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The easiest free trade deal ever?

Liam Fox suggested that a UK-EU trade agreement should be the “easiest in history" to negotiate. He is right about the starting point – but he should not assume it’s a slam dunk, argues Jill Rutter. 

Canada-EU. Japan-EU. Ukraine’s Association Agreement. Turkey’s Customs Union. Switzerland’s proliferating bilateral deals. These are all models touted as the possible shape of a future UK-EU deal.

But these trade deals are trying to do something fundamentally different from what the UK needs after Brexit. They start with countries or blocs whose economies developed apart – and which are seeking to increase the gains from trade by bringing disparate systems into a degree of greater alignment. They are trying to agree a process of managed convergence. 

The template is not the same for UK-EU negotiations. As Liam Fox points out, the UK will start from a point of convergence, with EU regulations transferred into UK law through the EU Withdrawal Bill and no tariffs.  

It is not just Liam Fox who thinks this - Michel Barnier does too. He told the House of Lords EU Committee last week: "We are used to doing free trade agreements… All those agreements were negotiated in terms of regulatory convergence. In the case of your country, however, the set-up is the opposite.” 

He then goes on to point out the potential stumbling block: “We are of course totally integrated now in the single market, and you will diverge mechanically. The questions that we have are: is that divergence reasonable? Is it under control? Is it mastered, and if so by whom? Or will it become a tool for regulatory competition with us?...It is one of the keys to the success of the negotiation…on the future relationship."

A Liam Fox-style UK-EU trade deal would have to manage future divergence.

The starting point is not the problem. The problem is the future. A UK-EU deal of the sort that Fox wants stands or falls on having a process for managing future regulatory divergence.

Divergence can come from three sources:

1. The UK amends EU rules on its statue book.The EU would worry that the UK is trying to gain an unfair competitive advantage – to unlevel the playing field – or reduce EU standards through the backdoor.

2. The UK does not follow new EU law. The EU or judgements of the European Court of Justice could change European law. The UK currently must adopt those changes, but in future it might decide not to.

3. The UK pays lip service. The UK could adopt EU rules in theory but not implement them in practice. Currently the Commission can enforce those rules via the European Court of Justice.

The deal could only work if divergence were the exception, not the rule. 

There is still the need for an effective mechanism to enforce the deal.

The question hanging over a Liam Fox-style free trade agreement is to what extent would the UK be prepared for compliance in the future?

The EU-US trade deal (TTIP) contained a proposal for a Regulatory Cooperation Council to look at regulatory approximation. One option might be a similar mechanism to judge whether the UK should have reduced market access if it diverged sufficiently from the agreement.

The UK is clear that it does not want directly applicable judgements from the European Court of Justice. But for this sort of arrangement to work the UK and the EU would have to accept that the body could enforce its decisions. We don’t yet know what the UK would propose or be prepared to accept.  

A deal on managed divergence could dramatically ease the problems of transition.

There are big potential benefits to the UK from an arrangement on ‘managed divergence’ – indeed it could minimise disruption and help change come about gradually as the UK decides to diverge. And decisions made to diverge would have to be made in full knowledge of the risks they would pose in terms of the UK’s access to the single market. 

It might even be possible to extend this arrangement to other areas. The UK could potentially maintain a customs union arrangement, applying the EU’s Common External Tariff, until it gave notice that it was opting out. This could be because it had negotiated a deal with a third country or wanted to apply policies that do not comply. The UK could remain within all existing EU bilateral agreements and regulatory agencies, until it explicitly opted out. 

Could we persuade the EU that this isn’t the UK “having its cake and eating it”?

This sort of agreement might make economic sense. Liam Fox says the sort of deal he envisages may not come about if the EU puts politics above economics. But the 27 EU member states think that is exactly what the UK has done, and have so far stuck to the line that the long-term integrity of the single market is more important to them than short-term economic dislocation. 

This position may well change in future but it would be foolish for the UK to base its economic future on that hope. The EU could say that this is exactly the sort of deal on offer: joining the EEA with its benefits and attendant obligations - including free movement.

UK politicians would have to ensure the EU 27 could present the deal as the UK 'getting half a loaf' rather than 'eating the whole cake', and so should think about what they are prepared to concede so that the EU can sign up to a deal without selling out its single market principles. 

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