25 May 2018

Financial Times: A Brexit compromise for frictionless goods trade

Martin Sandbu writes that what is emerging is that the UK may end up seeking a long-term relationship with the EU based on a customs union and accepting single market rules and jurisdiction for the production and trade in fish, agricultural and industrial goods but not services.

Over the past few months, the logic of such a model has been outlined here and in briefings by the Centre for European Reform. This week Ivan Rogers, the UK’s former permanent representative (ie ambassador) to the EU who resigned because of the government’s unwillingness to listen to civil service advice, also came close to endorsing such a model. His speech is as comprehensive an account as one could wish for of, on the one hand, how UK misperceptions and wishful thinking have put the talks in the mess they are, and on the other, the realities that confine what sort of post-Brexit relationships are possible. If he does not quite add “I told you so”, he is certainly entitled to.

I want to focus on a question he raises at the end of his speech. If — or as I think, when — the UK formally and in earnest makes a customs union-cum-single market in goods its negotiating aim, how will the EU respond? And how should it? So far it has not had to address this because it is not an option anyone has put on the table. This means such a proposal would help the UK get a little bit off its back foot, as it would mean “the EU [would face] the decision as to whether this is an unacceptable option sundering indivisible freedoms and offering something too close to membership advantages to a non-member . . . [or] rather a good deal for the EU with a major strategic partner”.

The case for the EU and its member states decide the latter and accept such a proposal overwhelmingly outweigh any objections.

First, it would be a good economic relationship from the EU’s perspective in several ways. It would maintain frictionless trade in goods, which would avoid a physical border on the island of Ireland as well as any checks on the much busier cross-border trade between the UK and the continent and between Great Britain and the Republic of Ireland. Moreover, a UK-EU customs union would maintain the EU’s current clout in trade negotiations, as access to the British market would be part of the prize for trading partners. And the EU’s laws would maintain their supremacy for a large sector of economic activity even outside of the bloc itself.

What about the worry that this is cherry-picking? After all the UK could, under this solution, end the free movement of people. But it is hardly picking and choosing the bits of the single market the UK likes while avoiding the costs. Above all, Britain would have to go along with EU trade policy (though it could argue for being consulted and especially for the EU to negotiate reciprocal access for British exporters in new trade agreements) and be a rule-taker not for cherry-picked sectors but for everything relating to the production of goods. That would include accepting the permanent jurisdiction of an international court, either the European Court of Justice directly or something like the Efta Court, which could easily do the job for this model that it currently does for the European Economic Area countries.

We should also note that the UK would lose the free movement of services — a huge blow for Europe’s premier service exporter. It is often said that the EU’s four freedoms (of movement of people, services, capital and goods) are inseparable. It is correct that you cannot meaningfully split out free movement of people and keep the other three: services and people go together. But there is a strong economic logic to having the first two (goods and capital) alone. Such a split — keeping two freedoms and losing two — is more like accepting half a cake for half the price than having your cake and eating it.

The final concern among EU countries is that the EU-UK relationship should not look so attractive that other countries might want to leave. But for the reasons set out above, the drawbacks relative to EU membership are blindingly clear. Trade policy and goods regulation would be set entirely without input of the countries benefiting from it. No EU member would find this — plus the loss of services trade — compensated for by the chimerical benefit of limiting the free movement of people.

Perhaps some non-EU members might see it as a possible option. This is unlikely for the EEA countries. But Switzerland, which is tied into the single market in goods but falls somewhat short on services, may be attracted. It would, however, involve the sort of continuous adaptation to evolving EU rules that has made the Swiss reject the EEA. That leaves the countries on Europe’s periphery: Turkey, the Balkans, Ukraine, most of which are candidates for EU membership. As a way station — even an indefinite one — the model sketched here looks attractive. And if there is no risk of existing members peeling off, the EU should like it too as a way to keep neighbours close. [...]

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