12 April 2017

The Economist: The EFTA countries show how hard Brexit will be for Britain

[...]After it leaves the EU, Britain will look much like an EFTA country: a rich economy with close links to Europe, but also seeking trade deals elsewhere. It is superficially an attractive prospect. Yet EFTA’s half-in-half-out relationship with the EU hinders its trade as much as it helps.

EFTA’s flexibility in trade stems from its odd relationship with the EU. Switzerland has a series of bilateral agreements, whereas Norway, Iceland and Liechtenstein are part of the single market through the European Economic Area (though with opt-outs for agriculture and fisheries). Crucially, however, all are outside the EU’s customs union, an agreement which regulates tariffs charged to third countries. This allows them to strike other trade deals.

EFTA has made the most of this power. The group has 27 free-trade agreements in all corners of the world. They give its exporters access to around 900m consumers—impressive for a club which covers just 14m people. In addition, individual states have bilateral deals. [...]

A recent paper from the European Parliament found that EFTA tends to make trade deals faster than the EU. South Korea’s talks with EFTA, for instance, took half as long as those with the EU. EFTA is speedy because it can agree on a common strategy faster than the EU, which has more countries to accommodate.

Similarly, once outside the EU customs union, Britain may be able to reach faster deals. Donald Trump says he wants a trade agreement with Britain “very quickly”. However, EFTA’s experience offers cautionary lessons. Striking a trade deal quickly is a bonus; but what really matters is how good a deal it is. The parliament paper also notes that EFTA’s agreements have been “shallow” compared with the EU’s.

Analysis of the Design of Trade Agreements Database, a project led by the World Trade Institute in Bern, backs up this claim. EFTA is not a big market: its partners are happy to make deals, but they are loth to spend too much time on the finer details. Nor will they make large concessions. The relatively low quality of the deals helps explain why EFTA’s free-trade agreements still account for only about a tenth of its members’ trade.

Britain is a much bigger market than EFTA. But it will still be in a far weaker negotiating position outside the EU than as part of the single market. Moreover, EFTA also shows that, besides offering uncertain benefits, an independent trade policy brings large costs. Being outside the EU customs union is an irritant for many firms. Goods moving from EFTA to an EU member undergo “rules of origin” checks, to ensure that the exporter is not avoiding EU tariffs. Karen Helene Ulltveit-Moe of Oslo University says that to avoid cumbersome checks many Norwegian firms simply relocate to Sweden. The idea of going it alone in international trade negotiations may be more appealing than the reality.

Full article on The Economist

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