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Analysis
A sectoral adaptation approach to Brexit

A sectoral adaptation approach to Brexit

EU-specific deals would be mutually advantageous

by David Owen

Tue 1 Nov 2016

‘Hard’ and ‘soft’ are ludicrous terms to use in relation to trade. Britain is a trading nation and has been for centuries. The City of London has proven its capacity to adapt to market conditions.

But in order to adapt, people and businesses need time to make their own arrangements. Were the financial sector, for example, still unclear about what the future holds one year before the UK formally exits the EU, then it would be forced to make decisions – including over whether to shift business elsewhere.

Before its exit from the European Union is finalised, the UK must therefore be able to begin negotiating new international trade agreements. This is a non-negotiable issue. The UK will need to establish full membership of the World Trade Organisation in its own right – presently it is only a member of the WTO by virtue of its EU membership.

The UK does 65% of its current trade under these WTO rules. Outside of the EU and the single market, non-EU UK trade is growing fast. There is a £30bn annual surplus which accounts for the majority of UK trade, all under WTO rules. This is supported by low WTO tariffs, in the single digits for most trade and only at 2.4% for manufacturing.

Conversely, UK-EU trade is contracting and shows a substantial £60bn deficit. Certain accommodations can be made with the EU under WTO rules. EU-specific deals will be mutually advantageous and not challenge the EU founding principles.

The alternative to WTO membership would be being pushed over a cliff edge after waiting for an EU decision in 2018-19 which may prove unacceptable. EU leaders are making it abundantly clear that there can be no membership of the existing European Economic Area without freedom of movement of workers. After the UK referendum on EU membership, however, this is clearly not acceptable to a large part of the British electorate. What the referendum showed is that some people in Britain have more confidence in its resilience than many of its leaders and most of its politicians.

But it is not a sensible UK negotiating position to challenge the closing of the single market option directly. There is no reason why the UK cannot, at the time it is drawing up regulations on restricting entry, discuss the similarities in the language of EU treaties under the title ‘sectoral adaptation’. Under these principles, Liechtenstein, a member of the EEA, can run a selective system for incoming labour from the EU. This is a not a mini-state privilege, but part of a free-standing EU treaty agreement. The Nissan deal the British government is currently outlining is an example of sectoral adaptation in practice. More could follow.

The hard truth on free movement of workers is that the EU’s position is unlikely to change, if it ever would, before the 2017 elections in the Netherlands, France and Germany. The free movement of labour is vital for a core euro area; but not everyone agrees it is necessary for an EEA where some EU members will have no wish to become a member of the euro area and some may leave the euro.

The government is now searching for the most acceptable procedures for controlling the admission of people who wish to enter the UK. This cannot be a solely EU process – the fullest possible consultation will be needed with Commonwealth states and other nations, in addition to parliamentary debates. Legislation will be needed well before any exit in 2019, two years after the expected activation of Article 50 of the Treaty of Lisbon in March 2017.

My view is that the UK must define a fair-minded interpretation of the impending negotiating framework before invoking Article 50. Under Article 8 of the Lisbon treaty, the UK and the EU should lay the foundation for a mutually beneficial bespoke deal in the context of the WTO. Roberto Azevêdo, the WTO’s director general, has made it clear that there will not be a trade ‘vacuum or a disruption’ when Britain exits the EU.

Lord (David) Owen is a former UK Foreign Secretary. This is an abridged version of a speech given in Zurich on 27 October to the Swiss Civil Society Association. The full speech can be found here.

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