Assuming the UK government promises to cough up a few more billion for the Brexit exit charge, the conversation will finally move on to the Brexit transition deal.
In this case the UK would enter a half-in, half-out position with the UK out of the EU but still able to trade without borders by virtue of European Economic Area membership.
Is This What The British People Voted For?
The Brexit transition deal is a form of Brexit-Lite. It could be argued that this is the arrangement that the UK collectively voted for: 52% out and 48% in, equates to just out of the EU and no more, i.e Brexit-Lite.
However, it is apparently a “winner takes all” vote, and thus the loser has no say. Only the view of the 52% is considered.
What The Leavers Voted For
One interpretation of the Brexit referendum result is that the expressed wish of those who voted to leave is for the UK to:
- take control over immigration
- cease paying £350 million per week (gross) or £150 million net to Brussels
- have power of veto over EU laws as applied in the UK
- assert precedence of English courts over the European Court Of Justice
- regain the ability to make bilateral trade deals outside the EU
- retain full access to EU markets without tariffs, quotas or any other restrictions
Except for the last item, all the above are delivered by a no deal Brexit.
After a “no deal” Brexit, the degraded ability to trade freely with the EU which comprise around 43% of UK exports would have a massive negative impact on the UK’s short term economic prospects. Why? Because without a deal the UK is looking at the imposition of tariffs, quotas and customs delays that would automatically hit in March 2019.
How can this disruption be mitigated?
Transition Deal Allows More Time For Trade Negotiations
The idea behind a Brexit transitional arrangement is to give the UK more time to agree bilateral trade deals. A two year transitional deal will allow free trade to continue as usual for that period while the UK engages with our largest trading partners: the USA, Switzerland, China, Japan, India, UAE, Canada, Australia, New Zealand and the most importantly, the EU, to secure new bilateral trade deals.
Historically, making bilateral trade deals typically takes several years. Normally they take 2-5 years in preparation followed by 1-2 years of final negotiations. It will be unlikely to get many deals signed in two years without weakening the UK’s negotiating position. In reality it will take 10 years for UK to get back to the same trading basis as before. However, beyond that period the UK may be able to see the benefits across the board of not being part of the EU. In the short to medium term the UK would be able to do trade deals in the Agriculture sector which would allow cheaper non EU food imports into the UK. This is good for UK consumers, bad for UK farmers due to increased competition, and makes life more difficult for negotiators trying to strike a deal with the EU on Agriculture.
A Divide And Conquer Approach To The EU Trade Deal
The EU deal, which is made more complex by the need to seek agreement with 27 national governments, poses particular challenges due to its complexity and the additional political pressures. I would prefer the UK not to aim for a single deal and instead strike deals for different sectors according to need ; finance, technology, agriculture, pharmaceuticals, energy. automotive, etc. This approach would be driven by market necessities and not political expediency. The danger is that with a single EU deal, it still can fail. The sorry end result might be that the cliff edge for UK-EU trade has simply been delayed for 2 years, rather than mitigated.
It is much easier to negotiate 30 or so sector specific deals, than one big complex one. More importantly, benefits are enjoyed, and uncertainty is reduced, as soon as each deal is concluded. For example, for the Automotive, Energy, Pharmaceuticals and Technology sectors, reaching agreement should be relatively easy while Agriculture and Finance will be more difficult.
Agriculture and Finance Sector EU Trade Deals Will Prove Difficult
Agriculture is complicated by the number of interested parties involved and the complexity of the Common Agricultural Policy. And both agriculture and finance have an additional political element due to the imbalance in trade and hence the relative importance of these sectors to both UK and EU economies. In agriculture, the UK has a trade deficit of around 18 billion and in Finance the UK a surplus of around 18 billion a year. So Finance is the most critical deal for the UK and Agriculture for the EU.
Transition Deal Aligned to EU Budget Cycle
In any case, the EU won’t want to allow the full 2 years. The transition deal offer is likely to be set for just 21 months to coincide with the EU budgetary cycle.
