Heads I win, tails…….?

Any deal is likely to be a 2-sided mechanism

Tariffs are a sideshow; the question is where any deal leaves the UK on non-tariff barriers if it aligns

Are the UK and the EU finally converging on a post-transition Free Trade Agreement (FTA)? The story seems to change by the hour. As I always thought, though, a landing zone does exist. The UK’s concern was the ability to make its own regulations. The EU’s concern was whether the UK would use that autonomy to distort trade. It did not want to give tariff-free access to its market to firms in a neighbouring country that might get cost advantages from less stringent regulation. They were always likely to find a landing zone in a place where the UK could make its own rules and the EU could respond if the UK used its autonomy to deliver its firms a distortive competitive advantage.

Clear Divergence

If there is a deal, the result of any divergence by the UK from EU Single Market rules now seems clear. The EU will be able to levy tariffs against UK goods. The EU, for its part, has compromised on the need for arbitration. It will not be able to impose “lightning tariffs”. Rather, it will likely have to prove to arbitrators that the UK’s divergence has given some kind of unfair advantage to UK firms.

But what if we align?

There is another aspect of this dynamic mechanism, though, that deserves more attention. What happens if the UK stays aligned? Everyone has been so caught up on the redress mechanism for divergence that they have forgotten to ask the pertinent question of what will happen under continuing alignment. Tariff-free trade is great. But what about non-tariff barriers (NTBs)?

Non-tariff barriers (NTBs)

The absence of NTBs is the primary benefit of the Single Market. Here is a quick recap on how the UK’s trade has functioned within the Single Market since 1st January, 1993. It happened as Margaret Thatcher envisaged in 1988. All this will stop on 1st January, unless something emerges from the talks.

The regulatory standards in the UK are the same as those in France, or deemed equivalent. For this and other reasons, for a UK firm, selling in France is substantially the same as selling in the UK. Why? All goods sold in France must meet French standards. But if the standards in the UK are the same, then there is no need for proof. If it comes from the UK, then it meets UK standards. UK standards are French standards, so voilà! Or “Bob’s Your Uncle” if you prefer. There is no need for import/export documentation on food. Chemicals do not need a French agent. If it’s a financial service, the UK firm has authorisation in France because it has authorisation in the UK.

Integrated supply chains

If it’s a physical product, then there is also no need to stop the product at the border and check it for safety or compliance reasons. The UK’s trade with the EU evolved to respond to this. It now consists to a large extent of time-sensitive products served within integrated supply chains. Within one value chain – process that adds value as raw materials become a finished product available for purchase – products move seamlessly from one country to the next as manufacturers work on them.

Even politicians who were behind the Single Market, like Thatcher, might have complained at times about the content of the regulatory regime becoming a pain in the proverbial. However, having the same regulatory regime reduced NTBs on a massive scale for UK firms across the continent. The return of NTBs is the primary component in the losses from transitioning to a simple FTA.

If the UK had stayed in the European Economic Area (EEA), though, via EFTA with Norway, Iceland, and Liechtenstein, it would have preserved these Single Market benefits while leaving the EU. The EFTA option provides these fantastic Single Market benefits, while enabling the UK to escape from ever-closer union and an EU that is now taking on the features of a sovereign state such as collective debt. A public that is not ready to be poorer outside the EU would readily choose such a trade-off.

But are we not leaving the Single Market?

We are. But picture this. Imagine that on the 1st of January we still have the same laws as before. We have the same technical standards for chemical registration under the new UK-REACH. We have the same sanitary standards for live animals and the same food safety and labelling regulations. We have the same financial services regulations as were deemed good enough to give us passporting. We have the same laws on workers’ rights and environmental protection as we did on 31st December. We have even committed to transparency on what is happening to all of this to keep tariff-free trade.

In that case we have the same regulations and the same transparency as Norway.

Now, it is possible that there are provisions coming through that the media has not covered. The media understands only tariffs. So maybe, the EU has granted the CBI’s asks on NTBs. We await news on mutual recognition, regulatory border procedures, and on rules of origin and more. But if not, then, despite the same regulations and transparency, we don’t have the same access as Norway: we face a battery of NTBs. There will be regulatory border checks. Financial services will lose passporting and fail to even gain equivalence in many areas. Chemicals firms will have to trade in the EU through an Only Representative (OR) or move their operations to an EU-based subsidiary. New sanitary and phytosanitary (SPS) checks and paperwork will be ruinous for the food and drink industry.

How did that happen?

It is possible that the government is getting a bad deal because of its bad faith negotiation. Maybe, after the UK threatened to break international law by passing the Internal Market Bill (IMB), which reneged on the Northern Ireland Protocol (NIP) that was part of the 2019 Withdrawal Agreement (WA), the EU does not want the UK to be able to spin a victory for its “tough” negotiating position.

Alternatively, of course, it could be that the government does not understand the value of avoiding NTBs. Every Johnson speech on the FTA has revolved around the relatively irrelevant issue of tariffs. Indeed, a search of a compendium of his pre-referendum speeches and debates returns 64 results for tariffs but for “non-tariff” only two, neither of which came from the now PM himself.

Either way, having set out looking for Norwegian (higher) benefits for Canadian (lower) obligations, the government may have achieved the opposite. If there is nothing on minimising NTBs in return for regulatory alignment, the UK may have settled for lower Canadian access for higher Norwegian obligations. This is exactly what Theresa May pledged not to accept.

So what do we do about it?

Of course, this is not a reason not to sign the deal. A deal is better than no deal. Even if regulatory divergence is the preferred path, the government can sign the deal and delay tariffs until it starts to diverge. However, it should see the deal as a mechanism to maintain tariff-free trade, a means to maintain relations with the EU, and, most importantly, a platform on which to build.

The deal will not be a long-term proposition. The UK will be unable to diverge and capture the benefits of deregulation without incurring tariffs. At the same time, it will not have the benefits of frictionless trade that typically come with having the same regulations: benefits that the EFTA states get. It will have a “bespoke” deal that is worse than any of the off-the-shelf options.

Critics always derided “Norway” as “Brino” – Brexit In Name Only – because of Single Market rules. But if there is little in the deal on minimising NTBs, then the government may inadvertently have delivered “Brino minus”: Single Market rules but substantially no Single Market benefits. Joining EFTA and the EEA – to mitigate the chaos that is already starting – will then simply mean getting the benefits that logically go with the rules that the UK will already be following.

Another reason why the movement for EFTA is just beginning.

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Martin Smith

Martin is a management consultant, former think tank researcher and lobbyist (appearing on national TV) for small business organisations and successful campaigns featured in Public Affairs Magazine. He has provided research and articles on trade issues for the Conservative Group for Europe.

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