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Following the government's publication this morning of its assessment of the withdrawal process from the EU in the event of a vote in favour of Brexit in the referendum, Open Europe's Pawel Swidlicki assesses the credibility of its warning that negotiations over a new trade deal would lead to "up to a decade or more of uncertainty".
29 February 2016
The government has today published its official assessment of how the withdrawal process from the EU would look in the event of a vote in favour of Brexit on June 23. The report’s central claim that negotiating the UK’s exit from the EU, the UK’s future arrangements with the EU, and finally UK trade deals with countries outside of the EU would likely take around ten years – “up to a decade or more of uncertainty” – has made headlines and been widely criticised by Leave campaigners. So how credible is this claim?
Looking at some examples of previous trade negotiations, be they between the EU and other global economies or exclusively between non-EU parties, we see that this process can be very drawn out, with years passing between the start of negotiations and the entry of the FTA into force. The fastest negotiations the EU has concluded are with Mexico and South Korea at just over four years, but the agreement between the EU and Switzerland took the best part of a decade. Looking at the experience of non-EU negotiations, the US-Australia FTA was negotiated in just under four years, but the Canada-Korea deal took over 10 years, suggesting the EU is not uniquely sluggish.
The key question is how comprehensive the agreement is – for example, does it cover services as well as goods? Negotiating tariff reductions is relatively easy, negotiating mutual recognition of regulatory standards is trickier. Essentially, there is a trade-off between speed and scope. As the government’s report points out, “The China-Switzerland agreement… took only three years to negotiate, but provides a relatively narrow coverage compared to the EU’s new-style Trade Agreements (like EU-Canada).” Given that the UK would likely at least set out to try and strike a comprehensive agreement covering services, including financial services where the UK has a surplus with the EU, it is fair to question whether this could be wrapped up within two years.
The question of investor protection and dispute resolution (ISDS) emerged as key sticking points in the EU’s negotiations with Canada and the US. Political opposition to ISDS – portrayed as a secretive mechanism which privileges corporations over democratically elected governments – held up negotiations over both deals. In the case of post Brexit UK-EU negotiations, the question of dispute resolution would be vexing but unavoidable for both sides if the deal is to cover services. Clearly, given the controversy over the European Court of Justice’s (ECJ) ability to trump the UK parliament and courts, the UK would want to avoid any arrangement giving the ECJ the final say.
It is true that unlike other countries negotiating with the EU, the UK’s regulations would already be harmonised with those of the EU which would save a lot of time and effort. But one of the main arguments in favour of leaving is the ability for the UK to regain control over regulatory policy making to ease the burden on business. Therefore, the UK would either have to chose between compromising market access in areas where it wants to decisively break with the EU regulatory approach or leaving most of the EU laws in place in order to facilitate continued trade (as Norway and Switzerland do to varying degrees). Furthermore, while UK and EU regulations may start off in line there is no telling how they might develop and diverge over time – there would need to be a mechanism to manage this, to avoid renegotiating access every time regulations diverged.
The map below, via the European Commission’s DG for Trade, shows the current status of the EU’s trade agreements with other global economies. In total, via its EU membership, the UK is party to 31 FTAs with 60 countries (some FTAs cover more than one country). Together with EU membership itself, these agreements covered 58.9% of UK exports in 2013 (based on ONS figures), rising to 88% if those currently under negotiation are agreed.
If the UK were to leave the EU, the status of these agreements would be put into question. Since the UK is a party to them via its EU membership, they would not be automatically inherited by the UK post Brexit. It would be up to other countries as to whether they wanted to grandfather these existing agreements to the UK outside the EU. If the UK were to propose that the terms stayed the same, one could argue that this would be relatively easy to agree – replacing these agreements with the UK as a signatory in its own right could be a largely technical and therefore potentially relatively quick process.
However, there is a question around sequencing, i.e. would the UK be able to do so alongside the UK-EU talks? The government suggests not, arguing that “The countries with which we currently have preferential trade agreements through the EU are likely to want to see the terms of our future relationship with the EU before negotiating any new trade agreements with the UK.”
It is true that the terms of the post Brexit UK-EU deal may restrict the scope of FTAs the UK would be able to negotiate with other countries – particularly if the UK elected opted for a Norway-style deal so it could retain full access to the Single Market. Ulf Sverdrup, director of the Norwegian Institute of International Affairs, told The Times last week that when it comes to Norway’s FTAs “A lot of issues in free trade agreements are about non-tariff barriers like food security, and technical standards are already in the acquis [law] of the EU so we cannot negotiate on these things. So what we in reality can deal with in those free trade agreements is very much constrained.”
Once an FTA is signed with the EU, the UK might have agreed to abide by certain standards and on certain approaches to regulation. This could limit the options it has in striking an FTA with other states – it would be difficult to agree wildly different terms from those it has already agreed with the EU. Furthermore, some countries may wait to see what the rules of origin and cumulation rules are for UK trade into the EU – these will determine the make-up of goods which they are able to sell into the EU and thereby will impact their demand for raw materials and inputs from other countries.
Given all the above, it is clear that post-Brexit negotiations would be complex and take a significant amount of time – though no-one can really be precise about how long they would take. Generally, striking an FTA takes anywhere between four and ten years. When it comes to the UK-EU negotiations the importance of the deal and the extent of the links between the two sides could cut both ways. On the one hand, given that the two sides are each other’s largest single trading partner, there could well be significant pressure to move swiftly ahead with the negotiations, while the existing cohesion might make this possible.
However, on the other hand, the deal will be incredibly complex to negotiate and will encompass not only a free trade deal but also tying up all the other lose ends from Brexit – ranging from the status of UK nationals in the EU and vice-versa to tricky issues around Gibraltar and Northern Ireland. Furthermore, as our EU Wargames simulation showed, there may be a desire to drag out the negotiations in order to ward off those who may want to follow the UK’s lead.