Trading places: swapping stability for uncertainty
Britain wants a bespoke Brexit trade deal. But, as former senior international trade adviser JIM FANSHAWE explains, the clock is ticking towards the worst case scenario
Back in January, South Africa dealt a blow to Britain's somewhat naïve intention to just try and adopt existing EU agreements post-Brexit.
Rob Davies, South Africa's trade minister, said he had every intention of pushing for enhanced access to the UK for its agricultural sector.
Who can blame him? After all, while countries have so far appeared keen to use the EU agreement as a template, many will push for further concessions from the UK and it would be negligent on their part if they didn't. Let's face it, they are unlikely to ever have this much leverage over the UK again.
Why then – as a source at the Department for International Trade revealed in August – has the UK government failed to put into place a realistic contingency should it fail to reach agreements to replicate existing arrangements?
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It seems to me that up until very recently, Britain has been demonstrating a dangerous level of overconfidence here – something that could come crashing down around its ears as the prospect of 'no deal' becomes increasingly likely.
The UK government should take a leaf out of the books of the most successful business owners I know, who are adept at financial and sales forecasting, planning, budgeting, contract management and analytics.
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These UK businesses have long been considering the merits – or otherwise – of the various trade relationships between the UK and the EU and the impact of a range of Brexit scenarios on export services, import services, export goods, import goods, employment, funding benefits, supply chain links and the formation of subsidiaries, parent companies, joint ventures, branches and franchises in other countries in the EU.
Any or all of these could be affected by any or all of the issues at stake from a change in trade relationships. From tariff-free trade in goods to working towards frictionless borders and establishing a strong General Agreement in Trade of Services, not to mention immigration, access to labour and citizens' rights, a dispute resolution system, continued access to research and development programmes and the recognition of UK product standards legislation.
We can kid ourselves that everything will stay the same or that we will have the same, or better, trade agreements to those that exist within the EU, but agreeing on a relationship that works for both parties into the future is proving to be as easy as deciding who gets the children in a particularly acrimonious divorce settlement.
The most natural starting point in assessing the trade options open to us is to look at how other countries outside of the EU operate.
Norway is a member of the European Economic Area (EEA) along with the 28 current EU members, Liechtenstein and Iceland. It has full access to single market, is obliged to make a financial contribution and accept the majority of EU laws, and free movement applies as it does in the EU.
The downside for Norway is that it has no say over how the rules of the single market are created.
Switzerland is a member of the European Free Trade Association (EFTA) but not the EEA. It has access to the EU market governed by a series of bilateral agreements.
The EFTA is unlikely to appeal to the UK government as the Swiss model of EFTA membership only permits limited access to the services market with financial services and agricultural products – key areas for UK economics – poorly represented.
On a slightly more positive note however, 6% of the UK's trade is with Norway, Iceland and Switzerland and EFTA membership would secure close ties to these markets. It would also provide access to the single market for all non-agricultural products.
We must however, consider the practical and physical implications of not being part of the EU customs union as neither EFTA nor EEA would necessarily provide membership and, as a result, there would be customs checks between the UK and EU member states.
The physical and technological infrastructure required by the UK to manage this extra work would be huge and have a seriously detrimental effect on trade.
As is the case with Norway – and as has been made clear by Jean-Claude Junker and Donald Tusk – access to the single market comes at a price. As the government is in the throes of negotiating the so-called 'settlement bill' I think it is highly unlikely they are then going to agree to making ongoing contributions to the EU budget to pay for access to the single market as Norway does.
While we are on the subject of money, under the Switzerland model, we would benefit from regional funding from the EU and research programmes but we would pay for these rights – something which, again, could prove difficult for the government to consider.
So, let's look at the issues of a frictionless border state. There are mutual recognition systems such as Authorised Economic Operator (AEO) status that can significantly help towards this and in my opinion, the UK government should be looking to promote this system much more heavily than it has to date.
UK businesses should also be looking into achieving this status as it will mean they are better placed to limit customs delays whatever the outcome of the negotiations.
This leads us to migrant work forces, both skilled and unskilled – which are extremely important to British businesses across a wide variety of sectors. Both Norway in the EEA and Switzerland with its EFTA have freedom of movement of people agreements with the EU.
Business are pushing hard to get the message across to politicians that they must be able to have uncomplicated access to suitable workforces but the government has to balance this with the political reputation of controlling immigration.
Should we then look to the relationship the EU has with Singapore and Canada when drawing up our wish list for a deal?
After all, World Trade Organisation rules and free trade agreements with these countries do not stipulate any conditions on the free movement of people.
We could consider cherry-picking elements of trade agreements like these to create a bespoke solution. In which case, let's not forget Turkey.
Turkey is not part of the EEA or the EFTA but does – like Andorra and San Marino – have a customs union with the EU. This means it faces no tariffs or quotas on industrial goods it sends to EU countries. It does, however, have to apply EU's external tariff on goods imported from outside the EU.
Brexit campaigners have made much of the importance of the UK being able to negotiate its own trade agreements with countries outside of the EU and if the UK is to have a complete customs union with the EU, it will have reduced capability to negotiate with third parties.
If we adopted Turkey's model, the UK's external tariffs would have to align with the EU's external tariffs and the UK would then have to surrender its ability to control its own trade agreements. It is therefore very unlikely the government will go for this scenario.
It could, however, go for a partial customs union agreement. If so, businesses still need to prepare themselves for additional administration burdens caused by the paperwork that will be required.
The most pressing concern we have right now – regardless of how we create our bespoke Brexit – is that of time.
With no green light to discuss trade, our next opportunity for progress is December. And in the meantime, the clock is ticking down. For Brussels and for Britain.
Jim Fanshawe is a former senior international trade adviser for the Department for International Trade. He is now the Brexit ambassador for the Suffolk Institute of Directors and runs Your Export Department, www.yourexportdepartment.co.uk
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