Monday, 18 December 2017

A spot of cherry picking

I now realise that I have not been as clear or detailed about certain aspects of post-Brexit trade options as I perhaps ought to have been and I hold my hands up to this. Usually I try not to fill posts with too much in the way of caveat because I believe doing so has the opposite effect to what I am trying to achieve: informing readers. I tend to paint what I consider to be the bigger picture and sometimes that means leaving nuance to one side.

As I explained yesterday, the UK faces a straight choice between Norwegian and Canadian models as far as our future relationship with the EU is concerned. This is correct but must not be taken completely literally. This is why I wrote in my blog post that the eventual arrangement would have "its own country-specific protocols fixed in". In other words, it would follow a general pattern but would retain a certain degree of uniqueness.

The thrust of the argument I am making here is that, whilst a UK-EU FTA would indeed be bespoke, Norwegian and Canadian models would represent the general principles dictating its nature. I did not mean to suggest that the UK should opt to replicate CETA or that the Canadian option necessarily meant a symmetrical agreement. The distinction here is important and in not being specific enough about it I have been a little lazy.

It is true that third countries cannot have the benefits of Norway and the obligations of Canada simultaneously. But that is not to say that there can be no cherry picking, the new buzzword in Brexit circles. It is not the case that there is a contradiction here. If I have given the impression the EU does not allow for cherry picking then this has not been done intentionally. It is not true. The EU has cobbled together quite a diverse range of relationships with major trading partners.

Instead of thinking in terms of Norway versus Canada, it might be better to reframe this paradigm into Norway-type and Canada-type. Norway can't be replicated to the last treaty provision because the volume of trade on its border with Sweden is sufficiently low to warrant simplified customs procedures and it doesn't carry the weight of the Good Friday Agreement. Most of the Norway position can be replicated, but the differences will ultimately what makes Britain's return to EFTA distinct.

One of the things I most like about the EEA Agreement is that it is a useful example of the cherry picking and flexibility I mention. The Single Market arrangement is static and flexible, demonstrating adaptability in its raft of country-specific protocols and independent solutions to specific problems. Norway's targeted border inspection programmes and Liechtenstein's carefully carved alternative to free movement are good pieces of evidence to which we can refer.

Where I have been plain and correct is in suggesting that a best of both worlds scenario will not emerge. The Single Market is conceptually very different from the scope of FTAs. To claim that we can merge the two together, possibly under the guise of starting with regulatory convergence, doesn't make sense. For it to come about, we would have to negotiate an FTA free from non-tariff barriers and border checks. And for Brussels this could not be allowed to materialise.

As regards trade, there are two principle differences between the framework of the Single Market and those built by FTAs. The first is a marked shift in enforcement and surveillance strategy - in other words: where the inspections and checks take place. In the EU and EEA, thanks to a widespread market surveillance programme, conformity to standards is checked at the point of production by a web of domestic government bodies, EU agencies and by producer self-assessment mechanisms.

This vertical system of inspection is facilitated through the EU's political and legal jurisdiction in the internal affairs of EEA countries. Identification of customs risks, such as counterfeit goods, is shared through a Rapid Alert System, managed by the Commission. This device is implemented for the purpose of information sharing and enhances communication between member states and the relevant bodies responsible for upholding the maintenance of standards.

Within the bounds of an FTA, this all changes. FTAs are signed with third countries in whose internal affairs the EU does not hold any political or legal jurisdiction. It therefore cannot establish any system of checks at the point of production and must wait to check conformity to standards at its external border. Customs checks are henceforth intelligence-led and organised strategically, operating purely in accordance with track record and data flows so as not to cripple supply chains.

FTAs therefore do not - and cannot - produce frictionless borders. The shift in enforcement regime insists this is the case, and there is no avoiding it. This must be recognised by the government and business community ahead of any such negotiations. An FTA which achieved borderless trade would spark a diplomatic crisis at the WTO and would undermine one of the many values of the Single Market. We cannot roll over the current non-tariff barrier regime from an outside position.

The second structural difference between the fabric of an FTA and that of the Single Market is a simple (and large) disparity in market access. No two FTAs are identical, but no FTA even remotely compares to the access enjoyed by Norway, Iceland and Liechtenstein. For Brussels, protecting the integrity of the Single Market is key. By this premise FTAs are extremely limited in what they can achieve right off the bat.

