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Analysis
As UK exits, goodwill is crucial

As UK exits, goodwill is crucial

Six negotiations to bid Europe farewell 

by Charles Grant

Mon 1 Aug 2016

Britain’s exit from the European Union will require not just a single deal, but at least six interlocking sets of negotiations. If the British government wants the talks to run smoothly, it will need to earn the goodwill not only of the countries in the EU, but also of those in the World Trade Organisation.

The Brexit negotiations will take much longer and be far more complicated than many British politicians realise. One set of talks will cover Britain’s legal separation from the EU, the second a free trade agreement with the EU, the third interim cover for the UK between its departure from the EU and the entry into force of the FTA. The fourth step will be accession to full membership of the WTO, the fifth new FTAs to replace those that currently link the EU to 53 other countries, and the sixth co-operation on foreign, defence and security policies.

The first deal, the divorce settlement prescribed by Article 50 of the EU treaty, will divide up the properties, institutions and pension rights, and deal with budget payments. It will also cover the rights of UK citizens in the EU and vice versa. The treaty sets out a two-year negotiation period, extendable by unanimity. The 27 want Britain out before the June 2019 European elections, and before talks on the EU’s next seven-year budget cycle (the current cycle ends in 2020), so they will not extend the two years.

The second deal will be some sort of FTA, probably similar in scope to that negotiated by Canada and the EU. The much-discussed ‘Norwegian model’ is not viable: Norway, as part of the European Economic Area, participates in the single market, but pays into the EU budget and has to accept free movement. The latter condition, and perhaps the former, would be unacceptable to the British parliament. Although most MPs supported Remain, many of them now believe that the referendum result means that free movement must be restricted.

But even a Canadian-style FTA would require the British government to make painful trade-offs. The FTA could well eliminate tariffs on manufactured goods – but only if the UK agrees to comply with EU environmental, social and health and safety rules; otherwise the 27 would worry about unfair competition or ‘dumping’ by British firms. The UK’s FTA, like that of Canada, would probably provide only limited access to the single market for services. In return for deeper access, the 27 would ask the UK to accept free movement, budget contributions and the relevant EU rules. UK-based financial firms would almost certainly lose the ‘passporting’ enabling them to transact across the EU. Tourism, accountancy, law, air transport, freight and shipping would suffer too.

Both the European Commission and Donald Tusk, president of the European Council, have said work on the FTA should not start until the UK has left the EU. Perhaps they worry that if the UK negotiates on trade while still an EU member, it will be a more awkward customer. But their hard line would extend uncertainty. Many member states, including Germany, suggest the UK be allowed to work on the FTA at the same time as the divorce settlement. That softer line will probably prevail, but in any case the FTA will take many more years to negotiate and ratify than the Article 50 deal (which does not require ratification by EU members). So several years would elapse between Britain leaving the EU and the FTA coming into effect.

That gap requires a third negotiation, for an interim deal. Without this, British companies would depend on WTO rules – which set maximum levels for tariffs – to prevent unfair decisions or practices by EU countries. One possible interim solution, disliked by eurosceptic MPs, would be for the UK to become an EEA country for a limited period, while it pursues the FTA (technically, the UK would have to join the European Free Trade Association in order to make EEA membership work).

Many would jib at the price of EEA membership – substantial budget payments, free movement of labour, most of the EU’s single market rules and judgments by the EFTA court. Furthermore, the existing EEA countries (Iceland and Liechtenstein, as well as Norway) show little desire to reconstruct their own treaties and institutions to accommodate temporary British visitors. So we will probably see a bespoke interim deal – over which there will be much haggling – to provide temporary cover to the British economy, while UK participation in EU policies and programmes is phased out.

Charles Grant is director of the Centre for European Reform. This is the first article in a two-part series on Britain’s transitional arrangements. It was first published, in slightly longer form, by the CER on 28 July. A second article by Grant will appear tomorrow.

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