The 160 members of the World Trade Organisation (WTO) are subject to rules to ensure fair trade, largely in the area of tariffs (taxes on imports). The rules insist that nations offer the same terms of trade to all their trading partners. However, nations may conclude formal trade deals, with one or more other nations, which offer more favourable conditions, for example the EU. In this case, the trading bloc, thus formed, would be bound by WTO rules in its trade with non-member countries.
If the UK were to leave the EU and trade under WTO rules it could, in principle, replicate today’s zero tariffs for the EU. However, the EU would, under WTO rules, be unable to reciprocate. The UK, for its part, would be obliged to offer zero tariffs to all other nations unless or until it concluded trading agreements with them. To date, no such agreements have been agreed.
A customs union is a form of trade agreement between two or more countries in which they decide not to impose tariffs (taxes on imports) on each other’s goods and agree to impose common external tariffs on goods from countries outside their customs union. The latter means that members are not able to set their own tariffs on goods from the rest of the world. If they were able to, the bloc would form a free trade area. The UK is a member of the EU customs union.
A single market is an agreement between a group of countries to remove all possible barriers to trade within their collective boundary. Their provisions include common product standards and regulations as well as freedom of movement of goods, services, capital and labour (the four freedoms). In the EU, the removal of these non-tariff barriers complements the customs union. The EU Single Market has also been extended to non-EU countries through separate agreements, excluding items such as the common agricultural policy and the common fisheries policy.
The European Free Trade Area (EFTA) is, as its name implies, a free trade area whose members are Iceland, Liechtenstein, Norway and Switzerland. As a free trade area, rather than a customs union, members are free to negotiate trade agreements unilaterally with other nations outside EFTA.
The European Economic Area (EEA) consists of the 28 EU member states plus three of the EFTA nations, Iceland, Liechtenstein and Norway, who have agreed to accept the rules of the EU single market, with some exceptions including the common agricultural policy and the common fisheries policy. Switzerland has a separate bilateral agreement with the EU. Schengen is not a part of the EEA agreement but all of the four EFTA States participate in Schengen.
Aside from the exceptions, EFTA EEA members trade with the EU tariff-free. However. they do not belong to the EU customs union and are therefore free to set their own tariffs outside the single market. On the downside, they have no say in the rules governing the single market and are obliged to accept new rules as they emerge.
The Norway model is a proposed formula for the UK exiting the EU and might equally well have been called the EEA model. The approach raises a number of difficulties for the UK, including continued free movement, arbitration by the EFTA Court and the likelihood that the EFTA members would block UK membership. In addition, the EEA countries are not subject to the common agricultural and fisheries policies and these areas are therefore not entirely free of tariffs. EEA countries have largely dealt with this, and proof of origin requirements, through IT systems and a series of bilateral agreements.
This is particularly relevant in the case of Irish cross-border trade where agricultural and food products account for over 40% of manufacturing trade. In addition, the issue of regulatory alignment will arise in areas where the EU insists on adoption of its food safety and animal health regulations to avoid onerous border inspection. To avoid a hard border, a bespoke customs union has been suggested as one solution. This, and other measures, are referred to collectively as Norway Plus.
The Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU has been proposed as a template for the UK leaving the EU. It is basically an agreement to facilitate free trade in industrial products and represents a lower level of access to EU markets than that enjoyed by EU member states at present. Non-tariff barriers are higher and movement of services is limited. The investor state dispute system (ISDS) or investment court system (ICS), under which corporations can sue nation states, is seen as potentially threatening to the autonomy of states in setting social and environmental policies. The deal was blocked, initially, by the Walloon Government who have requested an ECJ judgement on whether ISDS/ICS is compatible with EU law.
Mrs May’s “Deal”
The position Mrs May has agreed with the EU is essentially a divorce settlement and a transitional arrangement to allow a relationship with the EU to be negotiated. Trade would not be disrupted in the short term because the UK would, in essence, be part of the customs union and the single market but with no say in making the rules governing them. A hard border in Ireland would also be avoided. If agreed this would leave the shape of Brexit unknown for several more years at least.
At this time, given the lateness of the hour, there are only three possible alternatives to May’s “deal”: exit with no deal, and trade under WTO rules, negotiate an extension to Article 50 or remain. The first is the default position and the last could only happen as a result of a second referendum which would, in turn, require the second.
No deal means scrapping all existing EU treaties and trading under WTO rules. However, the term is open to misinterpretation.
If my wife says to me “penny for your thoughts” and I say “no deal”, nothing changes – I am no richer and my wife is none the wiser. In Brexit terms this would be equivalent to remain. If, on the other hand, I tell my wife I’m leaving her and want a divorce and she replies “no deal”, I lose my home and access to my children and end up alone in a poky bedsit in a rundown area of town. That corresponds to a no deal Brexit.