A Free Trade Agreement alone will not sustain the UK-EU economic relationship

The immediate direction of travel for UK-EU trade relations is now clear. Both the EU and UK have set out their positions for a Free Trade Agreement between the parties, aiming essentially to maintain tariff-free trade. For the EU, this needs to come at the price of strict level playing field conditions on things like workers’ and environmental rights, to ensure competition is fair. For the UK, these conditions are unnecessary. That’s an argument likely to be at the heart of discussions this year, as the deadline of 31^st December approaches.

It may well be that the two sides can come to an agreement, though time is tight. Many rightly point out that Boris Johnson conceded his red lines to reach a Withdrawal Agreement last year, then claimed he didn’t. They think a repeat is likely. On the less optimistic side it is pointed out that the time available is unprecedented for an EU trade agreement, and that Johnson this time has the parliamentary majority to do whatever he likes—including leaving with no trade deal.

In either case though we are likely to spend most of our time analysing the progress of talks, and not nearly enough considering the entire ecosystem of UK-EU trade. For a Free Trade Agreement reducing tariffs will still mean the erection of all manner of new trade barriers. The significance of the emerging UK position may be less in its stance on the level playing field, but more in the way that what seems to be a refusal to align or accept anything involving European Court of Justice (ECJ) oversight is actually implemented. For if both are interpreted as absolute red lines this will ensure that the UK has a very shallow trading relationship with the EU overall.

The cost of non-tariff barriers, which include differing regulations and associated border checks among other things, is usually estimated as being somewhat greater than the cost of tariffs. Some of the border checks can potentially be streamlined in an FTA, but others are harder to remove. Globally, until the election of President Trump and the Brexit vote, the trend was towards regulatory alignment in different ways. Since 2016 tariffs have returned to being a major trade issue, with Trump setting off a spiral of increases with the EU and China. But the need to find ways to align regulations and reduce the cost to trade in this respect has not gone away.

The EU features the deepest regulatory alignment which any group of countries has agreed, driven in the past in large part from London, as part of the commitment of previous UK governments to free trade. Australia and New Zealand also have a deep relationship with one another in this area. Clearly the UK has rejected these forms of alignment, but there are many others available. For example there are global bodies which focus on the safety of cars or food. These can be used as the basis for various agreements to facilitate trade. There are mutual recognition agreements which facilitate the acceptance of test results from different countries. There are equivalence agreements which say, for example, that a food product classed as organic in the US can also be classed organic in the EU.

Although the prime minister’s speech on Monday seemed to reject all alignment, it seems from the accompanying written statement to parliament that this isn’t in fact the case. In particular there is mention of the possibility of mutual recognition agreements as annexes to the agreement. The EU has reportedly suggested there isn’t time in 2020 to negotiate these, given the work in negotiating tariffs, fishing, financial services, implementing the Northern Ireland protocol and much more.

Despite sabre-rattling from both sides building a deeper relationship may be possible. One of the key parts of trade negotiations is to test the solidity of the parties’ commitments to red lines. For many broader EU and European programmes which support trade, such as the research programmes in which the UK has played so prominent a role, ECJ supervision may be an issue. If no part of the UK can ever be subject to ECJ rulings then there’s no way the UK can be part of research programmes, or indeed EU agencies like Euratom or the European Medicines Agency. However “no” alignment and “no” ECJ supervision are in fact open to interpretation. The Withdrawal Agreement already gives the ECJ some role, and if the true red line is simply that the main body of UK law cannot be subject to rulings from Luxembourg, and that we avoid automatically applying EU law when it is updated, then progress is possible.

Numerous stakeholder groups are starting to put forward their aims to government for the future relationship with the EU, as well as for trade agreements for third countries. All of those I have seen to date show preference for a deeper relationship with the EU than just a Free Trade Agreement which mostly focuses on tariffs. Refusing to participate in any deeper economic activity with the EU because of arbitrary red lines set today is unlikely to be a long-term sustainable position. As well as the question of whether an FTA can be reached in 2020, we should also be looking at the state of the overall relationship at the end of the year, what it is likely to be agreed in the medium term, the path to that, and the potential economic damage while we rebuild relations.