What does “Brexit means Brexit” mean? When Theresa May uttered these words, she almost certainly didn’t know what they will actually mean in practice, and she probably still doesn’t.
The conventional wisdom says there are four potential ways forward for the UK. First, stay in the Single Market by remaining in the European Economic Area (EEA). This is the Norwegian model. Second, sign a free trade agreement of some form. This is the Swiss model. Third, agree another form of bilateral deal, such as a customs union agreement. This is the Turkish model. Lastly, we have the WTO model whereby we would trade under World Trade Organisation rules.
When you scratch each option, however, the conventional wisdom is revealed to be too simplistic. The eventual reality will almost certainly be some form of hybrid model. Let’s examine why.
The EEA option is probably the most favoured in Whitehall and Westminster. From an economic perspective, it is the closest option to existing EU membership. It provides continued tariff and non-tariff barrier free trade with the EU, and covers goods and services, as now.
The problem with the EEA option is mainly political. The price of access to the Single Market would almost certainly be free movement of people. It is hard to imagine the rest of the EU allowing free movement of goods, services and capital, without the fourth freedom, people. But continuing with free movement of people would almost certainly be a bridge too far, politically, in the UK.
The political stumbling blocks with the EEA don’t stop there. The other price of access to the Single Market would be a budgetary contribution of some form also. Throw in the problem of regulation without representation, and the UK having to abide by Single Market rules it had no say in (and which might be worse in the future), and the political hurdles to EEA membership appear too high. Moreover, even if the UK were to seek the EEA option, there is no guarantee it could achieve it. Because EEA membership requires EU or European Free Trade Association (EFTA) membership, there is the possibility of a veto by an EFTA country.
The free trade agreement option is less attractive in terms of access, given that it is likely to only cover goods, with minimal coverage of services. The experience of the Swiss also shows that even limited access to the Single Market requires the free movement of people. Switzerland doesn’t have an EU agreement for financial services either. Throw in issues of complexity and timing (the Swiss have 120 bilateral agreements established over many decades), and the free trade agreement model has its own set of challenges.
The customs union model, illustrated by Turkey, is just another form of bilateral agreement. But remaining in the customs union would mean trade policy was still outsourced to the EU and that UK prices would remain higher than world prices, because of the European Union’s Common External Tariff (CET). Both the Swiss and Turkish models were agreed by the EU because of an expectation these countries were on a transition into the EU. Reverse the direction, and it is not at all clear that the EU would accept such agreements for countries leaving – the carrot would be replaced by the stick.
So we’re thrown back towards the WTO model, but in my view with a twist. The twist is that we wouldn’t revert to tariffs on goods imported into the UK. Instead the UK would trade tariff free with the world – unilateral free trade. We’ll examine the how and why next week.