Raoul Ruparel is Co-Director of Open Europe.
Following the vote to leave in the EU referendum much of the UK political class seems stuck somewhere between denial and anger. While understandable to an extent, this has sadly led to a dearth of leadership and thinking on where we go next. Whatever approach is chosen it must balance what is democratically feasible with what businesses need.
Some have already turned to the off-the-shelf agreement used by Norway – membership of the European Economic Area. While this is an option, it’s hard to see that (in its current form) it addresses the main motivations underlying the vote to leave the EU – immigration and sovereignty. It comes with free movement of people, albeit with the potentially unwieldy ‘emergency brake’. While it does deliver greater control over areas such as agriculture, fisheries and trade policy, it also sacrifices control in a number of areas, such as labour market law and energy policy. In particular, the UK would have no say over the rules for areas in the single market, including financial services. The UK would also no longer have a veto over a number of big issues as it does now, for example the creation of an EU army. Finally, the UK would not be able to entirely escape the clutches of the European Court of Justice – the European Free Trade Area (EFTA) Court must implement relevant rulings while rulings are also often incorporated into legislation, much of which the EEA is still subject to.
So, if the UK does not end up going for the EEA or some version of it, then what is the alternative? It would have to be a bespoke UK deal. The first point to note however, is that the fundamental trade-off looks unavoidable: the fullest EU market access means accepting greater ‘obligations’ (be they on regulation, some form of contribution to the EU budget, or accepting the free movement of people). Given that the EU is a political project, the trade-offs are political as much as economic and are not all black and white.
The logical framework to use would be a comprehensive free trade agreement, similar to the one negotiated between Canada and the EU recently (though it is yet to come into force). This would be a modern, living agreement that could evolve over time – as opposed to the outdated Swiss agreement which is incredibly complex and has to be continuously negotiated.
There is plenty of precedent for a reasonable deal on goods – the EU has more than 30 trade agreements with more than 60 countries, all of which include decent access for goods. Whether the current system of no tariffs on any goods could be maintained remains to be seen. The deal between Canada and the EU comes close (over time). While tariffs are often removed bit by bit, it would be strange to impose them and then remove them gradually given none exist now. One thing to note is that the UK would (under almost any scenario) leave the EU’s customs union. While this allows the freedom to negotiate one’s own trade agreements, installing a customs border where there wasn’t one before can lead to some disruption, particularly of integration of cross-border supply chains.
Services would be more complicated. There is no precedent for full access to the single market in services without being a full member of the single market and accepting all the rules and regulations (the EEA model). Of course, the single market in services is far less complete therefore the lost opportunities will inevitably be lower. But there is a nexus of issues around financial services where the passport – which allows financial firms to provide services from London to the rest of the EU – works relatively well. The UK could try to negotiate the continuation of the current access in this area. If it cannot it could fall back on the ‘equivalence’ process – whereby countries which have equivalent financial services regulation can access the passport, at least in part.
On day one, the UK would still have the same system as the EU; therefore it would be hard to not see it as equivalent. That said, this is not simply a technical process but a political one so it would be down to the judgement of the European Commission. Whatever access the UK negotiates in this area, be it preferential via the trade agreement or just based on equivalence, it seems likely the UK will end up following EU rules in this area pretty closely. Any services sectors which utilise the single market extensively will probably end up following EU rules in one form or another, though without the UK having any input into their creation. Of course, the benefit is that sectors which don’t utilise the market will no longer be bound by EU rules and may have greater freedom depending on the UK’s own policies and regulation post-Brexit.
It is important to remember, though, that the impact of Brexit will not just be determined by the new UK-EU relationship but also by the UK’s own policies. Immigration policy will be primary among these. It is clear that the EU referendum vote was at least partly motivated by the desire for greater control over immigration. But it must also be recognised that the UK has a record employment rate and there remains strong business demand for immigration. I believe the best compromise would be an Australian-style points system which allows for skilled migrants to come to the UK but also includes incentives for specific sectors where skills shortages are clear (science and healthcare come to mind). While the most contentious type of immigration is low skilled, there must also be a system to allow this to continue. A short term work visa system may suffice here, allowing a steady supply of labour but ensuring people only come to work and are not guaranteed citizenship. I do not imagine such a system would reduce overall net immigration by much, but I hope the changed mix and greater control will assuage concerns, though only time will tell.
There is no doubt that such an approach to the negotiations would take longer than entering into the off-the-shelf EEA. It may involve more short-term disruption and it involves greater dislocation from the EU. But precisely because it involves greater distance from the EU it returns greater control to the UK, albeit for less market access. In the end, the UK’s approach must be determined by long term goals not short term concerns.