11 February 2019

Here’s what a UK-EU trade deal could look like

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There are many things in short supply as the UK negotiates its exit from the EU, time and expertise in negotiation chief among them. What we do not lack are plans.

In September, we launched Plan A Plus to set out a holistic UK trade policy, including what should be done about the famous Irish backstop and support for a comprehensive Free Trade Agreement (FTA) between the UK and the EU. Our discussion about the backstop became the Better Deal, an alternative Withdrawal Agreement with new provisions for the backstop. These ideas have been taken up in the Malthouse Compromise, and are being engaged with by government now.

Without prejudice to the current talks, we recently published what that comprehensive and advanced FTA with the EU could look like – some 350 pages of legal text which is drawn from and builds on existing EU commitments to its trading partners, bilaterally, multilaterally and in international forums like the OECD. We did this so that people could understand what a modern FTA can accomplish. The Customs Union and Single Market arrangements are well known to us because we have lived with them. What is less well understood is how business can engage with and benefit from an advanced FTA.

The extensive use of precedent in the FTA is important for two reasons. First, it demonstrates workability. These proposals are already in use as part of the Comprehensive Economic and Trade Agreement (CETA), an FTA between Canada, the EU and its member states, the Japan-EU Trade Agreement, the EU-New Zealand Veterinary Agreement and the US-EU Insurance Covered Agreement, to name a few.

The second reason is negotiability. It is much easier for the EU to agree to terms it has already adopted with third countries. Where we provide for more extensive and deeper coverage, such as competition policy, state aid and market distortion it is because the EU will seek these commitments as well as the UK as part of the desire for a level playing field. In financial services, Barney Reynolds has written a state of the art financial services chapter which will be necessary to ensure that the capital will continue to be available for UK and EU businesses alike, and its cost will not rise unmanageably.

But, an FTA is based on a very different framework than a customs union and single market. Although the single market was originally built on mutual recognition, this has evolved to an identical regulation approach based on process. Many countries have had to choose between an FTA arrangement based on mutual recognition and shared outcomes, or a Customs Union. Most opt for the FTA approach. A classic example is the Australia-NZ Closer Economic Relations Trade Agreement.  A Customs Union between both these parties would have been easy, but they opted to retain a measure of independence so they could forge their own path.

In the case of an FTA, the goal is to lower barriers to trade and behind the border barriers between the parties. A WTO compliant FTA is one that is trade creative, in other words, does not increase barriers to the outside world.  An FTA approach seeks to lower barriers and improve domestic regulation on both sides. The regulatory identicality approach is agnostic about whether regulations are pro-competitive or anti-competitive – it cares about differences. This is fundamental, and why we think that an FTA is a better method of reaching the shared goal of lowered trade barriers, and fewer behind the border distortions.

But there are many kinds of FTAs. The most basic – one that simply applies zero tariffs and no quantitative restrictions on goods – does not deal at all with regulatory or behind the border barriers. The original multilateral round of negotiations starting with the GATT in 1947 dealt only with tariffs on industrial goods, a tiny sliver of actual world trade. It was only in 1994 that the multilateral system dealt with trade in services, intellectual property and related issues.

Starting with NAFTA in 1994, quite an advanced agreement for its time, issues such as competition were raised. Gradually, as the global trading system stalled after the failed round launch in Seattle in 1999, regional liberalisation became the focus for dealing with the issues behind the border that distorted trade.

There has been an inexorable march in FTAs towards more and more disciplines on regulatory barriers, and what have come to be called market distortions. Recently three of the world’s major trade and economic powers, the US, EU and Japan have agreed regulatory cooperation and regulatory coherence chapters in their trade agreements. All three have also agreed trilaterally to seek to reduce market distortions in third country markets. The EU has just this opportunity with the UK.

Key elements of the proposed UK-EU FTA include: deemed equivalence and regulatory recognition including of underlying product regulation to facilitate goods and services trade; customs and trade facilitation measures to improve customs clearance for just-in-time supply chains; regulatory coherence and good regulatory practice on both sides to ensure competitive markets; competition, state aids and subsidy disciplines to ensure a level playing field between the UK and EU; and commitments to honour treaties the UK has signed on labour and environmental standards.

A trade agreement approach, epitomised by this proposed UK-EU FTA, is not second-best to the identical regulation approach of the EU. It seeks to minimise disruption to UK and European business and consumers while preserving the UK’s ability to strike trade deals with other countries and make improvements to our domestic regulation.

Drafting the 350-page free trade agreement was not easy and I do not contend it is perfect. Indeed, I welcome input from business and others on how it could be improved. But I hope it shows what is possible: there is a way to maintain a close trading relationship with our European neighbours while strengthening our links with the rest of the world. Plans are not in short supply.

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Shanker Singham is CEO of Competere and author of Plan A+, A Better Deal and the proposed Comprehensive UK-EU Free Trade Agreement.