Britain’s trade relationship with Europe in a post-Brexit world may not be top of mind as voters weigh the June referendum, but it may be critical for their country’s future prosperity.
If British voters decide to leave the EU, the U.K. will have to strike a new trade arrangement with the remaining 27 EU member countries.
There’s a lot on the line: U.K. trade with the EU accounted for 45 percent of exports and 53 percent of imports of goods and services in 2014, according to a House of Commons report. More than three million jobs are linked to exports to the EU, the report stated.
What would post-Brexit trade landscape look like?
Most Brexit backers suggest a free trade agreement based on the Swiss or Norwegian models. Nigel Farage of the U.K. Independence Party believes Britain can do better. He told the BBC in November: “We are a country of 65 million people. If Norway, Iceland and Switzerland can get deals that suit them, we can do something far, far better than that.”
UKIP leader Nigel Farage. photo by Matt Cardy/Getty
His UKIP colleague David Campbell Bannerman wrote in The Telegraph last month that Britain should aim for “WTO Plus,” describing it as “a guaranteed basic trade deal based on current World Trade Organization arrangements with a better free trade deal on top.”
On March 2, the government submitted to Parliament a paper outlining three “alternatives to membership,” concluding: “The U.K. government believes that no existing model outside the EU comes close to providing the same balance of advantages and influence that we get from the U.K.’s current status inside the EU.”
POLITICO looked at existing EU settlements with countries outside the bloc and narrowed down on five options for the U.K.:
1. Join the minnows
The first option available would be for the U.K. to sign up for the European Free Trade Association (EFTA) and then enter the European Economic Area (EEA), like Norway, Iceland and Lichtenstein.
While the EFTA is a loose intergovernmental organization aimed at promoting free trade and economic integration, countries in the EEA are part of the EU Single Market with free movements of people, goods, services and capital in all member countries.
This would allow the U.K. to maintain access to the Single Market and continue trading with EU member countries with very few export-import restrictions. But there’s a major caveat: it would also require the U.K. to accept a high proportion of EU laws without any way of representing its interests in the EU institutions that make them.
Not everyone in Norway, Iceland or Lichtenstein is happy with this arrangement.
Paal Frisvold, Norwegian managing director at Geelmuyden Kiese Brussels, a consulting and lobbying firm for Scandinavian companies, told POLITICO that even though British Euroskeptics use the term “colonization” to describe the U.K.’s current relations with the EU, the term is more apt for Norway, which makes a full financial contribution to the EU budget but has no voice in the EU.
People in Norway ask: ‘How are we seen in Brussels?’ But the problem is, we are not seen — Paal Frisvold
“It’s a very humiliating situation for Norway,” Paal Frisvold said. “People in Norway ask: ‘How are we seen in Brussels?’ But the problem is, we are not seen.”
Jonathan Hill, the EU commissioner for financial services, told the U.K. Treasury Committee that Norway was “in the position of a supplicant” when dealing with EU authorities, adding: “For us to be in that position would be, to put it mildly, a trifle odd.”
The Euroskeptics’ argument that the U.K. would get a better deal because of its size is only a guess. It may also be difficult to convince voters who decide against EU membership on more emotive issues, such as migration, to accept an arrangement that would essentially keep them in the Single Market. Besides having to contribute to the EU budget, “the U.K. would need to accept the free movement of persons,” said Alberto Alemanno, a professor for EU law and risk regulation at HEC Paris.
2. Be more like the Swiss
If the U.K. decides to copy the Swiss, signing the EFTA will not be enough; the U.K. will also need to sign a bilateral trade agreement with the EU that is tailor-made for British needs.
However, “striking an agreement like the one Switzerland has with the EU would take years to negotiate,” Alemanno said.
Moreover, if it wanted to follow the Swiss model, the U.K. would also be likely to have to contribute to the EU budget, abide by some internal market laws — and accept the free movement of people.
While the Swiss voted for limits on immigration by EU citizens in a referendum in 2014, it is still highly uncertain whether the EU will accept the result.
“The more access you want [to the Single Market], the more you need to adjust your regulatory set-up,” said Alexis Lautenberg, chairman of the Swiss Finance Council, which represents the interests of Swiss financial institutions.
And again, even though he was “very happy” with the way Swiss organizations can work with EU institutions, Lautenberg observed that Switzerland has no impact on the decision-making process in Brussels.
3. Do like the Turks
If the U.K. wanted to move in the direction of even less integration, it could imitate Turkey and enter into a customs union with the EU.
A customs union is a kind of free trade area with a common external tariff. But this would only secure limited access to the Single Market: In Turkey’s case, the arrangements cover industrial and processed agricultural goods, but not raw agricultural products or services. And the U.K. would still need to apply EU laws to areas covered by its own customs union, again without having a say on those rules.
One of the Euroskeptics’ main arguments in favor of a customs union is that the U.K. would be able to strike its own trade agreements with third countries.
“The U.K. would be obliged to have common external tariffs and common trade arrangements with third countries,” said Roderick Abbott, a senior trade adviser at Kreab and former deputy director-general at the WTO and the European Commission. “For instance, when the EU did a free trade agreement with Korea, Turkey, because it is in a customs union with the EU, had to give a similar arrangement to Korea” — even though it was not involved in the negotiations.
4. Common cause with Canada
One example of an even less integrationist trade deal with a third country is the EU’s Comprehensive Economic and Trade Agreement (CETA) with Canada. Negotiations started in 2009 and were officially concluded in September 2014.
But CETA has not been signed yet due to disagreements over the so-called investor-state dispute settlement mechanism — although major progress on this front has been made in recent days.
“CETA has without question been a long process,” said Canada’s ambassador to the EU, Daniel J. Costello. He said official negotiations were preceded by several years of preparatory work, while months of toil still lie ahead to complete translations and obtain formal approval on each side before the agreement can be signed, ratified, and enter into force.
The U.K. Euroskeptics are looking at it with rose-colored glasses — Jason Langrish
“The U.K. Euroskeptics are looking at it with rose-colored glasses,” said Jason Langrish, president of the Canada Europe Roundtable for Business, referring to the prospects of the British negotiating a similar agreement with the EU. “There are a lot of areas where member states need to agree. It is very complex and very complicated.”
Worst of all, “everyone will know that [the U.K.] needs a deal,” he said. “Who’s going to have the upper hand?”
5. Live and let live
An option that no one seems to consider seriously, not even the Euroskeptics, is simply to trade with the EU within the framework of the WTO.
However, if the U.K. decided to do so, it would need to strike its own trade agreements with third countries. Currently, the EU ambassador to the WTO speaks on behalf of all 28 member countries and, by being part of a greater bloc, the EU member countries have more leverage over other WTO members.
“The EU has such a broad geographical agenda of free trade agreements because countries are queuing up to negotiate with us,” said EU Commissioner for Trade Cecilia Malmström in a speech in London on February 25. “And that’s because the EU, with our 500 million consumers, is the world’s largest vital market.”
Abbott, the trade adviser, agrees: “In the U.K., people are saying, ‘we can trade with everyone, we can make our own agreements with the rest of the world.’ But it is not an advantage. [The U.K.] will have less bargaining power.”