4 June 2018

Open Europe today published a new report, “Striking a Balance: A blueprint for the future UK-EU economic partnership.”

In this paper, Open Europe sets out a model for the UK and EU’s future economic relationship, which we believe offers a pragmatic way through the Brexit deadlock. Open Europe’s model lies between the so-called Canada and Norway arrangements framing the UK political debate.

Our proposal is that the UK should seek to remain close to the EU in terms of goods regulations. After all, as a member the UK was a key supporter of the Single Market, which replaced the European Common Market, in the late 1980s. In return for the UK keeping broad alignment with the EU’s rules, it would be reasonable for goods to continue to be freely traded with Europe. The UK should commit to maintaining the existing ‘acquis’ of rules over goods regulation, and will need a process to determine how to apply future regulation, which must not be simply automatic. Switzerland’s experience of alignment with EU goods rules illustrates that this does not necessarily mean full harmonistion with detailed EU rules in all goods sectors, only those that are already highly regulated. There is scope for flexibility for many products and, as a “third country”, the UK would be open to decide not to apply a new EU regulation, but this could prompt retaliation from the EU and might have an effect on market access.

When it comes to services, given this is where the UK’s comparative advantage lies, we do not believe the UK can be a long-term rule taker from the EU. Although, it should be possible to seek a more secure relationship than the existing equivalence regime for financial services, overall it will be for both sides to manage mutual divergence in services regulation.

Seeking a deeper deal would likely mean accepting wide-ranging level playing field rules. We believe that the UK must be able to regulate its wider economy, and that so-called level playing field requirements must be minimised as they would limit the Government’s ability to regulate areas including employment, taxation and the environment. It would not be sustainable for the EU to have control over such policy areas after Brexit.

Giving up some control – or sovereignty – over goods regulation, is a price worth paying for strong market access. Manufacturers in highly regulated industries often follow EU rules anyway, in some cases even in the United States. But seeking to replicate the patchy Single Market in services would require the UK to give away too much control over its economy, for too little gain.

 

Open Europe’s proposed bespoke UK-EU model

 

  • The UK and EU should agree an extensive Free Trade Agreement which takes as its starting point zero-tariff and zero-quota trade across all goods lines, with maximal customs cooperation (Open Europe’s suggested model in ‘Nothing to Declare’ is roughly equivalent to the Government’s Maximum Facilitation option; as an alternative the Government is considering creating a Customs Partnership with the EU).

 

  • The UK-EU agreement should be part of an overall partnership or association agreement – which creates a framework for managing UK-EU relations with chapters covering fields from trade to security. The UK and EU should not pursue a complex network of separate bilateral agreements of the sort which Switzerland and the EU have formed. However, the relationship will need to be flexible and will inevitably need to be able to evolve over time.

 

  • The UK should not seek to remain part of the European Economic Area (EEA) Agreement, which would provide ongoing membership of the Single Market. Nor should the UK seek to form a new customs union with the EU.

 

  • The UK and EU should agree to “managed alignment” over goods standards and regulations in return for the UK’s Swiss-style participation in the Single Market for goods. A broad-spectrum enhanced mutual recognition agreement would mean most goods manufactured by one party would be considered pre-authorised for sale across others. In highly-regulated sectors the UK may need to agree to continue to follow EU regulations. This process would not be automatic and it would be open to the UK Parliament to diverge from the EU’s regulatory framework, but if this divergence could not be resolved via negotiation or legal means, market access to the EU could be affected.

 

  • As the European Commission itself has said, customs checks represent only a fraction of procedures that take place at a border – the majority of these are regulatory controls on goods, or checks on agriculture and food. Under our model, where the UK agrees to accept and apply EU rules on goods in domestic law, there is high potential for mutual recognition of regulations to avoid the need for border checks. This, together with a comprehensive customs facilitation agreement that moves customs procedures away from the border, provides a strong basis for maintaining an open border on the island of Ireland.

 

  • Our analysis has primarily concentrated on manufactured goods rather than the agriculture and food sector. The choices that the UK makes on its alignment with EU rules on agriculture will have significant implications for finding a solution to the Irish border and how much flexibility the UK has in trade negotiations with non-EU countries. Open Europe will address these issues in future work.

 

  • On services the UK and EU should agree to “managed cooperation”, recognising that the UK could not be a rule taker in these areas. The ambition should be a high level of regulatory cooperation, including a combination of mutual recognition and enhanced equivalence. Both sides need the freedom to choose separate rules over services and this will inevitably lead to the loss of Single Market-style rights in some sectors.

 

  • Although a wide-ranging mutual recognition agreement for financial services would be ideal, an expanded equivalence regime would seem more achievable politically at this stage. This would necessitate a framework for regulatory cooperation, and lengthy lead times for disputes to be addressed before equivalence or market access could be withdrawn by either party. Higher levels of access would necessitate the UK accepting wider EU level-playing field demands which is undesirable.

 

  • The UK is not likely to deviate significantly from its existing socioeconomic norms, will probably retain the majority of the EU acquis as a non-member, and is likely to remain within the spectrum of European-style economies. However, the UK should not commit to following future EU rules as part of a level playing field agreement. Such a commitment could mean the UK Government giving up control of the regulation of significant areas of its economy, including over employment and labour regulations, environmental standards, and corporate and other taxation policies. It is likely that any dispute resolution mechanism included in the agreement will be available to either party if they feel the other side is seeking an unfair competitive advantage through lowering standards.

 

  • As a non-member the UK should be able to achieve a good level of access to the EU’s markets, and vice versa, through the relationship detailed above. Obtaining fuller access, especially on services, would entail a much greater loss of control, encompassing not just trade but also the wider UK domestic economy. There are diminishing returns available to a more integrated relationship than the model Open Europe proposes.

 

  • On data the UK should seek an adequacy agreement with the EU but should not commit to follow in lockstep with EU data rules. Again, this cross-cutting sector is too important for our future economy for the UK to be a simple rule-taker.

 

  • Unlike the EU’s relationship with Switzerland, there will need to be a joint mechanism for dispute resolution and investor protection. This cannot simply be via the European Court of Justice. For some sectors – particularly where the UK agrees to continue to follow or approximate EU law, such as goods – it may make sense for certain disputes to be handled by the UK docking into the EFTA Court (a separate court with which the EU already works) and appointing a judge to that body, or by a new institution with similar characteristics. In other areas, where UK-EU cooperation more resembles a traditional FTA and is not based on EU law, the remit of the EFTA Court would not necessarily apply and dispute resolution with joint committees or via ad hoc arbitration would be more appropriate.

 

  • In areas where the UK voluntarily commits to follow EU regulations, or to participate in EU agencies on an associate membership basis, the UK will need to accept an indirect role for the ECJ. However, a direct role should remain a UK red line.

 

  • We have not explicitly examined the trade-off between preferential access to the Single Market and any requirement to accept the free movement of people. This would be a matter for negotiation and compromises might include preferential, reciprocal schemes for UK and EU nationals. There is no inherent reason why close UK-EU integration for trade in goods requires the complete free movement of labour.

 

If you cannot see the PDF viewer below, please click here for the full report. 

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