2 March 2018

Dr Michael Gasiorek is Senior Lecturer in Economics at the University of Sussex and Director and  Managing Director of InterAnalysis respectively. He is a Fellow of the UKTPO.

There is much talk about the UK not being able to “cherry-pick” and “have its cake and eat it” with regards to post-Brexit trade policy with the EU. There are a couple of issues here. First, all EU agreements are different and hence by definition bespoke. Cherries are picked by both sides. This will also be true of a future UK-EU agreement. The question, therefore, really is to do with the extent to which the EU will grant the UK a bespoke deal in serious and substantive ways. The second issue is that it is far from clear that the UK government currently knows what all the ingredients are and what the recipe is for the cake it is hoping to share with the EU.

The UK Government’s stated trade-related objectives in terms of the post-Brexit relationship with the EU include

• independence with regard to trade policy,
• independence with regard regulatory policy
• maintaining the economic integrity of the UK, and no hard border between the Republic of Ireland and Northern Ireland; where the latter is also a condition for the EU (as seen in the EU’s recently published draft Withdrawal Agreement).
• In addition, the UK government seeks to maintain as much access to the Single Market as possible, while leaving the Single Market.

These conditions cannot all be reconciled.

Part of the discussion this week has been around continuing EU-UK customs union arrangements. It is important to underline that there is a real and manifest difference in the desirability of the UK remaining part of “the” current EU Customs Union, and signing “a” new comprehensive customs union with the EU. The latter option is far less desirable unless it has equivalent effect bilaterally. This is because it would commit the UK to granting access to any of the EU’s Free Trade Area partner countries, but would not commit the partner countries to reciprocate.

A further issue is that of the border between Ireland and Northern Ireland.  Any option that involves a free trade area (to allow for independent trade policy) and/or regulatory divergence would necessitate customs and border controls which implies a hard border.  A full customs union with the EU partly resolves the issue of tariffs and rules of origin but would not solve the issue of monitoring of regulations and conformity assessment, nor the movement of people.

If either tariffs or regulations differ between the UK and EU practically it is very hard to see how technological solutions could overcome the need for border infrastructure.  Even if there were such solutions, with all the political goodwill in the world, non-compliance and illegal trafficking would need to be curtailed via effective non-border monitoring and appropriate punishment procedures. This would be expensive, complex, and agreement / coordination with the EU may be difficult to achieve.

In the absence of a technological solution, all possible variants of UK-EU trade relations which meet the UK government’s stated conditions are mutually irreconcilable. For a full exploration and explanation of ways forward, see the Briefing Paper, UK–EU trade relations post Brexit: binding constraints and impossible solutions.

The solution space is null.

The best outcomes economically are those that keep the UK as a part of the EU Customs Union (or equivalent), and to remain in the Single Market (or as close to the Single Market as possible). Numerous empirical studies, such as our work on the impact on UK manufacturing, have made this clear. However, on the basis of the UK government’s current conditions and the path being taken, the likelihood is a fairly shallow free trade agreement with the EU, with limited liberalisation of services and the likely introduction of a border in Ireland.

The only way of resolving this is to drop and/or relax at least one or more of the conditions.

 

Disclaimer:

The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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