And off we go. Before the general election that UK prime minister Theresa May recklessly called, the desired model of post-Brexit trade with the EU was enveloped in her government’s habitual secrecy. The most persistent questioning did not elicit much beyond the tautological observation that Brexit meant Brexit, and a general sense that, given the UK’s red lines on freedom of movement and jurisdiction of the European Court of Justice, a bilateral so-called “free-trade agreement” (FTA) was the way to go.
The loss of an overall majority has, happily, broken open the black box and allowed a debate to break out. Given that talks with the EU start today, before Mrs May has even formed a government, the UK had better make its mind up quickly.
As well as the FTA option, the possibility of a closer relationship, now variously described as a soft or open Brexit, has once more arisen. The usual models are the EU’s bespoke relationship with Switzerland, which involves more than 100 bilateral agreements covering many aspects of cross-border commerce, the customs union with Turkey, and the arrangement with Norway, which is part of the single market and hence accepts EU regulations but can set its own external tariffs.
Each solution, of course, has problems for Britain’s own supposed political red lines. A customs union means giving up the ability to sign trade deals on goods with third countries, while the Norway and Switzerland arrangements involve accepting freedom of movement of labour, both apparently deal-breakers for the UK.
Even ignoring domestic political constraints, substantive problems remain. These three models may work for the countries involved. But they do not necessarily fit well with a diverse economy such as the UK’s. Britain specialises in exports of services and is also part of several high-value just-in-time manufacturing supply chains such as cars and aerospace where components go back and forth across borders, and a half-hour delay can disrupt an entire process.
The Norwegian model looks perhaps the most attractive. Retaining membership of the single market means easing cross-border commerce by routinely adopting EU regulations, and provides the financial services “passport” permitting banks to sell products into the EU. But being outside the customs union still introduces frictions into the border process on goods, such as checks on rules of origin to prevent Norway being used as a back door into the EU market. Such inspections generally take a few minutes but can stretch into hours.
Norway does not enormously care about this problem. Aside from oil, gas and petroleum, which make up more than half its exports by value, the country sells largely fish and basic commodities abroad. It is not particularly bothered about participating in tightly-knit manufacturing supply chains. Being outside the EU customs union means it can continue to protect its farmers with some of the highest agricultural tariffs in the rich world. The freedom to live off oil revenues while feather-bedding farmers and neglecting just-in-time manufacturing is not a luxury the UK possesses.
The Swiss model has similar problems, compounded by the fact that its bilateral agreements only cover some services and do not extend to financial sector passporting — and that the EU has said it does not want to replicate such a complex system with another country. For sure, and in contrast to Norway, a good proportion of Swiss exports are high-end manufactured goods such as pharmaceuticals, speciality chemicals, medical equipment and precision machinery. But it adds much of the value of those products itself, especially through the application of services and intellectual property-intensive manufacturing, rather than shuttling them back and forth across borders. Switzerland’s percentage of domestic value-added in exports is among the highest for similar sized economies — and is large compared with the UK in sectors like chemicals where both have significant exports.
Like Norway, Switzerland also tends not to specialise in industries with high-speed supply chains such as motor vehicles. Accordingly, delays emanating from border checks for Swiss exports to the EU are less onerous than they would be for the UK.
Retaining membership of the customs union for goods (technically, signing a new customs union agreement with the EU) could avoid some of the problems with border checks. But it would raise a fresh problem, which Turkey, a member of the EU customs union across most of its goods sector, has encountered. Services — in particular transport and logistics but also business services — are increasingly intertwined with trade in manufactured goods. Turkish manufacturers have found the lack of cross-border trucking services, and difficulties with obtaining business visas, to be important constraints on their exports.
Turkey’s membership of the customs union has chafed against these restrictions, to the point where negotiators are arguing for services to be included in the agreement with the EU. The inexorable logic of being in the EU customs union is that it pushes towards single market membership as well. And if the UK does that, of course, it is essentially a full EU member, but without any say over the union’s policies.
What the UK will ask for, let alone get, in its negotiations is anyone’s guess. But it is worth bearing in mind that even the softer forms of Brexit can inflict substantial damage on the sectors in which the UK economy has a comparative advantage.
Chart of the week
A poll by the Washington-based Pew Research Center has found a sharp jump in support for the EU among Europeans since the UK voted to leave the union a year ago. But there is one area where they remain sceptical. Most Europeans appear to want their own governments to negotiate trade deals rather than Eurocrats. Only a majority of Germans and Dutch expressed support for the status quo, whereby the EU negotiates trade pacts rather than member countries. A majority of people in all other countries — and notably France — want their national governments to have more of a say.
The UK has tapped a former top New Zealand trade official to serve as its chief trade negotiator. Crawford Falconer is a respected veteran of WTO agriculture negotiations among other things. (Gov.UK)
The key to China’s emergence as a trading power may have more to do with its decision to lower tariffs — and therefore costs — on manufacturing inputs than its entry into the WTO, according to a paper. (NBER)
A dispute over cheese is threatening plans for a new Canada-EU trade deal to go into effect on July 1. (CBC)
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