22 March 2018

Julia Magntorn is Research Assistant in Economics at the UKTPO and L. Alan Winters CB is Professor of Economics and Director of the Observatory.

The European Union is likely to reject a significantly enhanced version of its Canada trade deal for the UK after Brexit.

Our in-depth analysis of the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada concludes that the EU’s commitment to the Single Market is so deeply ingrained that a substantial loosening of the rules for the UK would be politically impossible.

The EU may agree to some exceptions but these would fall far short of a bespoke deal and would be a poor substitute for the Single Market, say the report’s authors Julia Magntorn and L. Alan Winters.

In the search for a framework for a future UK-EU trade relationship, CETA has fallen under the spotlight. ‘Canada plus’ is frequently cited as a model, but it is not entirely clear what this ‘plus’ should entail.

Our latest briefing paper provides an overview of the extent to which the EU restricts imports of services from Canada under CETA. Thus, the authors identify areas where ‘pluses’ may help to preserve existing levels of services trade between the UK and the EU post-Brexit.

The research reveals that, following CETA, some services sectors are relatively open to imports from Canada but that, equally, some sectors important to the UK – such as financial services and transport services – remain significantly restricted. The sectors in which trade is unrestricted are those for which the EU market is pretty much open to anyone, and the sectors where trade is restricted are those for which the EU restricts most imports. That is to say, while CETA offers some improvements on market access for Canadian services providers, it does not change the pattern of EU services restrictions fundamentally.

Insurance, pension and financial services combined accounted for the largest share of UK services exports in 2015. This sector is one of the most restricted in CETA, with considerable limitations on cross-border trade. Recreational and cultural services, as well as transport services, are also among the most restricted. These are some of the areas in which the UK government should be seeking ‘pluses’.

Julia Magntorn said:

“It is clear that some sectors such as financial services, transport services and certain business services would benefit from ‘pluses’ and, as such, they could be a good place to start negotiations. However, even an ambitious CETA+++ would not support existing levels of services trade between the UK and the EU, because it would lack the critical overarching features of the Single Market such as the Court and the freedom of movement of people.”

The UK starts much closer to the EU than Canada – both physically and in regulatory terms – and so the EU may be more likely to agree a deeper level of integration with the UK than it offered in CETA. For example, on data protection and exchange and financial services.

But a bespoke deal is not likely to be achievable. The EU genuinely believes that countries are either in or out of the Single Market, even if it grants a few derogations from the rules to members and gives some non-members member-like market access in a few cases.

Professor Winters, Director of UKTPO, said:

“The UK’s desired half-in half-out agreement is not on the EU’s to do list. The UK may well achieve a little more flexibility than Norway or a few more concessions than Canada, but it will have to be understood as a series of small exceptions, not a fundamentally different ‘bespoke’ deal.”

An additional obstacle is the fact that any CETA+ commitments on services that the EU makes to the UK will also have to be extended to Canada – via the so-called Most Favoured Nation Clauses.

CETA offers a range of appealing aspects, such as a near 99% removal of tariffs on goods and an aim of closer co-operation in areas such as regulation, conformity assessments and standards. At the same time, Canada retains power over its laws and sovereignty over its external trade policy, satisfying two of the UK government’s ‘red lines’. However, for the reasons given above, the EU is likely to reject a CETA+++ deal and, in any case, it would be a poor substitute for the Single Market.

 

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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