Brexit

Four main negotiating scenarios appear on the horizon at the beginning of 2018.

First, European Economic Association (EEA) membership, involving continuing Single Market (SM) access, along with its four freedoms, as well as continuing financial contributions, but with European Free Trade Association (EFTA) Court rather than European Court of Justice (ECJ) jurisdiction.

The UK could seek some possible tweaking to Freedom of Movement (FOM),and its exit from the Common Agricultural and Fisheries Policies, in order to make such membership more bespoke to UK needs, with associational tie-ins across areas, such as defence, medicines, and security.

Indeed some in the Labour Party project that an EEA arrangement, with some tweaking to FOM, to the Fisheries policy, and across other limited areas, is where the UK will, and should end up; and that end-point could then be sold as the least economically damaging option, while still  still honouring the Brexit vote and responding to connected primary immigration concerns across  leave voting Labour voting constituencies.

A de facto UK CU membership could possibly be then yanked onto UK EEA membership, as part of a permanent or indefinite post-brexit UK-EU deal, in place of a long-term 2019 transitional or ‘implementation’ arrangement. Ths remains current UK policy.

But EEA membership is not designed as a transitional phase in a journey towards an alternative trading relationship – at least, as it is currently constituted.

The UK being able to tweak FOM provisions is a doubtful and uncertain proposition, although the Cameron temporary brake proposal could possibly be resurrected.

And, of course, the negotiations are being conducted by the May government, not the Labour opposition. The prime minister is pushed to placate the hard brexit demands of a significant segment of Conservative MP’s, who will not hesitate to push for a disorderly brexit if the alternative that is offered appears to be, in effect, continuing practical adherence to EU requirements and processes, albeit outside full membership.

Second, an extension to Article 50 UK exit date in order to allow sufficient time to negotiate a Comprehensive Free Trade Agreement (CFTA), which, post any 2019 legal exit, is likely to take more than five years to conclude. Again, that would be anathema to the Tory hard brexiteers, but even more so. They would no doubt agitate that the democratic will of the UK population was being betrayed, supported by most of the populist media. It seems unlikely that the EU would be willing to agree such an extension, while the legal case for the UK to unilaterally declare an extension is contested.

Third, a disorderly (read: most economically damaging) exit.

Fourthly, and currently, the May government’s preferred expressed option, is a Deep and Comprehensive (or Special) Free Trade Agreement (CFTA).

Such a CFTA could be modelled on the EU-Ukraine Association Agreement (UK-Ukraine AA) rather than a EU-Canada CFTA-plus services model.

The EU-Ukraine AA was finally ratified in 2017 by the EU27. It, in essence, offers most of the the benefits of the SM and Customs Union (CU), including tariff-free access for goods and passports for services and with associated customs cooperation, Trade Observatory Briefing Paper on Ukraine/EU associational agreement. 

Regulatory alignment, including to EU competition, to state aid, to anti-dumping and to public procurement regulations, is also enshrined in the agreement. The FOM SM full membership obligation, however, is excluded, dealt with instead by a visa liberalisation and work permit system.

It also offers Ukraine the option of ‘buying in’ to a number of EU common programmes, for example, to the Horizon 2020 research programme, to EU agencies such as Europol. Prospects of participation in a wider set of EU common policies, such as transport, environment, employment and consumer protection policies, with political cooperation across justice and home affairs, foreign, security and defence fields is included.

But the EU-Ukraine AA was offered by the EU as an inducement for a country formerly in the erstwhile USSR political and economic orbit to move politically closer to it (and by extension NATO) and away from Russia.Ukraine confirmed its self perception and wish to be perceived as a European state looking westwards: a stance not universally accepted across its geographical area,  exposing the political fault lines involved. As such the agreement could indeed be viewed as particularly exceptional and special.

The replicability of the treaty to the UK-EU Phase 2 negotiations is open to severe doubt, insofar that these will be driven by a quite different set of political and economic imperatives.The Ukraine and the UK vastly differ in in economic characteristic and importance to the EU. The exponents of the treaty, however, point out that it could offer a precedent framework in which the UK could progress its own bespoke agreement with the EU, a process that could be propelled by the UK’s relative economic and political importance to the EU.

A bespoke CFTA, where the EU offers tariff-free access to the UK that has exited its regional trading bloc could possibly raise charges that the WTO Most Favoured Nation (MFN) rule, discriminating against other Non-EU potential trading partners, had been infringed.

Similar to the Canadian CFTA, the UK-Ukraine AA took many years to negotiate and ratify, meaning that a long term transitional agreement would be required. Full circle almost back to the first EEA option.

Most seriously, the negotiation of a CFTA involving continuing UK frictionless trade with the EU and its continued enjoyment of the benefits of SM membership while jettisoning key obligations, such as FOM, rests upon the willingness of the EU to flexibly adjust the institutional architecture of the SM to Britain’s particular interest or requirements. Why should it?

