LEADING THE WAY OUT OF THE EU

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In December 2017, Theresa May finally caved into the European Union on all three key divorce issues: the Irish border question, the rights of EU nationals in the UK, and the financial settlement. The estimated £40bn pay-out was supposed to open the door to trade negotiations along with an unwelcome transition period set to last until December 2020, only then will Britain become a sovereign nation again, and even then, perhaps only in name.

The EU secured additional concessions in the run-up to the March European Council summit when it was revealed British fisheries would be left under EU control for the entire 21 months of the transition period, threatening their very existence. Even though the withdrawal agreement was secured back in December, follow-up trade discussions only began in the summer of 2018. The pledge to avoid infrastructure in Ireland proved to just as disastrous as feared, putting a pause on negotiations until Theresa May was able to force through an ugly and unworkable compromise. The “Chequers proposal” (see option 5 below) is unworkable as it would require the tracking of all goods shipments flowing in and out of the UK. The kind of GPS technological solution needed to make the concept workable is light years away from widespread implementation.

Whatever trade agreement is forged with Brussels – and a big if hangs over that prospect – it will not consist of services. Absurd given that services account for the majority of British exports to the EU, and of the UK’s economic output as a whole. Instead, the focus is on goods, where Britain is in deficit by almost £100bn. Now as we enter the final stages of the negotiations, Leavers are faced with the bitter prospect of a deal paid for with countless concession including a £39bn payout that will only serve to help Europe export more to Britain, and only that. A collapse in talks leading to a no-deal would be the fairest outcome for the UK economy.

A BREAKDOWN OF THE OPTIONS

Britain will cease to be an EU Member State at midnight Central European Time on 29 March 2019. However, the transition period will essentially keep the UK in the open borders European Economic Area until December 2020.

Thanks to the Chequers proposal, the most likely outcome is continued membership of the Customs Union, with the prospect of free movement concessions being made to salvage some kind of services deal. This would be an entirely new kind of relationship borrowing from Turkey’s relationship with the EU and Switzerland. The EEA (AKA) Norway option is now out of sight, but not a WTO-based relationship, which would emancipate Britain’s commercial policy. In the likely event the prime minister returns to Parliament in October or more likely November this year to ratify a Customs Union arrangement there is every chance it will be thrown out. The WTO option will then beckon by default. There is still much to be hopeful for.

1. THE UK NEGOTIATES A FREE TRADE AGREEMENT (FTA) WITH THE EU

The most relaxed of the formal options available to the UK is a typical free trade deal. Britain would retain full or partial access to the Single Market, meaning tariffs on the vast majority of goods would continue to be exempted. But there would be no requirement for the UK to adopt regulations from Brussels, nor would Free Movement be a pre-requisite.

2. THE UK REMAINS PART OF THE CUSTOMS UNION

The Customs Union in many ways mirrors the the EEA. Just as all EU countries are in the EEA, they are also members of the CU. Non-EU countries in the Customs Union are usually hoping to one day become fully-fledged EU Member States, whereas the likes of EEA Norway have decided not to join the EU but have sought a higher level of EU market access. Non-EU countries in the customs union include Turkey, free movement is not a pre-requisite as it is with the EEA. The EU wants to retain access to the UK labour market and has not entertained the CU option in public.

The Customs Union carries a major drawback. Members must adopt the EU’s common tariffs (aka import duties) and regulations. In other words, members of the CU cannot unilaterally raise or lower tariffs on any imports other than agricultural goods, and as a result, they cannot enter into trade agreements without the EU doing so first. EEA countries can.

3. THE UK REMAINS A MEMBER OF THE EEA

Under this option, Britain would still remain within the European Economic Area (EEA), which comprises of all the EU Member States plus three other countries, Norway, Iceland, and Lichtenstein. The EEA is essentially, the EU’s Internal Market, minus agriculture and fisheries. A ‘Norway-Style’ relationship therefore means the European Court of Justice will no longer be Britain’s supreme court, EU VAT requirements will no longer apply, agriculture and fisheries policies will be back under the government’s control, as will its ability to independently negotiate trade deals. A condition of remaining in the single market however is to adopt Free Movement, pay budget contributions to the EU, albeit at a significantly reduced level, and adhere to the EU’s single market regulations.

4. THE UK NEGOTIATES ITS OWN EEA TYPE DEAL

Switzerland, chose to arrange its own EEA-type deal with the EU. It has tariff-free access to the single market, but whereas Norway and the other EEA countries have chosen to weld most of their industries to the EU’s single market, Switzerland has opted to be more selective. The alpine country has still had to adhere to free movement of labour, but it has on occasion decided to restrict access to its labour market for non-Swiss nationals.

5. THE CHEQUERS CUSTOMS FUDGE

The option no-one foresaw. Only Whitehall, where the fudge was hatched, says it can work, most likely spin to soften the blow of remaining in the Customs Union (see option 2). The prime minister’s December 2017 pledge to not install border infrastructure in Ireland signalled a horrible compromise would be in the offing. No sovereign border in the world is controlled without the presence of infrastructure (cameras, barriers, checkpoints). Discounting these facilities consigns Britain to the CU.

Following the December withdrawal agreement, The British government had to think up a third way to avoid what is known as the “Irish Backstop” – namely staying in the Customs Union. Under the so-called “Chequers proposal” the UK is supposed to remain part of the EU’s external frontier but act as a de facto sovereign trading nation by collecting tariffs on behalf of Brussels for EU-bound shipments. Exporters of goods destined for the UK market from nations with whom Britain has signed trade deals will receive a refund. All well and good if they enter the UK via a British port, but what about shipments routed through Antwerp, Hamburg and Rotterdam? The government is not pushing for the EU to record these imports and refund HM Treasury although it is compelled to do so thanks to an amendment forced onto the EU Withdrawal Bill by Tory Brexiteers led by Jacob Rees-Mogg. This sense of not knowing where anything stands is far from confined to the Rees-Mogg amendments, indeed it perfectly encapsulates the entire concept, which needless to say, is doomed.

6. THE UK TRADES WITH THE EU THROUGH WORLD TRADE ORGANISATION (WTO) RULES

Should negotiations break down with the European Union for whatever reason, the UK would fall back onto World Trade Organisation (WTO) rules in its commercial relationship with the EU. The core principle of WTO membership is to treat all other members equally and the EU will not be able to impose arbitrary and prohibitive duties on imports from the UK.

ARTICLE 50

Article 50 of the Treaty on the Functioning of the European Union (also known as the Lisbon Treaty) is central to the process of exiting the EU. Following the Prime Minister’s notification of withdrawal to the European Council on 29 March 2017, time is almost up on the two-year negotiating period, which is supposed to define both the terms of Britain’s exit as well as its future relationship with the European Union.

Perhaps neither will happen in the event London and Brussels fail to come to an agreement. That hopeful prospect remains less likely however. This is because the government has taken far too long to come up with an opening pitch for the future trade relationship – it was only made in June 2018 – as a last resort both sides may seek to get around the thinning timeline by signing a vague treaty commitment towards a future trade deal to be negotiated during the transition period, an option sketched out by Article 50.

Click here to learn more about the withdrawal process.

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