Shanker A. Singham is Chairman of the Legatum Institute Special Trade Commission.
British politicians have been negotiating against themselves vigorously as the negotiations with the EU have officially commenced. Most of these internal discussions have focused on the shape of the interim arrangements between the UK and the EU in the likely event that we will leave the EU without a free trade deal.
While this outcome seems likely, it is worth bearing in mind that NAFTA was negotiated in 14 months, and that if both parties had the requisite political will, a deal even in the 18 months or of effective negotiating time would not be impossible, especially since we are currently in a customs union and in the European Economic Area (EEA). But let us assume that the political will does not exist.
Any interim arrangement or set of measures must be judged by how well it minimises trade disruptions and how well it maximises opportunities.
The disruptions are obvious: imposition of tariffs, customs complexity, lack of financial services access and so on. The opportunities are less obvious and it is worth restating them properly. We are not weighing trade deals with other countries versus trade deals with the EU. The opportunities are:
- Improving our own domestic economic environment through selective tariff reductions where we can, and improving our regulatory environment.
- Making trade deals with countries bilaterally and by joining existing structures.
- Improving the global rules by taking a more active role in the WTO and other global bodies.
These opportunities are mutually reinforcing. While the big gains come from joining larger existing trade arrangements and from improving our own domestic environment, we should not neglect the enormous economic gains of moving the global environment in a more pro-competitive direction.
Many interim measures have been suggested that would certainly minimise disruptions – such as remaining in the Customs Union or in the EEA for a period. But what is less well understood is that these would completely eliminate any opportunities we would have.
This is because in order to maximise the opportunities suggested above, we must have control over our tariff schedules, and we must have control over our domestic regulation. If we do not, no country will want to negotiate with us, and we will not be able to make any domestic improvements – which is where the large economic gains potentially lie.
Other countries are looking at the UK as being a potential partner whose attraction is not only its size, but also the fact that we would be more open than the EU with respect to out regulatory structure and domestic environment. If we are merely identical to the EU but smaller, we will not be a particularly attractive partner. If we are temporarily in the EEA and Customs Union, this will simply mean that we are a full EU member in the eyes of other countries, and they will put their agreement discussions with us on hold, and return to their previous trade agenda – perhaps a little wistful about a lost opportunity.
Furthermore, the great danger of the EEA agreement temporary solution, which has also been proposed, is that we would become a rule taker with a rule-making body which has traditionally been checked from anti-competitive regulation by our presence. If we are no longer a brake, we can be certain of more rules that are distortive to market competition which we will have to adopt. This would make us progressively less and less attractive to trading partners. This is the worst of all worlds. We would emerge from these transitional arrangements, wondering where all those trade deals and sunlit uplands have gone, only to find ourselves so locked into EU regulatory arrangements that no-one would speak to us. We would therefore be guaranteeing a bad Brexit.
So the question is whether remaining in the EEA or Customs Union is the only way to minimise distortions. We do not find that it is. There are many interim measures which do not mean remaining within the EEA, Customs Union or a party to the EEA Agreement. The following examples of interim measures are the types of things that will achieve the goal of minimising disruption on both sides, and a framework or early harvest should be established as quickly as possible based on the following types of measures:
- Zero for zero tariff deal for an interim period, with liberal rules of origin (or potential an agreement that the UK will keep apply the Common External Tariff for a short period, pending agreements with other countries).
- Expedited customs clearance arrangements, including Authorised Economic Operator programmes mutually recognized by both sides.
- Mutual recognition for product regulation, conformity assessments and market surveillance
- Dual Regulatory Coordination mechanisms in areas like financial services, life sciences, aviation and regulatory coordination councils in digital trade.
All of the above measures will be as necessary for the EU as they will be for the UK. They will also be demanded by managers of global supply chains that pass between the UK and the EU such as the US, Japanese, Koreans and others.
What is important in any negotiation at the outset is clarity. The Article 50 letter and Lancaster House speech provided enough clarity for all of our negotiating partners, the EU, our WTO partners, and global value chains to understand the framework in which negotiations would be conducted.
The confusion emanating from Westminster now confuses this picture and threatens the stability of the enterprise. It risks taking all the opportunities that Brexit presented off the table, leaving only the disruptions. Policymakers should not be surprised, if they choose to remain in the Customs Union, EEA or EEA agreement for any length of time, that our trading partners will choose other players to dance with. While a bird in the hand is very difficult to resist, we must maintain our course in order to realise the opportunities.