensifying trade talks with other parties and (ii) removing elements the EU would like from a basic trade deal. An obvious example would be excluding sensitive agricultural items from the scope of a trade deal. The notion of rolling together these different elements in an Association Agreement or similar framework should be rejected.
In this respect, there has been some good news recently with Boris Johnson confirming that trade talks post-Brexit will be carried on in parallel with all main trade partners. This will put extra pressure on the EU not to string things out as doing so risks an earlier and greater loss of trade preferences in the UK market.
‘Harry Western’ is the pen name of an independent economist working in the private sector.