Brexiting Swiss-style: The best possible UK-EU trade deal

Brexiting Swiss-style: The best possible UK-EU trade deal

Policy brief
24 April 2017
  • Since Britain voted to leave the EU, the 27 other member-states have made ‘no cherry-picking’ their mantra. The UK will not be allowed to pick the parts of the single market it likes (such as trade and investment) and avoid the parts it does not (such as free movement and the supremacy of EU law). For her part, Prime Minister Theresa May insists that free movement and the supremacy of the European Court of Justice (ECJ) will end. This policy brief outlines the best possible trade deal for Britain and the EU, given each side’s red lines.
  • Despite the 27’s ‘no cherry-picking’ rule, any trade agreement between the UK and the EU will require both sides to decide which sectors of the economy should continue to have the lowest trade barriers possible, given Theresa May’s decision to leave the single market. Thus, the negotiation will be an exercise in sectoral bargaining, as with all free trade agreements.
  • A new empirical analysis of trade barriers, set out in more detail below, shows three things. First, trade barriers in goods with the EU has almost halved since the UK joined in 1973, while barriers with the US has only fallen by one quarter.
  • Second, Switzerland’s barriers in goods with the EU are now almost as low as the UK’s, despite its partial membership of the single market, and its arm’s-length relationship with the EU’s institutions.
  • Third, barriers in both goods and services between the UK and the EU have barely fallen since the year 2000. This suggests that the single market is reaching its limits, given that further falls would require more sharing of sovereignty, especially in the highly-regulated services sector. It also suggests that the losses foregone by Britain from further single market integration will be limited: the priority must be to limit the costs of the divorce.
  • How might that be done? The focus should be on goods trade, not services. The barriers to trading goods between the UK and the EU are less than half as large as those in services, according to our analysis. The exception is in capital markets and the business services that support them, such as accountancy, law and consulting. But the UK’s dominance in finance – Britain exports three-quarters of all capital market services within the EU – means that the 27 are keen to repatriate that activity.
  • In recent years, the most contentious ECJ cases involving Britain involved disagreements over financial regulation or the free movement of people. The 27 will not be willing to allow financial services access without closely aligned rules and the power of the ECJ to arbitrate disputes with the UK government.
  • The best hope for the UK, then, is a comprehensive trade agreement focussed on goods and those services, such as aviation, where both sides have a strong incentive to maintain the freest trade possible. This would be similar to Switzerland’s deal with the EU. Despite the Commission’s frustration with the Swiss relationship, a Swiss-style agreement largely limited to goods is Britain’s best hope: it represents the limit of market access that the EU has been willing to accept without the full supremacy of EU law.
  • The Swiss-EU bilateral agreements show that compromises between sovereignty and economic integration are possible. Bilateral committees in the sectors where the Swiss and EU co-operate closely determine whether the Swiss should update their regulations to match those of the EU. The ECJ does not adjudicate disputes (although Swiss updates to their regulations must take account of ECJ case law). Something similar would be a potential ‘landing zone’ for the EU-27 and the UK in their forthcoming negotiations.
  • Such an outcome would have significant economic costs for Britain, given its advantage in services trade. But it provides a middle way between two extremes: severe trade disruption and full sovereignty on the one hand, and continued single market membership and the wrath of Brexiteers on the other.

Comments

Interesting that "Switzerland’s barriers in goods with the EU are now almost as low as the UK’s, despite its partial membership of the single market, and its arm’s-length relationship with the EU’s institutions" when the reality is I have a host of issues today in batching orders for customs clearance to reduce flat fees, paying duty, and returning products across the Swiss border. Do academics talk to business?
As the Swiss accept FoM, in effect follow EU standards on products, and pay an EU contribution - then I have to wonder why the Swiss model is even seen as a basis for a UK EU trade deal?
I'm a Brit, running a medtech company in Switzerland. There is a fundamental conflict. Switzerland has to accept all of the EU rules without a vote in their creation. The new Medical Devices Directive is a clear example. The 28 (soon to be 27) decided what to do following PIP and other concerns. After they had decided, Switzerland had to follow and is subject to the ECJ.

So if the UK goes Swiss, we will have gone from having one vote in 28 (and disproportionately greater influence because of our economic power and expertise) to having no vote. And this is supposed to repatriate sovereignty?
I fear that you greatly underestimate what you describe as EU "frustration" with the relationship with Switzerland, and it's determination to avoid creating further similar situations and, indeed, to cease further development of the existing relationship and ultimately to convert it into something more efficient. This is not just a Commission position, in fact probably the strongest statement on the issue is the communication following the Council summit of December 2014. In addition, the UK has already been a visibly fractious and argumentative partner ---and positions expressed during and especially since the referendum have greatly aggravated this impression and continue to do so to the UK's cost--- which represents an enormous disincentive for the EU to enter into more flexible and less automatic arrangements with all the potential for heel-dragging and obstruction that they afford.

Furthermore, without FoM, etc. ---which has been a blocking issue in the Swiss case--- why would the EU be attracted to an invitation to create novel and complicated mechanisms and committees specially for the UK to duplicate the work of the Commission overseeing Britain’s alignment with EU law, and a new 'I-can't- believe-it's-not-the-ECJ' body (which must in any case take account of ECJ rulings) to arbitrate when things go wrong? And on top of this, the UK then desperately wants to keep the cherry of cooperation in scientific research which was the first perk to be withdrawn against Switzerland's restricting FoM!

Why, as an EU negotiator faced with such a proposal, would one not simply suggest that the issue of automatic implementation and compliance with EU regulation be revisited once the UK has had a couple of years to contemplate the consequences of 'no deal,' a period during which, of course, supply chains will already shift and EU imports begin to redistribute within the Single Market? Certainly there would be some economic impact, but it is always within the gift of the EU to make a temporary exception should it feel too much pain in any specific area, e.g. it might grant a temporary but sun-setting continuation of cooperation with London's capital markets in order to smooth transition to its own centres.