BREXIT – A NEW MODEL FOR BRITAIN
· Looks at the different modelsthe UK can take on post Brexit
This article is intended to examine briefly the different types of models used by countries outside the EU who wish to gain some access to the single market.
Before looking at the different models; we will first of all define the single market.
1. The Single Market
The single market is an economic trade bloc that exists for the benefit of its citizens. It is the largest economic free trade zone in the world. The single market allows: free movement of goods, services and capital between all 28 member states of the EU; referred to as the Customs Union. There are preferential/no tariffs or import duties for members who are part of the union. The bloc stimulates competition and trade and aims to improve efficiencies’ and raise standards of the quality of goods and keep down costs.
There exists a single common external tariff for businesses who import from countries outside the EU.
Europe also negotiate on behalf of its members free trade agreements with other countries for the whole bloc. So far there are 36 external trade agreements that covers 53 economic markets. We get preferential rates because of these agreements when we export.
Not only do UK businesses have access to the largest single market in the world tariff free, we also benefit from cooperating with our European neighbours in relation to international security, crime and terrorism.
The financial passport allows free movement of financial services. UK has always benefited from this and has always been at the heart of Europe’s financial sector. This will change once we Brexit and it will impact on London as the financial centre. The extent to which this sector is really damaged will depend on the Brexit terms. If anyone disagrees with this statement. I am truly happy to hear your views on the matter.
An important factor of this union is that we cooperate with each other on terrorism, crime and security. The Union has helped to maintain a reasonable amount of peace in the region[i].
A. The Norway Model
· Norway is not part of the EU, but is a member of the European Economic Area (EEA) which comprises of the EU 28 member states and Norway, Iceland and Liechtenstein[ii].
· Norway has some access to the Single Market, but not complete access. Norway is therefore outside the EU Customs Union.
· This model means that there is no access to the EU trade agreements with 53 other markets around the world.
· Norway contributes to the EU and is bound to its rules.
If we were to take on this model we would still be bound by EU rules but we have no right to vote or veto some of these rules. To adopt the Norway model we would need to agree with the remaining 27 EU countries, along with Iceland Liechtenstein and Norway. Members have a right to veto the UK from joining.
The key features of the Norway Model are:-
Access to the European Union
· Norway is outside the Customs Union, thus all the trade in goods between Norway and the EU are subject to customs procedures. Countries that export to the EU will have to provide documentary evidence that goods are made inside the EEA or the goods comply with 500 product specific rules[iii]. Reality check, this means more costs to UK businesses.
· Norway is outside the Single Market for agriculture. However 64% of the UK fish exports and 73% of our vegetable exports[iv] so these industries if they still want access to the market will have tariffs added making the goods less competitive.
· Norway deals with its own trade and investment deals. Some has been dealt with by the European Free Trade Association[v] however this organisation only has 25 Free Trade Agreements compared to the 53 we abandoned with Brexit.
· Norway chose to be part of Schengen border free area. Thus it accepts freedom of movement from both the EU and EEA. Although because of the recent migration crisis, Norway has introduced temporary passport checks at its borders for EU member states[vi].
· Norway has no automatic right to participate in the EU cooperation in police and security. In order to benefit from important things as the European Arrest Warrant, Norway has executed a bilateral agreement with the EU. These take time to negotiate.
· Norway has no voice in decision making or a right to vote over EU International and security policy as it is not part of the club.
Costs and legal obligations
· Norway domestic laws comply with EU legislation that forms part of the EEA Agreement.
· Norway has to accept freedom of movement.
· Norway still makes a significant spend to the EU.
· The UK will still have to pay the EU for access to the single market. The House of Commons estimated that its contribution under the EEA would fall by 17%.[vii]
· I am not prepared to write a lot here as it goes without saying that if you are outside of an important economic club; you will have little or no influence. Naturally it will impact on how you are perceived also on the world stage.
Good model or not for the UK
First of all we are not really comparing like for like. Norway is a much smaller country. 5.2 million Population. GDP $388 billion. The UK in comparison 65 million people and our GDP is $2.85 trillion[viii]. We used to be the 4 largest economy in the world; everyone forgets this fact and under the current government we are now the 5 largest economy in the world.
Compared to the current arrangement, this proposed new arrangement will not benefit those who run businesses that export to the EU as there will be additional costs with more regulation and no influence. It is not rocket science.
Due to the fact that immigration was the biggest reason for Brexit; I cannot see those who vote for Brexit accepting freedom of movement. However if we want access to the single market; freedom of movement may be imposed. This is the position under the Norway model; so I do not see this model being used frankly.
This model is not good for the financial services sector which accounts for 8% of the UK output.
