Brexit: Hard or Soft?

The problems that beset the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada is a sobering reminder of the minefield that the UK will have to tread through once Article 50 is triggered.

CETA, which passed its first stage of signing 30th October, was an agreement seven years in the making and aims to abolish barriers to trade. It ran into to trouble when the Belgium region of Walloon at first refused to ratify the deal over concerns over agricultural subsidies and the Investor-state dispute settlement (ISDS).

Protest against CETA

This was an agreement both sides wanted and served mutual (corporate of course!) interests and still requires ratification from the 28 member states. It shows the hazards of negotiating trade deals with the EU which surely bodes ill for the UK.

A complex of agreements

There are a complex set of agreements that make up the EU ‘Single Market‘ and the other trade agreements[1]. The Single Market for example is fairly rigid in imposing, free movement of goods, workers, services and capital. Attempting to gain exemption from one aspect, for example free movement of workers, undermines the principles driving the Single Market strategy. This is clearly a red line that would result in the UK losing out either in compensating the EU for any exemption or a point blank refusal to grant access to any part of the agreement.

It’s obvious that there is a political difficulty surrounding negotiations on the Single Market access. If the UK had to pay compensation for opting out of free movement it would be branded by UKIP and others as a betrayal of the aim to get back the £350 million a week (an incorrect claim) the UK sends to the EU.

In this light it’s difficult to see how a deal can be struck in the two years once Article 50 is triggered. Even with the lower bar of qualified majority voting it looks doubtful.

Sector by sector agreements

One possible clue to the approach the UK government may proceed from is given by the ‘Nissan Deal‘.

There is a suspicion that the government is preparing to underwrite potential tariffs for Nissan and there may be others. This seems unlikely as there may be the question of tariff compensation (which would in effect subsidise domestic products) being illegal under WTO rules.

It’s quite possible that this is instead a sign of a sector by sector approach in lieu of general agreements on areas such as the single market. With this there would be the upside for the government of plucking low hanging fruit. As Christophe Bondy, a former trade adviser, put it[2] in the context of the CETA agreement that he advised on:

“In trade agreements, usually one goes from the broader, easier issues to the last nub issues, that happens in any negotiation…”

The downside however is those ‘last nub issues’ which hold the potential to dog the main negotiations.

The compulsion of Co-operation

Taking a look at two different sectors, automotive and fishing, illustrates the difficulties and dangers.

The automotive industry is highly integrated across Europe. Britain’s car makers are mostly foreign-owned and around half of their exports go to the other 27 EU countries.

All companies and countries involved in the industry have a compelling case to continue tariff free trade. Even though the car companies are competitors, they have the same manufacturing model which would be damaged by tariffs. In his interview with Andrew Marr, 30 October 2016, Greg Clark the Business Secretary stated:

“It is important to manufacturing they get the minimum or no tariffs or and no impediments. The reason I was able to give that assurance is this is a, a good negotiations are about finding common ground between both sides to negotiation. For the European, for the continental European car manufacturer, they export us to and we export to them, and this is an exam of if you conduct the negotiations in a serious and civilised way, there is a lot in common that we can establish and that I was able to reassure Nissan and other manufacturers.”

I suspect that promises of no tariffs may be the nature of the agreement with Nissan and the car industry generally, rather than promises of compensation, and that EU members are also on the same page.

The compulsion of competition

However, when we take a look at the fishing industry, which is covered by the Common Fisheries Policy (CFP), the picture is a lot more complicated. The majority in the industry were in favour of leaving the EU. They wish to see restrictions on the access of other European fleets to British waters.

Fishing boats
Cornish fishing boats vote leave

Unlike the automotive industry, the fishing industry is fragmented largely serving domestic markets. Although there is some cross ownership, that’s used as a device to to ‘quota grab‘. It’s obvious countries such as Spain and Portugal will demand the same access to the lucrative UK waters they enjoy at present.

Less negotiations more disputes

This will almost certainly result in those member states putting these issues into the broader negotiations. The greatest disputes will most likely centre around agriculture, fisheries and to a lesser extent finance. The East European countries are also likely to play hard ball on the issue of free movement as many of their citizens work in the UK.

It points towards hard Brexit

At this early stage it’s not easy to discern the precise direction of travel for the Brexit negotiations. While there has been feverish speculation on the impact of the High Court ruling[3] on triggering Article 50, it’s not certain it will have a fundamental part to play beyond complicating the timetable.

The negotiations will not be taking place in a vacuum, they will be set against a slow down in world trade. This will exert protectionist pressures as the size of the trade cake shrinks.

With so many competing interests and issues, a limited time frame and a deteriorating economic picture, it looks set for a hard rather than a soft Brexit.

Gary Hollands – November 4th 2016

Notes and references

1. Europe and the European Union is linked by a number of interdependent agreements. Put simply, the greater the number of these agreements that are maintained the ‘softer’ the Brexit.
The following list is based on an excellent graphic by Bloomberg.

European Union official website
Membership: 28
Description: A politico-economic union that operates an internal single market.

European Union Customs Union (EUCU)
Membership: EU members + bi-lateral agreements with Turkey, San Marino and Andorra.
Description: Membership of the EUCU is a condition of EU membership. Internally it is tariff free but imposes a common external tariff on all goods entering the union. Agricultural goods are excluded from the agreement with Andorra and Turkey.

European Economic Area (EEA)
Membership: EU members + Iceland, Lichtenstein and Norway
Description: The EEA provides access to the Single Market and is compulsory for EU members. Non EU members have access in exchange for contributions to the EEA Grants scheme. Agriculture and fisheries are not covered by the EEA.

Schengen Agreement
Membership: 22 EU members + Iceland, Lichtenstein, Norway and Switzerland
Description: The Schengen Agreement covers an area where its members have abolished passport and any other type of border control.

European Free Trade Association (EFTA)
Membership: Iceland, Lichtenstein, Norway and Switzerland
Description: EFTA is a free trade area that has agreements with the EEA and EU.

2. Daily Politics 28th October 2016, interview with Jo Coburn.

3. R(Miller) v Secretary of State for Exiting the European Union: Summary and full judgement.

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