This makes it a lot easier to calculate what the UK owes and for the EU to create the next 7 year budget without UK input. That date is 31 December 2020. This will most likely be the day the UK finally leaves any meaningful EU jurisdiction.
So what will the transition deal look like?
Brexit Lite – Modeled on Norway or Switzerland?
Let’s remind ourselves of the Brexit Lite options: the Norwegian deal or the the Swiss deal. A UK deal of course would be unique however it is going to be closer either the Swiss or the Norwegian model. One entails the continued freedom of movement of people, the other does not.
EFTA and The Swiss Model
Of the 4 members of EFTA, Norway, Iceland, Liechtenstein and Switzerland, the first 3 are part of the European Economic Area (EEA), and necessarily have signed up to free movement. However Switzerland no longer accepts freedom of movement since a referendum in 2014.
The Swiss started out with a set of bilateral agreements in 2002 covering specific areas:
- public procurement
- air traffic
- road traffic, and
- freedom of movement of people
Later, in 2008, Switzerland joined the Schengen area (which removes the need for passport checks at borders), and signed further bilateral relating to security, fraud pursuits and other matters, leaving them with 10 bilateral agreements in all.
The bilateral nature of the agreement gave the Swiss a greater sense of sovereignty since it restricted the EU influence to just those 10 areas, excluded them from new areas of law and added the protection that any changes in EU law would only apply after a joint bilateral commission all agreed.
However all 10 areas are subjected to Guillotine clause so if one agreement fails then all others terminate.
Swiss Reject Freedom Of Movement In 2014 Referendum
The Swiss model operated for several years with Switzerland retaining support for free movement. Then, in a referendum in 2014, the Swiss voted for a ban on mass migration by 50.3% to 49.7%. The result committed the Swiss government to implement a quota system by 2017. In March 2016, the Swiss National Council voted to withdraw its suspended application for EU membership. On February 9th, 2017 the deadline was passed with no action being taken.
Given the complexity and future uncertainty of the Swiss position, it’s not a viable model for a Brexit transition deal that requires simplicity and speed of execution.
EFTA and The Norwegian Model
The Norwegian Model, which is full EEA membership, would give the UK free trade with the EU but with acceptance of freedom of movement. This includes goods, services, capital and people.
In this Norwegian model the only brake available on immigration is the EEA emergency brake. Notably, the EEA emergency brake has been used by Lichtenstein, citing Article 112(1) of the EEA Agreement.
Article 112(1) states : If serious economic, societal or environmental difficulties of a sectoral or regional nature liable to persist are arising, a Contracting Party may unilaterally take appropriate measures under the conditions and procedures laid down in Article 113.
Article 113 lays out how the application of the brake must be justified and negotiated with the EU so it probably feels more like an emergency brake an an oil tanker than one on a Ford Focus.
Norwegian Model Is Brexit Lite
Therefore the transition period under a Norwegian style model would result in the UK:
- having limited control over immigration
- still paying around £150 million per week to Brussels for EEA membership
- having less influence in the EU – the UK will be able to persuade others but not make decisions
- accepting precedence of the EFTA court in Luxembourg which largely follows the European Court Of Justice
- retaining access to EU markets
- gaining the ability to make bilateral trade deals outside the EU
This does not tick many boxes from a leave voter standpoint, other than preserving trade and economic prosperity (at least prosperity for those that had some).
Could The Transition Period Make A Difference To The Outcome of Brexit?
The Norwegian Model is the conscious uncoupling version of Brexit. It has the least impact on economic activity, on British expat communities in the EU and on EU citizens in Britain. It offers a smooth Brexit. However, it will only really be of use (and worth the money) if the UK is able to secure or at least make significant progress on many bilateral trade deals. It needs to the exact opposite of the last 18 months that yielded little progress. If the Brexit transition ends after 2 years with no bilateral deals in place, it would be regarded as resounding failure, a would the government that presided over it.
Also, the extra 21 months of Brexit Lite, the separation before the divorce, does open the door to other possible future outcomes (like having a change of heart and not going through with the divorce!).
To see how the Brexit transition deal looks from a political standpoint check out Brexit Transitional Deal Part Two : The Politics