We most certainly will be spending a lot of time negotiating new Free Trade Agreements.
Whatever new model we have, our global influence has been damaged as we had a powerful position almost at the helm of the European Union; but few people would agree with that statement.
The Norwegian government did a report in 2012 of the benefits of being outside the EU and concluded that it has received economic benefits through access to the EU single market; but the cost was a loss of voice. In other words EU rules and regulations were imposed rather than negotiated.
On a personal note, I cannot see how this model would assist the UK to achieve its goals especially as free movement is a fundamental pillar of the EU. The UK is trying to get away from this provision.
B. Bilateral Agreements
Some countries have simply negotiated their agreement with the EU. To be honest this appears to be what the UK may have to do. How long it would take for a reasonable agreement to be made only time will tell. However I would be impressed if everything was resolved, done and dusted within 2 years.
Countries that appeared to have negotiated such agreements are: Switzerland, Turkey and Canada. We will therefore briefly look at these in turn.
Switzerland’s relationship with the EU is based on a number of bilateral agreements. The country has negotiated over 100 agreements with the EU covering market access in relation to different sectors. Unlike Norway Switzerland only has partial access to the Single Market. Most of it is trade in goods, agriculture is not covered and therefore any agricultural produce is subject to tariffs.
Switzerland bilateral agreement only provided limited access to trade in services. There is a limited market for professional services, such as accountants or lawyers (90 days to be precise). This therefore has impacted on Switzerland’s ability to export to the EU.
In order to benefit from the financial passport provisions, Swiss banks have been forced to establish a subsidiary in an EU country with full membership (dare I say such as the UK) so as to get the passport rights. Brexit must make the UK less attractive.
UK banks, just like the Swiss banks will have to do the same to retain financial services passport rights.
Costs and legal obligations
Switzerland does not have to comply with EU legislation like Norway; however because of its agreements with the EU Switzerland chooses in most cases to align its legislation to EU laws.
Switzerland has to enter into its own trade agreements with other countries around the world. Switzerland has 29 agreements which covers 41 countries unlike the 53 markets covered by the EU. These agreement can take time to negotiate.
Switzerland has similar arrangements as Norway on border and police cooperation. It is also part of the Schengen border free area.
Just like Norway, Switzerland is not part of the EU club so it has little or no influence. It has always been known for its neutrality in any event politically. Like Norway it does make a contribution to the EU spend as part of its bilateral agreements.
Currently there is a dispute between Switzerland and the EU regarding one of the bilateral agreements. In 2015 the Swiss chose to vote for immigration quotas and the EU is arguing that this is a breach of the bilateral agreement between Switzerland and the EU regarding freedom of movement. In response the EU has suspended negotiations with Switzerland regarding further access to the Single Market.
Good model or not for the UK
I do not see how this can differ from the argument specified above; save to say the position for Switzerland actually appears to be worse as they have limited access compared to Norway.
This model was created to enable Switzerland to join the EU. This never occurred. The EU are not happy with the model and it is unlikely that they would enter into such an agreement again.
Turkey and EU have been trading with each other under a trade and economic Association Agreement since 1963[ix]. Turkey joined the EU Customs Union. The relationship is based on the fact that Turkey is a developing country that aspires to acquire full EU membership.
The recent political turmoil in Turkey will not help it to acquire the EU membership it desires.
Access to the single market is partial and relates to Turkey’s industrial goods and processed agricultural goods. Thus there are no custom checks for these goods when they enter the EU single market. The arrangement means however that Turkey has to comply with some EU specific rules such as the rules on competition, production and the environment. Turkey aligns support to businesses (state aid) in line with EU rules. Turkey’s tariffs must also be aligned with the EU.
Part of the agreement that Turkey has with the EU means that a Turkey has some limited rights to enable it nationals to reside in the EU.
One of the major problems with this model is that the Customs Union does not cover financial services which are essential to the UK economy.
Costs and legal obligations
Turkey can do trade with other countries. However because its tariffs are aligned with the EU, this limits the trade deals that Turkey can agree. What makes things worse is that if the EU enters into an agreement with a third party country. Turkey is bound by that agreement and must open its market to the third party county. Turkey still has to enter into an agreement with this country to be able to export its goods.
Influence and sovereignty
It is clear that there is only minimal influence.
Suitable for the UK
The above model would not be suitable for the UK who would have tariffs imposed. This model again is a precursor to Turkey joining the EU; there is no evidence that the EU would have the appetite for a similar model with another country. However we would be foolish to use this model as it’s clearly not in our vested interest as a country to do so.
Canada and the EU have a Free Trade Agreement. It took them 7 years to conclude the agreement. Canada’s access to the EU is less than what we currently enjoy. The agreement had to be approved by the EU Commission and its parliament.
