17 February 2017

Should Britain set sail for an EFTA trade deal?

By Shanker Singham & Molly Kiniry

As the United Kingdom moves to formally separate itself from the European Union, Brexit supporters and detractors alike have recognised the right to negotiate trade agreements with the rest of the world as one of the major dividends of the process.

Britain now has a number of tracks it needs to progress on – what it can do unilaterally, bilaterally, even plurilaterally – through a like-minded group of countries, and in the WTO.

The Prime Minister stated unequivocally in her Lancaster House speech that the UK will not seek membership in the EU’s Single Market, and instead pursue “the greatest possible access to the Single Market, on a reciprocal basis, through a comprehensive Free Trade Agreement”.

She also noted that the UK would have control of its WTO schedules, and would not be bound by the Common External Tariff, the core element of Customs Union. The UK will therefore be free to negotiate trade deals with other countries, and will be able to negotiate comprehensive agreements in services by having freedom over its own regulatory environment.

The question is: how will the Government prioritise the countries with which it can or should strike deals?

There has been much discussion of potential agreements with large markets such as the US, China and India, and bilateral agreements with these countries are important to be sure. Yet some of these deals will take time to negotiate, and the Government needs to also look for quicker wins.

The UK already has agreements through the EU which cover the bulk of its trade: for example with the members of the European Free Trade Area, namely Iceland, Norway, Switzerland and Liechtenstein, and countries such as South Korea and Mexico.

It is in this EFTA group that some of the quickest wins may come. But should this group should be pursued as a bloc or individually? And if individually, what should our priorities be?

One solultion is for Britain to simply rejoining EFTA. But opposition to this may come from the EFTA counties themselves. Norway’s prime minister, Erna Solberg, has already expressed scepticism about the prospect of the UK joining EFTA.

Having the UK as a member would change the balance of power within the bloc and potentially complicate its own trade-negotiating ability.

From the UK’s perspective, the very different issues presented by each of these countries, and the fact that some are members of the European Economic Area and others or not (primarily Switzerland), would mean that bilateral deals outside of the block would have to be negotiated separately anyway.

Several Swiss, Icelandic and Norwegian ministers have proposed negotiating separate bilateral agreements with the UK; the Swiss minister of the economy has already declared his intent to have an agreement ready to sign the day after Britain formally withdraws from the EU.

Such bilateral agreements could be tailored to address specific economic goals, while also providing strategic political leverage for the UK, Iceland and Switzerland in their respective, ongoing negotiations with Brussels.

Agreements with Norway and Iceland will be limited compared to Switzerland, but will still need to be considered. Norway and Iceland are members of the EEA as well as EFTA, which leaves limited scope for negotiating liberalisation of services, which necessitates a liberalisation of domestic regulation.

EEA members do not have the right to negotiate on matters of exclusive competence for the EU, or for those matters of shared competence which have been pre-empted by Brussels. The result is that any free trade deal reached with Norway and Iceland will likely be limited to goods and those services which EU regulation does not cover.

However, this already reflects the current state of play with UK-Norway and UK-Iceland trade. UK-Norway trade is dominated by petrochemicals and raw materials. A future trade deal would present some difficulties in agriculture, where Norway maintains high levels of protection. The high levels of state intervention into the market would also present additional non-trade difficulties which would likely scupper a high-standards agreement.

As with Norway, a UK-Iceland FTA would heavily feature fish and fish products. An FTA would also present the opportunity to simultaneously agree liberalisation of fish products tariffs, continued landing rights and mutual recognition of sanitary/phyto-sanitary standards.

While Iceland is a relatively undistorted economy, its capital controls regime would likely serve as a roadblock to an agreement with post-Brexit Britain – because the UK will place its services, and specifically financial services, front and centre in every negotiation.

Iceland has made some progress on liberalisation of its capital controls regime, but holders of some bonds, known as offshore Krona, have been prevented from selling their assets. The restrictions have led to protests from both US diplomats and UK politicians, and could delay or derail a UK-Iceland agreement unless the situation is fully resolved.

The advantage for Iceland is that there are comparatively few other issues between the two sides, and if Iceland can resolve the capital controls and fisheries issues, it ought to lead to a good agreement. British ports such as Grimsby and Hull are very reliant on Iceland’s fishing industry to land fish for the UK’s food processing industry. The UK is Iceland’s top trading partner and so a rapid deal, without complications, is clearly in the interest of all.

A UK-Switzerland trade deal would, due to the nature of the two economies, be both more complex and offer more potential economic gain.

As Switzerland is not a member of the EEA, it does have the right to negotiate on its domestic regulation.

Britain and Switzerland’s financial services sectors are complementary and primed for deeper integration. So the UK-Switzerland deal should go much further than the current EU arrangements – especially in the area of principles-based financial services regulation, which is in the interests of both parties (understanding that these arrangements will need to be consistent with both countries’ negotiations with the EU).

The UK should move aggressively on all of the four tracks mentioned. Bilaterally, in the case of our closest non-EU neighbours, it would be foolish not to make the best deals possible on behalf of the British people while we also pursue bigger and more difficult game.

Shanker A. Singham is chairman and A. Molly Kiniry is a research analyst at the Legatum Institute Special Trade Commission