Most experts on trade matters are clear that a bespoke Comprehensive Framework Trade Agreement (CFTA) between the UK and EU can be expected to take at least five years to negotiate after UK exit. For example:https://blogs.sussex.ac.uk/uktpo/2017/12/15/magic-realists-and-economic-realists/.

The Stage 1 negotiation process showed that the EU calls the shots in this process. It has confirmed that the purpose of the impending stage 2 exit negotiation phase is to secure full agreement on the divorce deal, including the outlines and parameters of the future trading relationship between the two parties, the detailed negotiation of which will follow later.

Insofar that the UK chooses to pursue a bespoke CFTA in line with current government expressed intentions, it is most unlikely to be operative by 2024, at best.

Assuming that the UK does irreversibly leave the EU in March 2019, subsequent to a UK Parliament vote, but then continues with de facto single market (SM) and customs union (CU) membership regime for two years until early 2021, some of these experts, as above, have pointed out that would mean the UK falling off the cliff in mid-2021, leaving a hiatus until a new CFTA is ratified.

It follows that transition period involving continuing de facto SM and CU membership or, alternatively, postponement or extension of article 50 until 2024 or when the CFTA actually becomes operative, is required.

That, however, would be unacceptable to the conservative hard Brexit wing. They could bide their time until the Brexit divorce is legally sealed in early 2019, and then agitate for ‘real Brexit” without continuing SM and CU de facto membership: in other words, a disorderly exit.

Meanwhile it appears that the May cabinet has authorised an approach where the UK will seek from the EU, a transitional deal where the benefits of continuing CU and SM membership are retained, viz: frictionless trade in goods without tariffs and without border customs checks, but with some regulatory divergence in key sectors to the UK interest, as well as, say, exit from the Common Fisheries Policy: the ‘let us have our cake and eat it’ option.

It is almost certain that this approach will be rejected by the EU next spring; perhaps that will serve to further clarify minds.

The prospect of de facto five year SM and CU post 2019 transition period-at least involving continuing FOM, EOJ jurisdiction, and membership fees, does not appear yet to have been accepted or understood by Labour, at least in public discourse or in policy terms. Perhaps that will change when the fixed parameters of the stage 2 negotiations, as set by the EU, become even more visible by March 2018, as above.

By then it could be clear that the real choice is either a disorderly exit or a status quo where the UK continues as before until 2024 or later, but without influence; that is, unless, the UK seeks to postpone Article 50 divorce with EU assent.

The EU decision early this month that sufficient progress had been made in the brexit stage 1 negotiations to proceed to stage 2 was predicated on the May government, in effect, recognising that the UK will continue to adhere to adherence to customs union (CU) and single market (SM) processes during the anticipated two year post-March 2019 transitional period, so staving off the imposition of a hard Eire/NI border.

Many in her party are still wedded to the illusion that it can be avoided without continuing de facto continuing SM and CU membership post 2019, or find it convenient for their own purposes to pretend that is the case.

In response, Keir Starmer(KS) has suggested that the UK is moving to a Norway European Economic Association (EEA) arrangement, implying continuing FOM, UK membership contributions, and fealty to ECJ jurisdiction. Meanwhile John Mcdonnell(JM),while also highlighting the advantages of continuing adherence to SM, rules out continuing FOM.

Quite likely both front benchers are flying mutually understood kites, but JM risks mimicking the hubris of the government brexit approach by holding out that the UK can maintain the benefits of the SM, while ditching free movement.

As suggested in a hybrid option where the UK proceeds into the medium term on the basis that it will proceed to negotiate a CFTA while maintaining adherence to CU and SM processes, appears at present most likely as that would avoid the economic damage of a disorderly exit, but would allow the political can to be kicked beyond a 2022 election.

The UK faces either a Comprehensive Free Trade Agreement (CFTA) based on the recent EU-Canadian agreement that will still disadvantage UK services, and which – on current information – would take us well past the two year transitional period post March 2019 legal exit, ending early 2021; or a long-term Norway European Economic Association (EEA)-type arrangement involving continuing adherence to the single market with its four freedoms, including FOM, as well as continuing membership fees and fealty to EoJ jurisdiction on SM matters.  

The former would inflict continuing economic damage while the latter is logically absurd (why not just stay in and retain influence) and is likely be politically unacceptable due to the self serving unwillingness of the political class to ‘disrespect the will of the people’, despite the population being sold brexit on a false prospectus, or more kindly, one that was based on imperfect and incomplete information, a deception that is now steadily and surely emerging.   

A hybrid of these two options, perhaps – the author of this post, like others, suffers from imperfect information on this complex, technical and unfolding story – is more likely: extended de facto continuing UK CU and SM adherence until a CFTA is agreed sometime mid-next-decade. This could allow UK exit from the CU, while allowing continuing indefinite UK SM  involvement for services. Such a hybrid would allow the political brexit can to be kicked down down the road past a 2022 election
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