Since the UK’s election, the noise around precisely how the UK will leave the EU has increased dramatically, and the level of confusion about what the UK will do has increased.
The rest of the world is rightly wondering what to make of this, as UK politicians call for “Global Britain” to be a free trade leader, and members of the Cabinet are dispatched around the world calling for trade deals as soon as possible.
Few expect Britain and the EU to conclude the comprehensive free trade agreement that both sides have called for between now and March 2019, when the UK formally leaves the EU.
This means that some form of interim arrangement will be necessary immediately after the exit date. The government’s official line is that this will be an “implementation phase”.
Recent discussions suggest that such a phase will not be longer than three years. The critical issue is what will be in this phase, and whether any of the interim measures that the EU and UK might agree prevent the UK from acting like any other sovereign nation with respect to trade agreements, domestic policy, and international negotiations.
In order for the UK to be a viable candidate for a US-UK agreement, to ascend to the trans-pacific partnership (assuming it is live by March 2019), or make bilateral deals with India and others, it will have to be able to execute an independent trade policy from day one of Brexit.
That means it must have control of its goods and services schedules, and have unfettered control of its domestic regulatory authority. This last is particularly important for a country whose major areas of comparative advantage are in services. Since product regulation also applies to goods trade, the UK will need to maintain control over its domestic regulations to be able to do deals that cover industrial goods and agriculture as well.
The UK and EU may also agree interim measures such as zero tariffs, mutual recognition of product regulation and so on, in a way that satisfies the WTO, as long as only for a limited time, and in contemplation of a free trade agreement.
Since everyone knows that the EU and UK will be negotiating a free trade agreement, they should both promptly declare that intention to the WTO so that countries know what to expect. This would greatly reassure global business, as well as the WTO membership. Such a notification would include reference to the kinds of interim measures they would be contemplating. Other WTO members who manage supply chains that flow through the UK and EU will also be reassured that the cost of their supply chains will not be increased as a result of Brexit. These countries will want to make their views on this point known to London and Brussels.
On the regulatory side, where possible, mutual recognition type arrangements should be put in place, and these must be such that the UK can interoperate with the rest of the world, while maintaining regulatory recognition with the EU.
Too much locking into the EU regulatory system and the UK won’t be able to reach regulatory agreements with others, and its independent trade policy will be in tatters. No UK-EU agreement, and significant damage will be done to both the UK and European economies.
The task that faces UK and EU negotiators should not be underestimated. For the UK, they will have to ensure that they allow the country to walk a tightrope so that the global trading opportunities that Brexit affords can be fully capitalised on, while ensuring the disruptions caused by leaving the Customs Union and Single Market are minimised.
In addition to potential trade deals, the WTO is crying out for leadership, and a large economy that is the second biggest exporter of services in the world will be expected to provide it. That leadership cannot be provided if the UK does not have full authority to negotiate as soon as it leaves the EU.
The UK must be able to provide the clarity of being out of the Customs Union and EEA on day one of Brexit, with a regulatory base-line that will result from the porting over of most EU law through the Great Repeal Bill. That way, other countries know exactly what they are dealing with, and can conclude deals as soon as they are ready.
If such clarity does not exist, then other countries will not think the UK is serious about executing an independent trade policy and they will quickly lose patience and move on.