We are now entering a potentially dangerous phase of the Brexit process. Some Westminster politicians seem to think that the hard work is now over, given the epic struggles of 2017.
In fact, we have merely left the rocky terrain and are now entering the minefield.
Monsieur Barnier has repeatedly told us that the choice for the UK is between a Free Trade Agreement model (perhaps like CETA) or a Single Market-style relationship like Norway or Iceland.
Either alternative has pros and cons for the UK.
The FTA approach would give the UK back more sovereignty (at least on paper) but would leave us a rule-taker in many ways, following rules and regulations ‘faxed’ from Brussels when trading with our largest trading partner (and many other countries which are emulating their rules willingly or unwillingly).
In addition, this approach would mean we would have to strike new deals with the EU and its member states about the rights of UK citizens to live, work, study and retire in the EU (and vice versa).
This approach could also be harmful to our financial services industry since FTAs don’t tend to contain much on Services.
This fact has been conceded by Secretary of State for Exiting the European Union David Davis who has said that he wants “Canada plus, plus, plus”.
As he said in an interview on the BBC Andrew Marr show of 10th December 2017:
“AM: So if the basic deal, I’m being very crude about this, but is Canada plus the City, or something like that?
DD: Canada, plus, plus, plus is probably would be one way of putting it.
AM: Plus, plus, pluses are difficult, aren’t they? Because for instance the French want to steal as much of the City as they possibly can. So the fact that they can –
DD: I wouldn’t use that word. That’s your word.
AM: And what you want is Canada plus, plus, plus. David Davis. That’s what you said.
DD: You’re desperately trying to get a headline out of this.
AM: No, of course I am.
DD: What we want is a bespoke outcome. We’ll probably start with the best of Canada and the best of Japan and the best of South Korea and then add to that the bits missing which is the services.
AM: Okay, thank you very much indeed.”
So Mr Davis admits that CETA (Comprehensive Economic and Trade Agreement) the EU-Canada treaty doesn’t go far enough for the UK.
This was also conceded by Prime Minister May who said in her Florence Speech:
“As for a Canadian style free trade agreement, we should recognise that this is the most advanced free trade agreement the EU has yet concluded and a breakthrough in trade between Canada and the EU.
But compared with what exists between Britain and the EU today, it would nevertheless represent such a restriction on our mutual market access that it would benefit neither of our economies. And precedent suggests that it could take years to negotiate.”
So just to clarify:
- the UK government desperately wants a deal with the EU.
- it recognizes that CETA is the most advanced free trade agreement the EU has yet signed with a third country.
- the UK government has said this type of agreement doesn’t go far enough to be a template for a UK-EU deal.
- the clock is ticking.
The Bloomberg website recently reported that HMG believes Monsieur Barnier is ‘bluffing’ about services access:
[Prime Minister Theresa May believes Michel Barnier is bluffing when he says there will be no special deal for financial services, officials said, as the U.K. prepares to negotiate its post-Brexit ties with the European Union.
Two senior officials familiar with the matter privately think the EU’s chief Brexit negotiator is faking a hard-line stance in ruling out a deal that would allow banks to continue operating freely across the bloc.
Yet Barnier insists the U.K. will not be offered anything more than a Canada-style deal, which keeps tariffs to a minimum on goods but does not include trade in services. He says this is a result of May’s red lines, including her decision to leave the single market in order to regain control over immigration from the EU.]
This is the point at which the UK could potentially step on a landmine.
The EU has a trade in goods surplus with the UK, so it is in their interest to sign a basic goods FTA in order to ensure tariff free trade for their industries when selling to the UK. In fact post-Brexit, it is debatable whether the UK or USA will be the EU’s second largest single export market for goods.
However the UK has a surplus in Services trade with most EU countries, so it could be in their interest to be protectionist when it comes to trade in services (in order to draw business from London to Frankfurt and Paris).
Springing the trap
Monsieur Barnier could easily catch David Davis in a trap by simply doing the following:
- Stage an angry ‘walk out’ of negotiations, saying Davis is asking too much.
- Brief European Journalists that talks are about to collapse.
- Have more negotiations close to the deadline (to avoid detailed scrutiny of final draft proposals).
- Call a press conference in which he says Davis is a “smart operator” who has “bargained hard” and got a great deal including services.
- UK signs deal.
All Barnier has to do is include a services chapter in the agreement that contains little of substance. Don’t forget that the UK hasn’t had to negotiate its own FTAs in decades and so could easily fall for a clever scheme.
Just because a trade agreement contains the word ‘services’ doesn’t mean that your nations’s service providers will have unfettered access to the other nation’s services markets.
Many FTAs contain warm language about Services but don’t go much beyond merely reaffirming the parties rights and obligations under the General Agreement on Trade in Services (GATS).
If Mr Davis fell for this, then he might be initially praised as a tough negotiator, until businesses finally got to see the small print of what he had signed us up to.
A different path?
The UK could avoid a complex and difficult negotiation and transition period by going down the path of Iceland. Iceland has free trade with the EU in both goods and services.
If the UK uses this approach, it would retain EEA (European Economic Area) membership by rejoining the EFTA European Free Trade Association (which we helped to initially create).
If we left the EU and returned to EFTA we would be free from the:
• EU Common Agriculture and Fisheries Policies;
• EU Customs Union;
• EU Common Trade Policy;
• EU Common Foreign and Security Policy;
• EU Justice and Home Affairs
• EU Monetary Union (EMU).
EFTA Countries don’t come under the ECJ but instead the less ideological and more ‘hands-off’ EFTA Court.
In addition, we would regain our seat at the World Trade Organisation (WTO). If the UK does rejoin EFTA, it will be applying to take part in its existing trade portfolio – 27 free trade agreements (covering 38 countries including Canada).
Unlike the EU, EFTA has a unique ‘two-track’ trade deal system. EFTA’s negotiators work to negotiate trade deals for the bloc as a whole, while allowing member states to negotiate their own bespoke trade deals.
An example of this is that all of EFTA has a trade deal with Hong Kong, but EFTA members Switzerland and Iceland have separate trade deals with China.
We believe that most of the states that EFTA has signed FTAs with would agree to our participation, and we could find that many of the countries we currently have preferential trade relationships via the EU would also wish to carry on ‘business as usual’. This would make the UK in EFTA a world-leading Free Trade nexus.
Brexit was a decision made by the British people for the UK to take its own path in the world. The EFTA/EEA approach allows us the freedom to go where we like, but equips us with a compass, a flashlight and a map.
We suggest Mrs May adopts this approach; before we get lost in the minefield of global trade.