A trade agreement signed two decades ago could provide the inspiration for a compromise argues Mark Essex
We seem to have got stuck in a rut. Instead of seeking a comprehensive plan for future EU-UK trade relations, political leaders are focusing on their ‘must haves’, rather than what is necessarily achievable. Proposals that are comprehensive, politically feasible and can be done in two years are thin on the ground. So here is my starter for 10: both sides could do a lot worse than consider an enhanced version of the customs union between the EU and Turkey.
For those not familiar with the deal, the 1995 agreement allows for the free movement of Turkish goods within the EU. This is not a free-trade agreement however. In exchange for access, Turkey has to maintain a common external tariff on non-EU goods coming into the country so it doesn’t become a tariff-free staging post into the bloc. The agreement covers manufactured goods, but does not apply to agriculture or the service sector.
As an option, it hasn’t gained much traction so far. The customs union route all but kills British ambitions to sign comprehensive free trade agreements with the rest of the world. It would mean the UK would have to accept, but have no say, on whatever tariffs the European Union erected around the customs union and rules on products within it. And at the same time it would deprive Britain of the benefits of any free trade agreement that Brussels had signed.So far, so unattractive.
But stick with me: done right, the customs union route has big advantages.
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First, it enables both sides to stick to their core principles in negotiations. Theresa May has been clear in her conviction that Britain will not “keep bits of membership of the EU”. Those comments in an interview with Sky News, together with an earlier insistence that the UK must have sovereignty over its borders and justice, rules out either the Norwegian or Swiss style agreement. Both of those countries have to accept free movement of people in some form in exchange for some access the Single Market. Besides, the prime minister has already said she wants a bespoke UK deal rather than to reach for a pre-existing model.
EU leaders should also be satisfied since Britain would be following a precedent model and not ‘cherry picking’ the juiciest bits of Single Market membership. The indivisibility of the four freedoms has become a mantra for the EU27 and a customs union would keep that principle intact.
What is more, having Britain inside a customs union satisfies another issue raised by several EU leaders; that Britain does not end up in a better position than when it was a member. The cost of administering the customs union and the limitations placed on Britain’s ability to make international trade deals sees to that.
The second attraction is the precious gift of time. If the UK suggested this model early in talks – and the EU agreed in principle – then irrespective of when a deal was eventually signed, businesses would be able to plan and invest with confidence. That would be a major boon to industries with complex, cross-border supply chains such as automotive.
As mentioned in last week’s column, a small window to make this deal may open next winter, following the German elections – giving businesses over a year to prepare. That’s not long, but better than the prospect of a disorderly Brexit which increases in likelihood if there is a last minute deal.
Agreeing a customs union up front avoids the spectre of protracted uncertainty. That might be the result of efforts to sign a comprehensive free trade deal. We know the EU-Canada trade deal took over seven years to negotiate and almost fell at the final hurdle. Unless the two parties can agree a lengthy transitional arrangement to bridge the gap, this is not a practicable way forward.
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A deal for banks
The biggest shortcoming in a customs union similar to Turkey’s – and where the deal needs enhancing – is avoiding serious damage to Britain’s banks, insurers and other service businesses.
To address this, the UK could simply agree to pay a fee granting financial services firms here access to the Single Market. That price might not be as high as some fear. The City plays a critical role in the smooth functioning of Europe’s capital markets and Europe’s financial institutions are increasingly making the point to their political leaders that a hard stop to passporting could cause real damage domestically. And having just lost 11 billion euros of funding as a result of the UK’s departure, the EU will presumably welcome the cash. No doubt, it would take some time for the two sides to agree the exact sum. But publicly establishing this as the favoured route would calm worries in the Square Mile and in Europe about a “potential systemic impact” as London Stock Exchange Group CEO Xavier Rolet warned this week.
Is the customs union a real contender? International trade minister Liam Fox, who had been a sceptic immediately after the referendum, said in December the UK might remain part of the EU’s customs union. And while it would tie his hands to some extent, the UK could still make agreements on agriculture, services and possibly make other accords that liberalised trade by lowering non-tariff barriers on industrial goods.Is this the perfect deal? No. It means real costs for the UK because of the need to stop the re-export of non-EU goods. It means limiting Britain’s room for manoeuvre on trade. And it means Government would need to create a domestic policy package for Britain’s farmers to replace the Common Agricultural Policy. In other words, it’s not perfect. But as a template, or as a model for a transitional arrangement, I haven’t heard many better suggestions.
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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK. You can register for the email subscription list of this column and expert views from our Brexit leaders.