With the UK having so far failed to demonstrate ‘sufficient progress’ in Brexit talks on its exit settlement, a move to the crucial second phase on the future EU-UK trade relationship can only be signed off in December at the next EU leaders summit in Brussels.
Such slow progress is leaving precious little time for both sides in what was already a small negotiating window of 17 months before the deadline of March 2019.
In the absence of tangible signs from negotiators, what are the likely scenarios of the future EU-UK trading relationship? And what must be agreed to avoid a ‘cliff edge’?
It is possible to make out six possible basic scenarios:
The first is ‘no deal’ which would entail WTO rules governing EU-UK trade. This is the least-desired option for both sides given the current absence of trade barriers and the amount of red tape that would be created. The UK could unilaterally decide not to impose tariffs, but this would have to apply to all trading partners, thereby removing negotiating leverage for its future trade deals.
The second option is a Canada-style free trade agreement (FTA). This would involve the removal of 98 per cent of tariffs and quotas on goods. Crucially, however, provisions on services are limited and financial services are excluded entirely. Theresa May conceded in her Florence speech that both sides “can do so much better.”
Single market access
The third option is an agreement which would grant access to the EU single market through membership of the European Economic Area (Norway), the European Free Trade Association (EFTA), or a network of bilateral arrangements (Switzerland). However, these options involve the implementation of EU laws with no influence over their creation, which would not be politically palatable in England.
The fourth option would be a customs union with the EU. However, the WTO’s General Agreement on Tariffs and Trade (GATT) requires alignment of the external commercial relations of members of a customs union, which would seriously inhibit the UK from doing its own FTAs.
The fifth option would be a ‘creative’ or bespoke solution, as Theresa May has called for. However, it is not clear what this involves, or whether the UK could ‘cherry-pick’ the benefits of EU single market and customs union membership without their obligations.
The sixth option would be for the UK to remain in the EU. This is the most unlikely scenario, but it cannot be ruled out.
With the negotiating window shrinking, the chances of ‘no deal’ becoming a reality are increasing. Ironically, in view of the professed commitment to free trade on both sides of the Channel, this would trigger the most egregious act of peacetime protectionism for nearly a century.
Theresa May has proposed a period of implementation with
“access to each other’s markets on current terms … The framework for this strictly time-limited period would be the existing structure of EU rules and regulations.”
This would seem to imply staying in the EU single market and customs union for a period of two years after March 2019 while the logistics of an FTA, negotiated and agreed before March 2019, are phased in.
Lead EU negotiator Michel Barnier has indicated that in his view it would be impossible to conclude FTA negotiations by March 2019.
Overall, it seems that the most likely outcome for the future EU-UK trade relationship will be a ‘Canada-Plus’ FTA.
How good or bad this is for business will depend on the amount of the ‘Plus’. The other big question is timing – how quickly can a “deep” FTA be negotiated; and can business be given early reassurance about the transitional arrangements? The UK and EU must work to ensure clarity on these issues as soon as possible to avoid the worst possible scenario.