Britain’s trade options after Brexit

European Union leaders used a summit in Salzburg this week to reject British Prime Minister Theresa May’s plan for the economic relationship between the two sides after Brexit.

May says her project is the only way to protect trade ties when Britain leaves the EU’s single market and customs union, and fulfil the vow by all sides to keep the Irish border open.

But the EU argues it would threaten the principles of its single market, while eurosceptics in Britain say it would undermine Brexit by binding London to the bloc’s rules long after it leaves.

May is constrained by her own red lines: to end the free movement of workers from the EU, to allow Britain to strike external trade deals and to leave the jurisdiction of the European Court of Justice.

She has also agreed with Brussels that there will be no physical checks on the land border between British Northern Ireland and EU member Ireland.

The EU has proposed a Norway-style membership of the single market or a wide-ranging free trade agreement, with a special deal for Northern Ireland.

Time is running out to reach a compromise, raising the possibility Britain could leave in March without any deal at all.

– May’s ‘Chequers’ plan

Under a plan agreed by May’s ministers at her Chequers country retreat in July, Britain would maintain a “common rulebook” with the EU for goods to ensure smooth cross-border trade in manufacturing and agricultural and food
products.

It suggests Britain maintain high regulatory standards in areas such as the environment and workers’ rights, and commit to common rules on state aid.

But London also wants to be able to sign its own trade deals with other countries, which could mean imposing different tariffs on products from outside the EU.

To resolve this, it proposes to use technology to apply British tariffs to goods intended for Britain, and the EU’s tariffs on those intended for the bloc.

– The Norway option –

Energy-rich Norway opted against joining the EU in 1994, choosing instead to enter the European Economic Area (EEA) which gives it all the benefits of the single market.

But it has no say in the rules and must adhere to the EU’s four freedoms: free movement of goods, capital, services and persons with its fellow members.

The big advantage for Britain if it became a member of the EEA would be that its financial hub in London remains undisturbed.

But critics say it would leave Britain a hostage to EU rules and unable to limit migration.

– Canada ‘plus plus plus’ –

The EU’s recent accord with Canada, the Comprehensive Economic and Trade Agreement (CETA), is considered a blueprint for the EU’s trade deals going forward.

The deal touches on all aspects of the economy, including health and safety norms, not just the usual cuts to tariffs and import quotas.

Both parties would negotiate, sector by sector, an agreed level of regulatory cooperation, with London especially keen for closely aligned norms for finance, aviation and autos.

In reality, such a deal between Britain and the EU would mean a significant distancing between economies which are now perfectly aligned with zero tariffs.

Future trade barriers could increase costs for certain sectors and may require customs checks, which poses a problem for the Irish border.

Many Brexit supporters in Britain back this option, but May says it would still require separate arrangements for Northern Ireland, which could undermine the integrity of the UK.

– WTO rules –

If no other deal is agreed, Britain will revert to “third country” status in the eyes of the EU, with trade relations administered according to the rules of the World Trade Organisation.

The EU’s default position at the WTO involves tariffs and increased barriers that could cripple the seamless supply chains that connect Britain and the EU.

While the EU’s average tariff rate for third countries is low — around 1.5 percent — they are bigger in certain strategic sectors: for cars, the rate is 10 percent.

It is unlikely that British products could enter the EU without further checks at the border, while the situation would likely grow more complex as regulatory differences widened over time.