In the aftermath of Brexit, the United Kingdom is faced with the challenge of negotiating a relationship with the European Union that balances Single Market access with national control over the movement of goods and workers. This article is the last of a four-part series examining the three models for a future U.K.-EU relationship.
Previously we have provided an overview of the three models as well as close-ups on the “Norway Model” and the “Swiss Model.” Here, in our final installment, we analyze the “Bilateral Trade Agreement Model.” We identify the main features, benefits and drawbacks.
What is the Bilateral Trade Agreement Model?
Under the Bilateral Trade Agreement Model, the United Kingdom would negotiate a comprehensive free trade agreement (FTA) with the European Union, as opposed to a series of bilateral treaties (e.g. the Swiss Model). This model may offer some flexibilities not afforded in other models. Recent EU FTAs with South Korea and Canada provide two prominent examples of what could be possible for the United Kingdom.
The EU-South Korea FTA took effect in July 2011, and eliminated duties for industrial and agricultural goods in a progressive approach. The agreement also addresses non-tariff barriers to trade, specifically in the automotive, pharmaceutical, medical device and electronics sectors. South Korea agreed to liberalize access for some services sectors, namely some professional services, telecommunications, environmental, transport and financial services.
While the EU-Canada Comprehensive Economic Trade Agreement (CETA) is not yet in force, it could be the closest approximation to the final outcome of an EU-U.K. agreement. The proposed text of the agreement will eliminate nearly all tariffs; open bids for government contracts to cross-border entities; liberalize financial, investment and some professional services sectors; harmonize some professional qualifications; and strengthen cooperation between European and Canadian standard-setting bodies. Canada has committed to upholding EU standards for goods and services traded in the EU markets.
What are the potential benefits for the United Kingdom?
An U.K.-EU FTA would likely at least provide for tariff-free trade in goods. Recent EU FTAs have provided for liberalization in some, but not all, services sectors—a concession the United Kingdom would want to push heavily for, given the importance of its services industries. Under an FTA, the United Kingdom would be bound by EU standards for any goods or services supplied to the EU, but it would not otherwise be subject to EU policies or the four fundamental freedoms—free movement of goods, services, workers and capital.
The United Kingdom would regain control over its immigration policies. New migrants, including those from the European Union, would need to qualify under United Kingdom Immigration Rules. This would likely stem or cease the net in-flow of unskilled workers. The United Kingdom could concurrently relax immigration requirements for skilled workers to attract skilled migrants.
The United Kingdom would also gain greater control over regulatory policies, which could result in some cost savings relative to current EU regulations. Policy areas with the greatest increase in self-determination would include social, employment, health and safety, environment and climate change.
The United Kingdom would not be obligated to contribute to the EU budget, an annual cost savings of approximately £96 per capita, based on last year’s net United Kingdom contribution.1
What are the potential drawbacks for the United Kingdom?
As noted above, the United Kingdom would still be required to implement EU standards on goods or services traded in the EU markets. As with the other models, the United Kingdom would have no voice in the creation of those standards without representation in Brussels. Increased regulatory independence in the United Kingdom could also result in divergence between U.K. and EU regulatory policies over time. This could result in increased non-tariff barriers to trade.
FTA negotiations with the EU could be lengthy. CETA is one of the most comprehensive modern trade agreements, which is reflected by the length of negotiations. CETA talks began in 2007 and concluded in late 2014, but the date of signing was just proposed by the European Commission earlier this month—a total duration of almost eight years. The EU-Korea FTA talks were significantly shorter, beginning in May 2007, and concluding just three years later in October 2010.
Under an independent FTA with the European Union, it is unclear the extent to which the United Kingdom could remain party to EU trade agreements with other countries. The United Kingdom would likely need to assess its status and position with respect to each agreement. If these agreements were not applicable to a future United Kingdom, trade with the implicated countries would revert to the less favorable World Trade Organization (WTO) terms.
Negotiation of an FTA may provide additional flexibilities for U.K.-EU trade relations. However, it is also the approach most vulnerable to the domestic political environment. It remains unclear whether the United Kingdom would be willing to reduce tariffs to zero, particularly in sectors, such as agriculture, that have powerful lobbies. With respect to the European Union, any U.K. terms would need to pass muster with all 27 remaining member states, which would be far from a frictionless process.
An agreement could be comprehensive or limited to certain sectors. As with the Swiss Model, the more substantial the agreement, the more the United Kingdom would need to be abide by EU regulations. The strength of the United Kingdom’s bargaining position with respect to the inclusion of services, specifically financial services, in an FTA is unclear. At best, the United Kingdom could achieve the same level of access its firms currently enjoy. At worst, an FTA would leave out services entirely, which would undermine the attractiveness of the United Kingdom as a financial and business center.