Summary: Trade after Brexit

Options for the UK's relationship with the EU

The UK rejects a binary choice between the Norway and Canada models

The European Commission has suggested that the UK faces a choice for its trading relationship post-Brexit – to become a rule taker with full market access like Norway, or have a standard free trade agreement like Canada.

The UK has rejected this “stark and binary choice” between two existing models, calling for a bespoke free trade agreement. The Prime Minister rejected the Norway model on the grounds that becoming a rule taker with no formal vote would be politically unsaleable.

The standard Canadian-style free trade agreement, which does not cover much of the service sector (around 80% of the UK economy), represents such a step change in market access that it would almost inevitably cause severe damage to the UK economy.

The European Union has been more flexible with other countries – but access to the Single Market always comes with obligations

The UK is right that there are precedents for deals in the “middle ground” between Norway and Canada. Contrary to the European Union’s (EU) frequent statement that no partial integration in the Single Market is possible, it has allowed some exceptions for non-EU countries. But where such arrangements exist, that access has carried strict obligations.

The agreements with Ukraine and other eastern neighbours provide for partial integration into the Single Market but tie market access rights to the adoption of EU rules and oversight by EU institutions. Even if this was attractive for the UK, the circumstances are different: Ukraine is moving towards the EU, while the UK has chosen to leave.

Switzerland has a network of agreements with the EU that allows for sector by sector participation in the Single Market, but without institutions to oversee and enforce the agreements. This arrangement might also seem attractive to the UK, but it has become increasingly unpopular with the EU, which is unlikely to agree to offer the UK the same.

The EU has used a limited form of mutual recognition to remove some barriers to trade with countries like the US, New Zealand and Israel. But an agreement with the UK based on broad mutual recognition is highly unlikely. Its absence of oversight and institutions would contradict the EU’s approach to trade.

The UK could adapt these precedents to propose a model that better suits its priorities

Leaving aside the issue of tariffs on industrial goods, which are mostly eliminated in all free trade deals, the UK’s aim is to retain the freest possible access to the Single Market for services and to avoid the creation of regulatory barriers.

No precedent offers the UK an immediate solution. But the Government might look to adapt the existing models for trade in its negotiations with the EU. We set out three options that try to do this:

• An EU–UK Economic Area (‘Bespoke Norway’)

The UK broadly accepts Single Market rules and parallel institutions, but negotiates a new arrangement on freedom of movement and greater input on devising regulation (though it would not have a final say).

• An EU–UK Deep and Comprehensive Free Trade Area (‘Reverse Ukraine’)

This would allow participation in the Single Market in sectors which remain aligned and subject to oversight. Non-harmonised sectors would face barriers.

• An EU–UK Comprehensive Free Trade Agreement (‘Canada plus’)

This would be modelled on the EU-Canada Comprehensive Economic and Trade Agreement (CETA), but with the aim of agreeing better access for services and provisions for enhanced regulatory co-operation, to try to minimise trade barriers where possible.

The UK could propose a new approach based on ‘managing divergence’

The UK and the EU start negotiations from a unique position, with complete convergence of rules. The final option this paper explores is a new approach, which takes into account this starting point and focuses on ‘managing divergence’.

This ‘regulatory partnership’ model would allow the UK-EU relationship to develop over time.

This approach would give more flexibility, as the UK could choose whether to align with the evolving EU rulebook. But it would come at the price of uncertainty – any decision by the UK to diverge from EU rules might create barriers to trade, creating a complex legal landscape and potentially deterring investment.

The UK can’t escape a fundamental choice: the more access it has to the Single Market, the more obligations it must accept

The EU so far has shown no willingness to come close to any agreement that combines the “weak constraints” of CETA with the access of Norway. Ultimately the UK will not be able to duck fundamental choices on how close it wants to stay to the EU market and the obligations it will have to accept as a consequence. The deeper the relationship, the more onerous the obligation, and the more likely it will cross the UK’s current red lines.

The UK may be able to make the EU’s offer a bit less stark. But it needs to be prepared to make trade-offs. High access and alignment can minimise disruption, but are likely to bring politically difficult obligations in the form of free movement and a role for supranational institutions.

If the UK wants maximum control, and no longer be constrained by EU rules and institutions, it will face significant barriers to trade with the 27 member states (EU27).

A middle way does not remove the need for those trade-offs.

Where it wants to continue to participate in the Single Market, it will need to accept commitments that come with it. There is limited scope for differentiating between very broad sectors, given the degree of integration.

The Government needs to put forward its preferred option

The Government is clear on what it does not want – but has failed to articulate what it does. The UK must put forward a concrete proposal on the relationship it wants with the EU and the Single Market as a basis for negotiations with the EU.

This should be based on a clear analysis of the impact on the UK economy, including the likelihood and benefits of divergence. The Government should make clear to Parliament and the public the assessment it has made of why that option is the best for the UK’s future.

The UK also needs to show more appreciation for the concerns of the EU if it wants to encourage flexibility. Any option in the ‘middle ground’ between Canada and Norway will require some compromise from the EU27.

While the EU27 will prioritise maintaining the integrity of the Single Market and ensuring the UK does not appear to benefit from ‘cherry picking’, they are also concerned at the prospect of a regulatory competitor next door.

The UK needs to shape its proposals in a way that meets the EU’s concerns rather than requiring the EU to abandon them.

There is very little time – even with a transition – to agree and ratify a new trading relationship

The UK must act quickly if it wants to influence the EU27 before detailed negotiating guidelines are agreed. With the EU expected to come to a position in March, the window for persuading European capitals is tight. Unless the UK uses this time wisely, it might find its preferred option never makes it on to the table.

Negotiations need to move at great speed. The more an agreement departs from precedent, the longer it will take to agree – unless both sides can rapidly accept a process of managing divergence over time. That means the UK may be forced back to the binary choice it has sought to avoid.