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Trading relationships

Early signals on a future trading relationship between the UK and the EU

I am just back from Brussels (20 July). From my trip and recent conversations with policy makers some themes are emerging. While nothing is certain, it appears that the boundaries for a future trading relationship between the UK and the EU are beginning to emerge.

When will the trading relationship be negotiated?

After exit terms are agreed, in principle EU law envisages a subsequent separate negotiation on a future trading relationship. I say in principle, because it is arguably in the interest of both parties to work on agreement for a future trading relationship alongside exit terms.

Time is against finalising a comprehensive agreement on trade alongside exit terms. The EU’s trade agreement with Canada took seven years to negotiate, and it is not ratified yet. But it is in the interests of both sides to get a degree of certainty as soon as possible. One way to deal with the timing problem might be transitional provisions.

One option being mentioned is that the future trade relationship could be subject to a sort of ‘heads of agreement’, negotiated and concluded alongside the exit terms. It would describe the framework of a future trading relationship. Detailed operational arrangements might be subject to subsequent negotiation.

There could be an interim clause where the UK temporarily joins the European Economic Area (EEA) upon leaving the EU while trade terms are being negotiated.

Does the trading relationship need agreement from all remaining member states?

The trading agreement may require approval by qualified majority of the remaining member states,[1] or unanimity and/or national parliament ratification, depending on its content. It was recently established by the member states that the Canada trade agreement cuts across some issues which are reserved in the EU for national competency, and therefore it requires ratification in national parliaments.

Can trade be negotiated as a standalone issue?

The remaining member states cannot afford for the UK to look like it has a more beneficial relationship outside the EU than as a member. German Chancellor Angela Merkel was quoted recently as saying: “the four freedoms are indivisible”[2] meaning that in negotiating a trade relationship the EU will not allow the UK to pick which freedoms it likes and ignore those which it doesn’t. The current expectation is that this sentiment will be adhered to by the remaining member states throughout the exit and trade negotiations.

What will the trade agreement cover?

Most trade agreements cover goods and associated trading standards. Services feature in very few existing EU trade agreements. The UK will need to make the case to the remaining member states for the exit agreement to include services, because it is not an obvious need for them. The UK should explain why London as a strong international financial centre is also good for the remaining member states. If it is only perceived as being good for the UK then it may not be included in the trading agreement.

Are Norway and Switzerland viable models for a UK agreement?

At this point, it is looking like neither model is a viable long term model.

Since the 1970s the EU has entered into 120 trade agreements with Switzerland. The EU members are collectively unhappy at how the Swiss model is working, and have asked the EC to review its effectiveness. This would imply that the remaining member states (and possibly the UK) would be reluctant to enter into a Swiss model for the future trading relationship.

As currently described, for the UK to follow the Norway model, it would need to join both the European Economic Area (EEA) and the European Free trade Association (EFTA). Both would need unanimous agreement from all respective members. Agreement from Norway may not be easily obtained, because it risks disturbing Norway’s arrangement with the EU. More clearly, access to the single market through EEA membership means accepting the four freedoms, and implementing applicable EU law, with no say on what those laws are. Sovereignty over law-making and freedom of movement of labour were behind significant numbers of leave votes.

Will the UK have access to other EU trade agreements?

EU trade agreements are made between a third country and the EU as a group, but not with individually named member states. There is a question whether the UK could be an additional signatory to EU trade deals such as Canada and the Transatlantic Trade Investment Partnership (TTIP). The EEA countries are added, after the agreement has been negotiated, but not others. This implies that to enjoy the benefits of EU trade agreements the signing country must also commit to the four fundamental freedoms of the EU’s single market.

There is one certainty…

There is a feeling in Brussels that the UK assumes it will get what it wants because the EU needs the UK market as much as the UK needs the EU. If there is one certainty about the trade negotiations it is that the UK will need to persuade its EU partners of the authentic case for mutual UK and EU benefit. The UK negotiators should not equate European dismay at the referendum result with a desire to keep the UK happy.

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[1] Qualified majority:  votes are generally proportionate to the member state’s population, with a weighting in favour of smaller member states

[2] The four freedoms within the European single market are free movement of: people, including labour; capital, goods; and services