Brexit – What Next?
In a post-Brexit world there are multiple existing frameworks that the UK can look to in negotiating a new trade deal with the EU.
- The European Economic Area (EEA) is that which is most similar to the EU, and, the free movement principle is considered essential to membership of the EEA.
- The European Free Trade Agreement (EFTA) consists of the EEA members who remain outside the EU, with Switzerland as the only state not also part of the EEA and as such this is often referred to as the Swiss model. The Swiss model is based upon a multitude of bilateral treaties, and again retains the principle of free movement
- The EU has recently concluded negotiations on the Comprehensive and Economic Trade Agreement (CETA) with Canada, which has yet to come into effect.
- There is also a Customs Union under which Turkey trades with the EU.
- As a baseline, international trade can be governed by the World Trade Organisation (WTO) rules.
The EEA is perhaps the closest alternative to the EU, and is often referred to as the Norwegian model. The free movement of people principle applies across the EEA and EEA (which includes EU) citizens are free to live and work in EEA states. EEA states are subject to the majority of EU rules and regulations however are exempt on certain areas such as agriculture and fisheries. However, the input that the EEA countries have into EU policy is very limited. They have been described as being subject to the rules without having a seat at the table where the rules are decided upon.
Non-EU countries within the EEA have to pay in to the EU budget proportionate to their economies and do not receive any funding from EU policies or any EU development funds. Norway for example pays in more than many EU member states, this is particularly heightened when you consider that actual members net contributions are reduced by the money they receive from the EU.
Switzerland is the only EFTA country to remain outside the EEA and its relationship with the EU is governed by over 120 bilateral agreements. These agreements cover some, but not all, aspects of trade, Switzerland makes a financial contribution to the EU, including to the enlargement fund, and is subject to the Free Movement of People. Switzerland does not have a general duty to implement EU laws but is obliged to do so where trade is concerned. EFTA importantly, does not provide full access to the single market for its banking sector and other parts of the services sector, which together make up almost 80% of the UK economy.
The Swiss model was devised in a very unique context and was intended to be a transition into the EU for Switzerland It is highly unlikely to be replicated
The EU has recently concluded seven year negotiations on the Comprehensive and Economic Trade Agreement (CETA) with Canada. The deal has not yet come into effect and still faces a number of hurdles to be ratified by each member state.
The EU and Canada have agreed to scrap tariffs on industrial and fisheries products. The majority of agricultural products, with the exception of some key and protected products, will also see tariffs scrapped. The agreement also brings significant liberalisation of public procurements, allowing European companies to bid for public contracts in Canada. Some agricultural products, such as eggs, chicken or beef, have been excluded or limited from the deal meaning an equivalent would make significant sectors of British agriculture subject to tariffs. This type of agreement however is unlikely to be reflected in a similar UK-EU agreement given the geographical and historical links between the two.
CETA does not involve Canada paying into the EU budget or signing up to EU rules on the free movement of people in return for increased market access.The free movement of people is not part of CETA, however, the agreement does provide for visa free travel. Limitations on this right to visa free travel for some member states is the subject of some consternation and could potentially delay ratification.
The presence of an investor state dispute settlement provision may also raise concerns for those who voted to leave the EU on sovereignty concerns.
Trade in goods under the Canadian agreement will be largely based upon EU rules of origin. These rules require a sufficient proportionate amount of a product to be made in Canada. A similar requirement would place additional requirements and customs checks on UK goods, subjecting small business in particular to onerous administrative requirements The UK would be subject to additional tariffs on products the EU seeks to protect whilst having no say on the setting of EU regulations and standards that all products would be required to meet.
There is limited liberalisation with regards to services, and importantly, financial services remain subject to regulatory and licensing requirements. In the wake of the Brexit, the City has stated the importance of Passporting rights to the viability of the financial sector, a CETA style agreement will not provide for any such rights. Passporting rights are the main concern for the City of London post-Brexit and is seen as essential to maintaining the City’s status as the place to headquarter from and do business.
A Customs Union
Turkey currently has a customs union with the EU, meaning that there are no tariffs or quotas on industrial goods exported to EU countries. As part of this union, Turkey must then apply the EU’s external tariff on goods imported from outside the EU.
However, the customs union does not apply to agricultural goods, or services – including financial services. As it is not a member of the EU, Turkey has no say on setting the EU external tariff. Were the UK to adopt such an approach, it would have no vote or influence on the trade deals that the EU pursues, effectively making it a silent partner in EU trade policy
Much like the Swiss bilateral agreements, the Customs Union with Turkey was established as a precursor to eventually joining the EU.
The UK could access the single market under WTO rules which form the default position for international trade. However, the principle of non-discrimination mandates that, in the absence of a bilateral treaty, members cannot treat any trading partner less favourably. This means the UK would be subject to the tariffs from its biggest trading partner in the form of the EU Common External Tariff. This avenue would also not provide any avenue for financial services to retain their current access to the single market.
The WTO rules will become the default position by which the UK trades with the single market if no trade agreement is reached before the UK exits the EU.
It is unclear which trade deal, or amalgamation of such, the UK will seek to follow. However, what is clear is that there will be important implications for EU citizens based in the UK. We would advise those that are in a position to do so to apply for permanent residency in an effort to solidify their status in the UK.