Canada has no obligation to contribute to the EU. Canada is not part of the single market therefore it is not bound by rules and regulations and policies and it does not have access to the EC of Justice
The agreement will allow for tariffs on industrial and most agricultural goods entering the EU to be phased out. In this agreement businesses are allowed:
a. To carry out trade, Canadian companies must prove that sufficient components of goods they manufacture are from Canada in order to benefit from the preferential tariffs.
b. Tariffs have not been removed however for everything. Thus for certain products the EU has imposed quotas. I assume this is when the EU produces the product. Thus Canada is limited on its export of beef. I understand that 90% of the UK beef goes to the EU, no wonder we will want some access to the market. Outside Europe our famers are facing tariffs of more than 12%. Our cars will also be looking at a similar tariff.
c. There is no passport provision for financial services. If Canadian financial firms want to benefit they have to establish a subsidiary inside the EU to operate under EU regulations.
d. EU is liberalising its market in relation to professionals. Thus making the market more flexible for professionals to travel and work abroad. Currently if Canada wants to benefit it has to establish subsidiaries in individual EU countries, employing professionals with qualifications in that country.
e. In terms of products submitted, for example medical equipment, in order to enter the market, the EU will have to approve the product.
f. Investment restrictions exist in relation to sectors such as banking and aerospace.
Costs and obligations
Both parties made concessions to make this agreement. It has taken a long time to thrash out though, 7 years!
Suitability for the UK
Another model where I cannot see anything positive because UK companies will have to comply with the rule of origin, adding to their costs. UK will have to comply with EU product standards which would be imposed as we will not be in a position to help set those standards. If companies in the UK feel that they are being treated unfairly under the agreement, it would be difficult and costly to enforce as the UK Company will not be able to use the ECJ.
UK will not have the benefits of cooperation with the EU regarding security, the police and the European Arrest Warrant.
There would be tariffs applied to industries such as agriculture and for those that manufacture. We may also have quotas imposed. We will not be able to benefit from the Financial Services passport regime. Instead the banks and insurance firms will have to have a base in a European country, a member of the EU to obtain this benefit.
C. WTO – MODEL
The World Trade Organisation model is like the ‘lender of last resort in banking’. If we cannot arrive at an amicable agreement with the EU, this is the model we may have to be used.
We would have no preferential access to the single market as all WTO members must be treated the same. We would be outside the European Union. There would be no need to make a contribution.
We would have tariffs imposed by the EU. I believe that this is inevitable. This will significantly increase costs and make us less competitive than countries within the EU or those with free trade agreements. The EU will impose a common tariff and WTO members must offer similar terms to other WTO members. So much for sovereignty and control. The WTO agreement would not cover financial services.
Access to the 53 markets we currently have would naturally stop and we would need to negotiate new agreements.
Rights to live, work and be educated in other member states will end.
The European Court of Justice would not apply.
If there is any remote chance we get access to the market, we will need to comply with the rules. For example if you manufacture cars and sell them in the EU, you will still need to meet the EU safety standard.
Influence and Sovereignty
Again, the UK would be insignificant. The main players of the 162 WTO members are USA, China and the EU. These countries or trade blocs will be at the table when it comes to the multilateral trade deals.
Good model or not for the UK
I do not think we intentionally want to lose our place in the world ranking, however we will. The UK would be viewed as smaller player internationally,
We would have tariffs imposed.
We would have no access as such to the single market; nor for that matter would we have access to the 53 markets with whom the EU has trade agreements. Yes, we can enter into new agreements however with different countries. Australia has said it is prepared to enter into an agreement.
This model would impact on UK companies, jobs, exports and investments.
We would not have cooperation with Europe regarding crime, terrorism and policing unless we enter into bilateral agreements. Such agreements take time.
I do hope those who pushed Brexit as the way forward can enter into a Free Trade Agreement with the EU and other markets that in the long run is truly beneficial to the UK and does not destroy the financial services industry in the City of London. Development over the next few years would be interesting.
© Johanna Cargill
[i] I have used the word ‘reasonable’ in an odd fashion here; because I am referring to the fact we all simply sat and watch Russia expand its borders.
[ii] Norway, Switzerland, Liechtenstein and Iceland are also part of EFT. The European Free Trade Zone which promotes closer economic cooperation and free trade amongst member states.
[iv] UN COMTRADE Harmonised System Product Group 03
[v] Norway, Switzerland, Iceland and Liechtenstein
[vi] Schengen border – 26 European members who have no passport checks
[vii] House of Commons Library (2013), “The Economic Impact of EU , membership on the UK”, pg 25
[ix] Ankara Agreemen