Featured The EU Briefings

An EU/UK FTA Can Be Done in 2020

backstop not optional
Written by Robert Lee

Now that Brexit “will get done”, focus switches to the EU/UK FTA negotiations. Can a trade deal be done by end 2020? Some Brexit opponents say it will take much longer, and the EU would prefer an extension. However, a deal is not only possible but very likely. The UK is now in a strong bargaining position, with a majority government prioritising the potential regulatory freedoms of Brexit. With a weak economy the EU needs to protect its huge trade surplus as the UK conducts parallel trade negotiations with non-EU countries. The parties start talks with full regulatory alignment and zero tariffs. The Political Declaration allows for the relatively limited goal of a Canada style FTA. This is eminently achievable.

“Take Back Control” and “Get Brexit Done” are two of the most effective slogans in British political history. Opposition parties in the recent election argued that the latter slogan was misleading, because the trade talks were still to come. However, the Brexit Withdrawal Bill now going through Parliament means that we will legally and politically leave the EU on Jan 31st. That is Brexit. The trade and other talks that now follow – and upcoming debates on new policies for Immigration, Agriculture, Fishing, and Regional Development amongst others – are the consequences of Brexit. This is what normal, independent democratic nations do – they conduct trade talks and devise their own policies. This is “Take Back Control” in action! The trade talks are the first item on our agenda as a fully independent country, and here are the reasons why they are likely to be successful.

The UK has a Strong and United Government

The UK now has a strong majority government that is remarkably united in its post-Brexit goals. The key Tory Remain rebels of the last Parliament have gone, and the new intake is heavily indebted to Boris Johnson’s leadership. He was heavily criticised for attempting a lengthy prorogation of Parliament, and then expelling rebel MP’s from the party. These drastic measures backfired from a short term tactical viewpoint, but they served to demonstrate the PM’s firmness of purpose. This will serve the UK well in the upcoming negotiations.

There is a Firm Deadline to the Talks

Trade experts agree that a firm deadline is vital if trade talks – particularly with the EU – are not to get bogged down. This need for a deadline became clear in the Withdrawal talks, when only the credible threat of No Deal forced the EU to re-open the original Withdrawal Agreement. A deadline of 31st Dec 2020 is contained in the revised Political Declaration, and both sides have committed in that declaration to meet that deadline. The UK has gone further – in a clear signal of intent – by putting this date into UK law in the Brexit Withdrawal Bill.

The EU Bargaining Position is Weak

The EU27 maintained a united front in the Withdrawal talks, but it was easy to maintain consensus while looking for protection for EU citizen’s rights, large UK payments to the EU, and strong adherence to EU regulation post-Brexit. This unity will be much harder to achieve in trade talks as the needs and priorities of the individual countries differ markedly. The EU would prefer the transition to be extended – thus securing more payments for the EU and keeping the UK closely aligned – but the UK has signalled that it is determined to achieve regulatory freedom. If the UK holds firm on this the EU’s unity will crack.

This is partly because the EU economy has slipped into recession in recent months, and it has little room for policy manoeuvre to combat any economic slowdown. The EU has in any case a very low sustainable growth rate, due amongst other factors to excessive regulation, and its financial system is highly vulnerable to a renewed banking crisis. In contrast, the UK economy has slowed but avoided recession, and should recover in 2020 on the back of rising real wages, fiscal stimulus, and a bounce in business confidence and investment. The EU therefore cannot afford to risk losing significant access to a relatively buoyant market where their exporters have been very successful. The EU’s surplus in traded goods with the UK was £99bn in 2018, with most of the EU’s exports to the UK concentrated in sectors such as agriculture, clothing and motor vehicles where the EU obliges the UK to impose high tariffs on non-EU products. In contrast, most UK exports to the EU are in low tariff sectors and in services (zero tariffs). The EU therefore needs a zero tariff agreement more than the UK does.

The UK will be Conducting Parallel Trade Talks with Non-EU Countries

The UK will simultaneously conduct trade talks with other countries, with the USA, Japan, Australia and New Zealand seen as priorities, as well as joining the Pacific trading bloc TPPII. These talks will put strong pressure on the EU to reach a deal. This pressure is exerted in at least two ways. Firstly, it strengthens the credibility of the Dec 2020 deadline, as the sooner we are able to offer other countries better access to our market the quicker progress will be. Greater regulatory freedom will also improve our offer to non-EU trading partners. Secondly, the more progress we make in other trade talks the more the EU will fear a shift of UK trade away from them and towards these faster growing markets (which after Brexit will comprise 85% of the global economy).

The Political Declaration Has Already Set Out the Direction of Travel

Most of the attention in the weeks leading up to the final withdrawal deal was focussed on the Irish border issue. However, crucial improvements were made to the Political Declaration. In particular, it was made clear that the very close economic partnership post-Brexit envisaged in Mrs May’s deal was to be replaced by a more conventional Canada-style FTA allowing greater regulatory divergence by the UK. The Declaration states that: “a free trade agreement [should] ensure no tariffs, fees, charges, or quantitative restrictions across all sectors”.

The EU/UK talks start with Zero Tariffs/Quotas and Regulatory Alignment

The former International Trade Secretary, Dr Liam Fox, has been unfairly lampooned for writing that the EU/UK trade talks should be “the easiest in history”. The Withdrawal Agreement certainly took an absurdly long time, but he was specifically referring to the trade talks which of course can only formally begin after Jan 31st 2020. He was pointing out that these upcoming trade talks start from the uniquely advantageous position that there are no tariffs or quotas to abolish or reduce – the usual meat and drink of trade disputes – and that this should greatly reduce the time taken to reach a deal.

Dr Fox also rightly emphasises that the EU’s insistence on achieving “harmonisation” of regulations between trading partners goes against the grain of modern trade agreements. The great majority of WTO members now favour the “outcome-based equivalence approach”, which means ensuring standards and outcomes are similar but without rigid rules as to how these should come about. This enables the market to determine the most efficient ways of achieving outcomes.  Much depends in the forthcoming EU/UK trade talks on whether the EU is prepare to bend towards the equivalence approach. If not, this would imply that only a relatively limited trade deal will be possible, along the lines of the EU/Canada trade deal (CETA), which can be used as a template. CETA focuses mainly on manufactured goods and agricultural products and even there not all tariffs were abolished. In line with most trade agreements there was only limited progress on services. It may be that the main talks on services and data sharing occur post-2020. As a heavily services-dominated economy the UK may end up devising a new worldwide template for trade agreements in services.

Conclusion

As set out above, the conditions are there for the EU and the UK to reach a successful trade accord in 2020. If the political will is there the relatively short time available is not a limiting factor. The USA, Canada, and Mexico have just achieved a major and complex re-negotiation of NAFTA (North American Free Trade Agreement) in less than twelve months, far sooner than all pundits suggested. The EU is a notoriously inflexible trade negotiator, but economic realities suggest that it will bend. Both negotiating teams are to be largely led by the same people who came to agreement in October last year, and success feeds on success!

 

Robert Lee is former Chief Economist, Board of Executors (South Africa), an economic consultant (UK), and a private investor.

About the author

Robert Lee

Robert Lee is an economic consultant and private investor.