The EU's basic approach to an FTA is balancing a desire to liberalise the conditions of trade between itself and its third country partner whilst aiming not to give too much away. The focus will be on tariff reduction and easing or removing non-tariff barriers to trade, where there is much more in the way of progress to be made. The EU will then offer differing extents of access on a sectoral basis where full reciprocity of its rules and regulations can be negotiated.

The Swiss relationship with the EU is an interesting account of this. While I don't consider Switzerland's arrangements to be an applicable model for Britain, it does give us an indication of the hoops which third countries must jump through in order to achieve greater levels of access to the European market. Switzerland's entire SPS regime, for instance, is fully aligned with EU regulations and nestled under the auspices of the ECJ.

Existing FTA-based relationships encounter very similar problems. One of the issues with CETA is its notable lack of service coverage. Even services which are included, such as postal and maritime, are accompanied by a long list of reservations. Extended services integration, such as amalgamation within the EU's passporting framework, would require Canadian firms to comply completely with the EU's relevant regulatory model and establish subsidiaries within the Union itself.

In the case of the UK we are working backwards. It is a question of reverse engineering and carving out differences from EU membership. In this respect I think a UK-EU FTA would be more ambitious than even comprehensive modern agreements with, say, Korea. It would need to fall in line with the principles outlined above, so as not to fall foul of general WTO commitments, whilst managing to facilitate maneuverability and that all-important off-the-shelf look.

When EU officials talk about no cherry picking, they are referring to the general principles, not to sector specifics. One of the reasons why no FTAs are the same is because each one achieves different balances as regards market access and alignment with EU regulations. Every negotiation must include fussiness and specificity. It is perfectly reasonable, therefore, to expect an FTA between the UK and EU to include such cherry picking. Both sides will be engaged in it.

Disparities in market access between EU FTA relationships are also aided by EU safeguards against the demands of MFN clauses. CETA includes MFN clauses which call for any preferential terms agreed elsewhere to automatically apply to Canada, but Brussels can get round this by using what is called a right of reservation. They can simply tell Canada that the UK is permitted preferable services access, for instance, because it has pledged to remain fully aligned to EU regulatory architecture.

They key part of the above text is point (c). It tells us that the EU retains the right to offer differential treatment (such as preferential terms on services for the UK in a future FTA) in any event which 'requires the approximation of legislation in one more economic sectors'. This means that if the UK chooses to remain enclosed within the EU's services frameworks, most-favoured nation treatment can be deemed unnecessary and a precedent will be allowed to form.

Initially I was under the impression that Canada with variants of 'plus' would spark a diplomatic crisis between Canada and the EU. I thought CETA would automatically be entitled to a duplication of the bespoke terms but there appears to be a clever little get-out. Canada did not ever start from the point of regulatory harmonisation, so unequal treatment is justified. I apologise for the error and will correct this in future. These things are easily overlooked and my eye is only partially trained to spot them.

The point in all of this is more simple than I am making it. Norway and Canada are not ends of a spectrum, they are separate categories which are conceptually completely different. Replicating either perfectly is not possible, and nor should it be, but both models present us with directions of travel. We can't cherry pick between the structural differences between an FTA and the Single Market, but we can cherry pick on sector specifics. At macro level we have a choice to make, at micro level we have everything to play for.

1 comment:

  1. I'm glad to see you made this point about the forward-looking MFN clauses and legislative approximation, which seems to have been widely overlooked. It would be interesting to look more at what can be achieved with Mutual Recognition of Conformity Assessment agreements in the case of a departing EU Member State -- assuming there is the political will to achieve such agreements. That sort of enhanced trade agreement could move towards the type of continuity the UK seeks in relevant goods sectors. It would also start blurring the lines somewhat between a single market-type agreement and a FTA-type agreement, although obviously there'd be a lot of work to be done on the governance of such an enhanced DCFTA to make it acceptable for the EU. None of this sorts the Ireland border conundrum entirely though, according to experts I've spoken to. They all maintain that only way invisible border can be achieved is with a new customs union, which is another large spanner in the Brexit works. Maybe UK will end up matching CET at least in areas deemed relevant to Irish border, or some such complex arrangement like that.