Brexit Roundup: Economic Issues for the Next Phase of Negotiations

Anton Muscatelli | 16 April 2018

© 2017 SCER

Last week the House of Commons Exiting the EU Select Committee published its latest report, on the future of the EU-UK relationship. In it the Committee set out fifteen criteria by which it will judge the outcome of the UK-EU negotiations on the future framework, which need to be concluded as a political declaration by October in order for the withdrawal agreement to be ratified by all parties.

The criteria the Select Committee have set are very ambitious. They include an expectation that trade in goods will be frictionless (‘no additional border or rules of origin checks’), and will not add to the costs to businesses that trade in goods or services. In addition, it set out a desire for UK providers of financial and broadcasting services to be able to sell their products into EU markets as at present. The Committee also makes it clear that if a bespoke ‘deep and special partnership’ is not successful, EFTA/EEA membership should remain an option.

The report’s conclusions were contentious, and broadly speaking divided the Committee between those advocating a softer EEA-type Brexit and those advocating a hard Brexit. If one looks at the forthcoming negotiations, what are the key economic issues? There are two: trade integration and people.

Trade integration with the EU

The first issue is whether a ‘deep and special partnership’ in trade is achievable in terms of the criteria set by the Select Committee. A stand-alone Free Trade Agreement (FTA) on the model of Canada or South Korea would cause real economic damage to the UK’s current trade with the EU, which is largely focused on integrated value chains between the UK and the EU, and UK services exports to the EU, which are only covered in limited ways by FTAs.

Meeting the Select Committee’s criteria (indeed, achieving the Prime Minister’s objectives as set out in her Mansion House speech) would imply a partial integration of the UK into the European Single Market (ESM). The only examples of this are the deals which the EU has done with Switzerland, Ukraine and the Eastern neighbourhood. But the EU has made it clear that these examples are not ones that would be applicable to the UK.

The Ukraine deal is limited in scope and has been designed with a view to convergence over time with the EU. The bilateral treaties with Switzerland are seen as problematic – at least by some EU27 members and by most officials within the European Commission – because they do not reflect the supranational and dynamic nature of the EFTA/EEA arrangements.

The EU has been pushing Switzerland to move to a new set of institutional arrangements to bring the ‘static’ Swiss treaties closer to the EEA framework, which dynamically adapts to the changes in the EU acquis. But, following the latest Swiss-EU discussions at the end of 2017, there has been no progress on these matters. This has even led the Swiss president to suggest that Switzerland should consider a referendum on its future relationship with the EU.

More recently, the Swiss foreign minister has suggested that Switzerland might be willing to allow its laws to adapt more closely to EU laws (using an independent arbitration panel) in exchange for less friction in market access. This is coming closer to the EU vision (following EFTA/EEA) of an independent surveillance authority and indirect jurisdiction by the ECJ via the EFTA Court.

There is little doubt that the (limited, but significant) elements of mutual recognition in the EU-Swiss treaties come closer to the Canada+ territory which the UK wants to explore in these negotiations. But, as I’ve suggested before, even if the EU were to agree to elements of mutual recognition[1] or equivalence in various sectors/tiers in a future trade partnership, there would be an asymmetry of power, with the potential for continuous conflict, between the UK and the EU. As is currently the case with Switzerland, the EU could end up effectively putting pressure on the UK whenever divergences emerge in tiers/sectors which compromise the integrity of the internal market.

If one looks at the 2017 Canada-EU agreement (CETA) or the 2011 EU-Korea FTA, we see just how limited the scope of these deals tends to be. In the EU-South Korea FTA, the focus of the deal in goods trade was in reducing non-tariff barriers in three main sectors – automotive, electronics, and pharmaceuticals and medical devices. In services, there was a limited relaxation of the right of establishment (mainly in shipping and maritime services, and to a lesser extent in legal services), and relaxation around foreign ownership in sectors like telecommunications.

None of this would approximate even slightly the current access enjoyed by UK business and the financial services industry in the EU. Even with CETA, which is a ‘second-generation’ and much deeper FTA, the provisions for financial services don’t go much beyond what is already in the WTO’s General Agreement for Trade in Services (GATS) under different modes of cross-border trade.

Migration regime for EU citizens

The second major economic issue facing the UK is that of the post-Brexit immigration regime for EU citizens. As we know, Scotland’s demography has benefited hugely from the inward mobility of talented skilled EU citizens. The same applies to key sectors at UK level, from financial and business services to the NHS, and to specific parts of the UK economy such as London.

As Jonathan Portes notes in his analysis of the economic impacts of immigration to the UK, the consensus is that EU immigration has had little to no effect on wages of existing UK workers. The evidence of EU immigration on UK productivity is also worth noting. Although the evidence base is not large, there are some studies which suggest that immigration has boosted UK productivity. This boost to productivity happens because of the human capital of immigrants, particularly in the key sectors mentioned above where these skills are scarce and are complementary to those of existing UK residents.

It seems inevitable that, in discussing the future UK-EU framework, the issue of labour mobility will not be front and centre of the negotiations. A standalone FTA like CETA only covers limited mobility for business, rather than immigration. But we know from the EU-Swiss relationship that freedom of movement has been intimately linked to the management of the overall relationship. For instance, the EU temporarily suspended Swiss access to Horizon 2020 programmes following Switzerland’s refusal to sign a treaty protocol which would have extended freedom of movement to Croatia, which acceded to the EU in 2013.

If the UK wants partial integration into the ESM and a Canada++ deal (not to mention association agreements in the European research and innovation area and student mobility), it is almost unimaginable that this will not involve a special relationship in terms of future EU-UK labour mobility. It would require the blurring of a key UK red line, but in economic terms it would be beneficial for the UK to accept this as an area for negotiation.

In summary, the two UK red lines around the role of the ECJ and free movement will both need to be actively in play if the UK is to achieve a ‘deep and special relationship’. What many of us have realised, from the beginning, is that both in economic terms and in terms of the governance of the relationship, the EFTA/EEA model offers many advantages compared to any putative bespoke model. The Commons Select Committee (or at least a majority of its members) may have also, privately, reached the same inevitable conclusion by suggesting that the EFTA/EEA solution should be an option in the negotiations.

[1] For a list of EU mutual agreements in trade relationships, see this collection from the European Commission

Anton MuscatelliAnton Muscatelli | Twitter

University of Glasgow

Prof Sir Anton Muscatelli is Principal and Vice Chancellor of the University of Glasgow. He is Chair of the First Minister of Scotland’s Standing Council on Europe and Advisory Board member of the Scottish Centre on European Relations.