After a vote for Brexit, Britain will be given three choices

Opinion piece (The Times)
20 June 2016

One of the most remarkable things about this referendum campaign has been the dearth of discussion on the various alternatives to EU membership.

In Brussels and other EU capitals, decision-makers are drawing up contingency plans for a British vote to leave. Views are emerging on the options to present to the UK, and on the process it would have to follow.

If leave wins, Britain’s partners are likely to offer just three options: the Norwegian model of the European Economic Area (EEA); the Canadian model of a free trade agreement (FTA); and the rules of the World Trade Organisation (WTO). The EU doesn’t want to give the UK bilateral treaties (like Switzerland), a customs union (like Turkey) or bespoke arrangements.

Most economists think the Norwegian model would be the least damaging, economically. This would keep Britain out of EU fish and farm policies, and its customs union, but in the single market. The UK would have to follow single market laws (including labour market rules) without having a vote on them, make substantial payments into the EU budget and accept free movement of labour.

The mainly pro-EU House of Commons would probably prefer the EEA, as would the City – since ‘passporting’, which allows banks regulated in London to do business across the EU, would continue.

Owen Paterson is one Brexiteer who likes the EEA. Daniel Hannan is another, though he sees it as an interim arrangement, to minimise disruption while an FTA is negotiated. However, the obligation to accept free movement would make it hard for any post-referendum British government to follow Norway.

The Canada model looks more likely. The EU’s deal with Canada – which took seven years to negotiate but is not yet ratified – is its most ambitious FTA. It will remove many but not all tariffs on industrial and farm goods. But it will give limited access to the single market, as many non-tariff barriers will remain.

For example, Canadian car and chemical makers will need regulatory approval from EU authorities before exporting to Europe; Canadian firms will have limited access to European public procurement; and since the deal excludes most financial services, Canada’s banks will need a subsidiary in the EU in order to do business there.

Boris Johnson has praised the Canada option. He and other fans of an FTA argue that Britain is so important that it could get a better deal than Canada. Possibly. But the UK’s partners are adamant that the price for full access to the single market would be payments into the EU budget and free movement of labour.

The third option appeals to those who don’t want the hassle of a long trade negotiation with the EU: the UK would join the WTO (however, this would not be entirely hassle-free: the WTO director-general recently warned that British accession would be complex and time-consuming).

The UK would then trade with the EU on the same basis as countries like Russia and China. WTO rules set upper limits on industrial tariffs. British car exports would face the EU’s common external tariff of 10 per cent.

EU tariffs would disrupt the supply chains that currently entwine the British and continental economies. The WTO has done very little to lift non-tariff barriers to trade in goods, or any barriers to trade in services.

Libertarian Brexiteer economists like Patrick Minford like the WTO model. It would permit the UK to scrap more EU rules than the other options.

It would also enable Britain to cut its own tariffs on farming and industrial products to zero, as he has suggested, even if other countries did not reciprocate. But that might not be politically feasible.

Two negotiations or one?

Article 50 of the Treaty on European Union allows two years for a departing country to negotiate separation. This period can be extended, if all member-states agree. The predominant view in EU capitals is that there should be no extension and that the UK should leave after two years. The presidents of the Commission and the European Council want this ‘divorce settlement’ to be kept apart from an agreement on future trading relations.

The divorce settlement would divide up pension liabilities, properties and other assets, and deal with budgetary questions. It would also cover the rights of EU nationals based in the UK and vice versa.

Two years should suffice: article 50 stipulates that the Council of Ministers must pass the deal by majority vote, which means that an awkward government cannot block it (though the European Parliament and the UK Parliament would have to vote in favour).

As for the trade negotiations, the EEA option would be fairly simple, since the rules and institutions already exist (though the UK would have to rejoin EFTA, the European Free Trade Agreement).

The FTA option, however, would require complex and detailed talks that could last five years or longer. Each of the 27 member-states would have a veto and some might hold referendums (as the Dutch did recently, when they voted down an FTA with Ukraine).

The UK would want to work on the FTA and the divorce settlement at the same time, for greater speed. But the Brussels institutions – and some governments – want the two sets of talks to be consecutive.

Otherwise, officials say, the UK might seek trade-offs between them, complicating the process; and if it wrestled over the trade deal while still an EU member, it would have more leverage than after it had left.

If the two negotiations are consecutive, the cloud of uncertainty hanging over the British economy will be prolonged. And even if they are simultaneous, several years would elapse between the UK leaving the EU and the FTA coming into effect. What rights would British companies enjoy in the interim? If goodwill prevailed on all sides, firms might be granted single market access on a temporary basis, so long as free movement continued.

But goodwill can easily evaporate. Last week, Chris Grayling, a leading Brexiteer, said that soon after the referendum, Parliament should legislate to reject rulings by the European Court of Justice and to restrict free movement. If a post-referendum government follows his advice and defies the treaties while Britain is still a member, British companies could find themselves excluded from the single market before the UK had left the EU.

Charles Grant is director of the Centre for European Reform.