2 March 2016

Today, the Government published its assessment of the ‘off-the-shelf’ alternatives to EU membership. Open Europe has considered the various options on several occasions. In our Brexit report, we assessed the three options the Government also identified on the basis of four tests – continued EU market access, say over the rules, gains in independence and ease of negotiability.

What are the strengths and weaknesses of existing alternatives?

Norway/EEA: While this model scores highly in terms of maintaining market access, it falls short in terms of guaranteeing the UK a say over the rules (Norway has no veto at the European Council, no votes in the Council of Ministers and no representation in the European Parliament) and also in terms of independence, given that most EU policy areas would continue to apply post Brexit. Crucially, this includes the free movement of people. The UK would gain the ability to negotiate its own trade deals. We assess the negotiability of this option as medium, since it requires approval from all EU and existing EFTA members.

160302 EEA Table itemprop=

Switzerland/FTA: This model scores a medium in terms of continued market access – it is relatively comprehensive in terms of goods but falls short in terms of services access, particularly for financial services. It also fares poorly in terms of having a say over the rules with Switzerland essentially having to mirror EU legislation in key areas where it wants to secure single market access. It does score more highly than the EEA option in terms of gains in independence with several policy areas including social and employment law returning into the remit of the UK government. We assess the negotiability of this option as medium, given that it is complex, took almost a decade to negotiate and the EU is keen to push Switzerland itself away from this model towards a more EEA-style relationship.

160302 Swiss Table itemprop=

In its report, the Government also considers the Canada-EU free trade deal (known as CETA) as an alternative. It is a variant on the Swiss-style agreement since it is a bilateral economic agreement and this was the model that Norman Lamont chose as a basis for his Brexit negotiations in our EU Wargames. See our report on the wargames for a detailed breakdown of the agreement and an assessment of how such an negotiating approach might look from the UK perspective.

In terms of trade in goods, 98% of tariffs will be scrapped upon entry into force of CETA by both sides – rising to 99% following a transition period of up to seven years after entry into force. In practice, all industrial goods will become duty-free – while some agricultural products deemed ‘sensitive’ (e.g. chicken and turkey meats) are excluded altogether. In terms of services, liberalisation is not full – but Canada has agreed to new openings in a number of key sectors, including postal services, telecommunications and maritime transport.

Importantly, in some cases EU services providers will automatically receive the same treatment and benefit from greater liberalisation if Canada decides to lower or scrap barriers vis-à-vis other trading partners. On financial services, the EU secured continued market access for cross-border insurance, intermediation, and portfolio management services – as Canada agreed to guarantee that its existing regulatory framework will not become more restrictive in future. However, EU-Canada services access is not the same as single market access, particularly in financial services, not least because a number of regulatory and licensing requirements remain in place on both sides. In order to take advantage of the EU financial services ‘passport’, for instance, Canadian firms would have to establish a presence in the EU and comply with EU regulations.

Clean break/WTO: This model understandably scores low in terms of continued EU market access as it entails no preferential agreement with the EU. Some key goods exports would face high tariffs and accessing EU services markets would become much harder, particularly in financial services. Likewise it offers the UK no say over the rules but offers maximum scope for gains in independence and would not involve as complex negotiations with the EU.

160302 WTO Table 2 itemprop=

What about the ‘British option’?

It is clear that all these alternatives, just like EU membership, involve difficult trade-offs. The fullest EU market access means accepting greater obligations (be they regulatory, some form of contribution to the EU budget, or accepting the free movement of people).

Many Leave campaigners have so far brushed aside the argument about alternatives to EU membership by stating that the UK would negotiate its own ‘British option’ tailored to its own circumstances. They are probably right – the UK will be in a unique situation and this will likely require a unique arrangement – and it seems inconceivable that the Government is not drawing up contingency plans in the event of Brexit. Nonetheless, the fundamental trade-offs described above cannot be avoided and the electorate will want the Leave side to spell out in greater detail which trade-offs it is proposing a post-Brexit UK would make.

These trade-offs are political as much as economic and are not all black and white. Would an exit deal prioritise market access over reducing immigration or vice versa? Will the UK seek to remain inside the Single Market (a la Norway) to ensure continuity of EU market access (avoiding initial disruption) and accept this entails continued adherence to much of the regulation that is seen as a hindrance? Or would it prioritise a greater deal of independence (and what would it do with it?) at the cost of reduced (but not no) access to the EU market for crucial UK industries, such as financial services?

Even if the Leave side cannot provide concrete answers to these questions, broad principles of how these questions might be approached would be a good start, and is the least the public will expect when trying to make this important choice.