THE EU APPROACH TO A BREXIT TRADE DEAL

Much has been said about Britain’s possible – or impossible – trade relationships with the EU and the rest of the world after Brexit. But what relationships will the EU want with Britain going forward?

EU business keen to talk Business groups and associations in the EU have taken several months to figure out what Brexit would mean for them. They have only recently started formulating precise wishes. The uncertainty surrounding the future relationship is also not helping them come up with concrete demands.

There are signs businesses are getting worried about the turn of the Article 50 EU withdrawal talks. Business Europe, for instance, the big business lobby in Brussels, has called for early talks on the future trading relationship between the EU and Britain. Here, business is not in line with political leadership.

There is an overarching theme in the public statements of papers released by business and lobby groups in sectors from cars to banking and agriculture to services: nobody is happy to see Britain go; all would prefer Britain to remain in the single market.

Yet all say that the integrity of the EU27 single is their paramount concern, and that principles such as the Four Freedoms should not be undermined. The EU27 market is bigger than the British market, and every single sector prefers to preserve this market, even it means losing the UK. There is a broad shared concern about Britain applying different technical and environmental standards once it leaves the EU. This for two reasons: the fear of potential competitors emerging, and the fear of losing access to the British market.

In the UK’s planned withdrawal process from the customs union and the single market, the pain of separation will be higher in EU sectors that are protected by relatively high(er) tariffs and regulatory barriers to trade in goods and services. Among those sectors are autos (with EU tariffs at 10 -15percent), textiles (high tariff peaks in some areas varying from 12 to above 20 percent), various agricultural sectors (meat in particular, fisheries), and various services sectors.

Some of these sectors have been successful at resisting trade liberalisation in the past and are organised in effective lobbies. The agricultural sector, for instance, tends to weigh disproportionately on the political process surrounding trade negotiations in the EU. Will this be the case in Brexit? Will they insist on keeping Britain in their system? It is very hard to say at the moment.

EU approach to trade negotiations

With third countries, the EU is:

• Quite liberal in terms of tariffs on industrial goods. Ready to go duty free in free trade negotiations;

• Pretty offensive when it comes to opening up selected services markets abroad, especially where public procurement markets are involved (infrastructure, transport, telecommunications, environment);

• relatively protectionist in agricultural trade issues (tariffs, quotas), but less protectionist than Japan, Norway or Switzerland;

• rather intrusive on technical standards. For example, in its trade agreements with Canada, Vietnam and Japan, the EU has ensured that its partner comply with the EU’s preferred technical standards in sectors like automobiles, electronics, or renewable energy products;

• increasingly expansionist in some regulatory areas such as pharmaceutical patents or so-called ‘Geographical Indications’ for food and drink products.

Types of EU free trade agreement

The first are agreements in its direct neighbourhood where it literally exports its regulations: in an almost blanket way, as in the EEA arrangement with Norway, Iceland and Liechtenstein; or only in selected areas, as with its Deep and Comprehensive Free Trade Agreement with Ukraine, or its various agreements with Switzerland. Turkey is part of the EU’s customs union except in agriculture, and Turkey applies EU technical industrial standards.

The second type are ‘classic’ free trade agreements where the EU seeks regulatory cooperative arrangements and refers to international technical standards or international conventions in chapters dedicated to issues like the environment or intellectual property. Examples are CETA with Canada or the 2011 EU Korea free trade agreement.

There is little room to negotiate an agreement that deviates significantly from these models. This is due to the EU’s constitution (e.g. the Four Freedoms) the ’bureaucratic’ way the Commission works, and also political constraints: member states need to build consensus before change can take place.

Binary choices

Given the UK’s current alignment with EU law many believe it will be easy to negotiate a free trade agreement with the EU following a ‘hard Brexit’ involving exit from the customs union and the single market. The Withdrawal Bill currently under preparation aims to replicate EU law to the letter. In such a context, zero tariffs and mutual recognition of standards across the board should be an easy deal, some believe.

Not so.

Although the Withdrawal Bill replicates EU law, the UK will most likely not have new or upgraded supervisory bodies ready to ensure compliance with EU standards. This means the EU will not be in a position to simply let any new British product enter the EU27. It will take time before the EU recognises the institution that will replace, say, the European Food Safety Agency, EFSA.

Britain also needs to decide if it wants to remain in the EU’s key standardisation bodies such as CEN and CENELEC. But that can only happen as part of a wide ranging trade arrangement with the EU. If the UK leaves these bodies in 2019, it is not clear when, if at all, the EU will recognise whatever standardisation body emerges in Britain – even if on paper Britain produces according to EU laws and standards.

If the UK continues to apply EU standards and sees them recognised by the EU, Britain will have little leeway to do a separate deal on standards with other countries in future – for example with the United States.

Brexit Britain has many of these binary choices to make. These will determine the final shape of a deal with the EU, not the nature of UK law.

In a world in which Britain wants to leave the EU’s customs union and the single market, the best option Brussels will be able to offer is a deal resembling that with Ukraine, the only agreement alongside the one with Turkey where no free movement applies. A Ukraine style deal would certainly not be favourable to Britain and would take time to negotiate.

EU business doesn’t want to see Britain go but all know there are difficult binary choices to be made. To date, the EU has shown that it is ready to make them.

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