Brexit Britain faces a reality check on trade

Opinion piece (CNN)
Charles Grant , Beth Oppenheim
19 December 2017

Britain and the European Union are finally set to begin what promises to be the toughest stage of the Brexit process: negotiating a new relationship and a transition phase to bed down the changes.

Both sides have identified the EU's recent trade deal with Canada as a template. But on its own this would be a bad deal for Britain, not least because the Canadian agreement does not include the services sector, which makes up 80% of the UK's economy. The key test for Britain will be how many extras it can win to upgrade the Canada deal.

Michel Barnier, the EU's chief Brexit negotiator, has said the UK's decision to leave the European single market and customs union limits the UK to "a free trade agreement on the Canadian model." David Davis, the UK's Brexit secretary, has expressed optimism about securing a "Canada plus, plus, plus" deal -- a bespoke agreement which takes the EU's best free trade agreements as a starting point, and adds services.

The EU has lauded its Canada deal, called the EU-Canada Comprehensive Economic Trade Agreement, or CETA, as "the gold standard for future trade deals." It abolishes almost all tariffs on goods, with most eliminated immediately.

It also reduces some non-tariff barriers, promising greater cooperation between Canadian and EU regulatory authorities, and offers improved access to some services markets, like telecoms, energy and maritime transport.

CETA would be far better for the UK than no deal, of course, but much worse than the advantages of EU membership that it currently enjoys.

Crucially, the Canada deal does not cover trade in services -- in particular financial services -- but also other areas from education to aviation. Barnier has crushed hopes of an upgrade on services, stating that there is no "single trade agreement that is open to financial services. It doesn't exist."

He confirmed that the UK's plan to leave the single market means UK financial service providers will lose their EU "passport," which allows them to operate throughout the bloc without setting up subsidiaries in EU countries (and vice versa).

CETA's offerings on financial services essentially repeat the WTO's General Agreement on Trade and Services (GATS), which offer significantly less market access than EU membership.

That's bad news -- the EU bought over a quarter of British financial services exports in 2014, totaling £22.7 billion.

Its goods coverage is also incomplete, with some agricultural products excluded, such as poultry and eggs, and 15 types of fruit and vegetables face tariffs of up to 20%.

UK Treasury analysis conducted before the EU referendum predicted that by 2030, the UK's economic output would be 6.2% lower under a CETA-style deal than what it would otherwise be.

The EU will have to tailor the Canada trade deal to suit the UK, because its economic profile is different. But the more bespoke the deal, the more protracted the negotiations will be -- and the UK is already facing a tight schedule.

The UK wants a trade deal and transition phase ready for exit day in March 2019. Yet CETA took seven years to negotiate. The new deal will also need to be ratified by each of the EU's member states, a process which is still ongoing for CETA.

"Most Favoured Nation" clauses in existing EU free trade agreements are a further obstacle -- if the EU offers the UK a deal on more favourable terms, other trading partners that have signed such clauses will be entitled to an equivalent upgrade.

Brexiteers like Foreign Secretary Boris Johnson insist Brexit is an opportunity to reclaim "lost" British sovereignty. But under a CETA-type deal, the UK would become a rule-taker, not a rule-maker. Canada has no say in setting EU rules and standards, but all its exports into the EU must meet strict European regulations.

A CETA-type deal would also use a controversial legal mechanism enabling foreign companies to sue the UK government if they believed a new British law would affect the value of their investments, potentially shaping British laws.

Throughout the Brexit process, the UK government has played down the complexities and trade-offs involved.

International Trade Secretary Liam Fox claimed that a new EU trade deal would be "the easiest in human history" because the UK and EU start from a position of convergence.

But the Brexiteers' desire for regulatory sovereignty -- and hence divergence from EU rules -- means customs and border checks will be needed where previously there were none.

Divergence also has major implications for the UK's only frontier with the EU -- the border between Northern Ireland and the Republic of Ireland.

Neither the UK nor Ireland want new border infrastructure, amid concerns it could stoke sectarian tensions in Northern Ireland. But this would be impossible to avoid if the UK diverged from the EU on regulations or standards.

The Irish border conundrum had threatened to delay progress in the Brexit talks until Prime Minister Theresa May committed to maintain "full alignment" with the EU's internal market and customs union if the two sides could not agree a solution to this thorny issue.

Remarkably, May's Cabinet has only just started to discuss what it wants from Brexit. So before trade talks can start, May must first find a consensus among her ministers.

Their range of views means this will be no mean feat. Brexiteers argue that Britain is in a strong position to push for pluses to the Canada deal because European businesses are desperate for access to the UK market.

But in trade terms, the UK needs the EU more than the EU needs the UK, and a "no" deal would damage the British economy.

European leaders are also determined to preserve the integrity of the single market and have been clear that there can be no "cherry picking" of benefits. Every "plus" that Britain wants to add to the Canada deal is likely to come at a price that will be unpopular with Brexiteers -- ranging from paying for market access to accepting EU migration or court rulings.

Depending on the price that May is willing and able to pay, there's a Brexit deal to be made.

Charles Grant is director and Beth Oppenheim is a researcher of the Centre for European Reform, a think-tank dedicated to making the European Union work better.