24 April 2017

CER: Brexiting Swiss-style: The best possible UK-EU trade deal

• Despite the 27’s ‘no cherry-picking’ rule, any trade agreement between the UK and the EU will require both sides to decide which sectors of the economy should continue to have the lowest trade barriers possible, given Theresa May’s decision to leave the single market. Thus, the negotiation will be an exercise in sectoral bargaining, as with all free trade agreements.
• A new empirical analysis of trade barriers, set out in more detail below, shows three things. First, trade barriers in goods with the EU has almost halved since the UK joined in 1973, while barriers with the US has only fallen by one quarter.
• Second, Switzerland’s barriers in goods with the EU are now almost as low as the UK’s, despite its partial membership of the single market, and its arm’s-length relationship with the EU’s institutions.

• Third, barriers in both goods and services between the UK and the EU have barely fallen since the year 2000. This suggests that the single market is reaching its limits, given that further falls would require more sharing of sovereignty, especially in the highly-regulated services sector. It also suggests that the losses foregone by Britain from further single market integration will be limited: the priority must be to limit the costs of the divorce.
• How might that be done? The focus should be on goods trade, not services. The barriers to trading goods between the UK and the EU are less than half as large as those in services, according to our analysis. The exception is in capital markets and the business services that support them, such as accountancy, law and consulting. But the UK’s dominance in finance – Britain exports three-quarters of all capital market services within the EU – means that the 27 are keen to repatriate that activity.
• In recent years, the most contentious ECJ cases involving Britain involved disagreements over financial regulation or the free movement of people. The 27 will not be willing to allow financial services access without closely aligned rules and the power of the ECJ to arbitrate disputes with the UK government.
• The best hope for the UK, then, is a comprehensive trade agreement focussed on goods and those services, such as aviation, where both sides have a strong incentive to maintain the freest trade possible. This would be similar to Switzerland’s deal with the EU. Despite the Commission’s frustration with the Swiss relationship, a Swiss-style agreement largely limited to goods is Britain’s best hope: it represents the limit of market access that the EU has been willing to accept without the full supremacy of EU law.

• The Swiss-EU bilateral agreements show that compromises between sovereignty and economic integration are possible. Bilateral committees in the sectors where the Swiss and EU co-operate closely determine whether the Swiss should update their regulations to match those of the EU. The ECJ does not adjudicate disputes (although Swiss updates to their regulations must take account of ECJ case law). Something similar would be a potential ‘landing zone’ for the EU-27 and the UK in their forthcoming negotiations.
• Such an outcome would have significant economic costs for Britain, given its advantage in services trade. But it provides a middle way between two extremes: severe trade disruption and full sovereignty on the one hand, and continued single market membership and the wrath of Brexiteers on the other.

Full policy brief

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