Post-Brexit Trade Relations: No Middle Way Between Free Trade Agreement and Internal Market

Screenshot 2018-05-16 10.22.43Piet Eeckhout and Clément Leroy examine various models for the UK-EU trade relationship after Brexit, and argue that a so-called bespoke agreement beyond existing frameworks is not available. This blog draws on Piet Eeckhout’s report Future trade relations between the EU and the UK: options after Brexit, which he is presenting to the European Parliament’s International Trade Committee on Thursday 17 May (watch here). 

The future trade relationship between the UK and the EU will affect a wide range of economic and social policies. Looking beyond what would be desirable from an economic viewpoint, one can examine the different models for this relationship that are under consideration in the context of the Brexit negotiations against the canvas of two distinct paradigms: market integration and trade liberalisation. 

At one end of the spectrum, the EU is the archetypical, if not the only existing, example of the market integration paradigm. The EU’s internal market is built on the basic freedoms covering the free movement of both products (goods and services) and factors of production (capital and labour). They are implemented by extensive EU legislation, aimed mostly at harmonising domestic laws to a level required to ensure adequate convergence. In itself, however, this is not sufficient for achieving market integration. In addition, market integration

  • requires a strong institutional system capable of generating the necessary rules. This system also relies on EU regulatory agencies.
  • is dependent on participation in the EU’s legal system with the principles of direct effect and primacy.
  • includes the free movement of persons, which is notably linked to trade in services and the right of establishment.
  • requires a number of “flanking” policies, aimed at establishing a level playing field as regards, for instance, competition policy, public procurement rules, environmental and social policies and customers’ rights.
  • requires the autonomy of EU law; the ECJ will not accept that an external jurisdiction is given authority to interpret rules identical to EU law. Moreover, the laws of the EU’s internal market affect all trade with the EU, and the EU is often a leading regulator, forcing businesses and regulators in third countries to adapt and follow.

At the other end of the spectrum sits the paradigm of trade liberalisation, manifested in the forms of customs unions and free trade agreements. Here product and market regulations are not comprehensively harmonised, and this paradigm offers few options to extend the scope of convergence. There are many more instances of free trade agreements than customs unions, even when limited to trade in goods. This is because the requirement for a customs union to adopt a common external tariff and trade policy is so demanding, and requires much more significant policy coordination between the parties than a mere trade agreement. Trade liberalisation has little to offer when it comes to trade in services, or to tackling non-tariff barriers. In terms of flanking policies, the trade liberalisation paradigm is also more limited: for example, the WTO only covers certain subsidies (in particular export subsidies). Finally, trade liberalisation is enforced through international law, and is hardly ever part of domestic law. This means that compliance with these commitments depends on international oversight, enforcement, and dispute settlement. These are purely intergovernmental in nature, which means that any business facing trade barriers needs governmental support to challenge them.

Given the fundamental contrast between the two paradigms, it is difficult to imagine a relationship that would allow for continued convergence and mutual recognition in some sectors, or for some of the basic freedoms, but not others. The current political red lines of both the UK and the EU make it even harder to adapt the existing frameworks in ways that would allow the creation of an ad-hoc model.  The choice is rather between the existing models:

  1. The EEA option (European Economic Area). This entrenched, existing model is closest to the market integration paradigm, and would enable the UK to keep most of the benefits of the internal market. However, the EEA effectively crosses most of the red lines that the UK government has drawn; it requires the free movement of persons, financial contributions, and the acceptance of EU law without representation in the decision-making process. It is difficult, further, to see how the EEA option could avoid customs controls at the EU-UK border, especially if the UK had its own external trade policy.
  2. A customs union agreement, as for example that with Turkey. This would sit firmly within the trade liberalisation paradigm. A first, political difficulty here is that the UK would need to continue to implement the EU’s external trade policy. There are also no instances of genuinely partial or sectoral customs unions. A second difficulty is that customs unions are limited to trade in goods, and do not cover services. Finally, an EU-UK customs union would not do away with the need to manage any future regulatory divergence, nor remove the need for border controls. It would further presuppose an effective competition policy and an intergovernmental dispute settlement system.
  3. A deep and comprehensive Free Trade Agreement (FTA). This seems to be the model preferred by the UK government, which would like to see some of the benefits of market integration being preserved. For this to be possible, the central requirement would be a system of mutual recognition. This would prove difficult politically: convergence would largely be a one-way street, with the UK converging with EU regulations, a far cry from a negotiation between equals. There would also need to be strong legal guarantees that any convergence is meaningful. Such guarantees would need to extend to the enforcement of the agreement, including at the domestic level (direct effect and ECJ authority, in other words). Furthermore, to maintain a level playing field, and if trade in services was to be included, the EU would have to insist that convergence extends to significant flanking policies such as competition, state aid, public procurement, social, and environmental policies.
  4. The WTO option. This option would be the least difficult to achieve in legal terms, but economic effects would be significant. Economic modellers may well be underestimating the potential economic damage of this option given the depth of the market integration of the EU.

On the whole, all these options reveal a strong rejection in the Brexit debate of the role of “common” law in matters of trade and economic cooperation in Europe. If this rejection were reflected in the final deal, it would signify a detrimental return to intergovernmentalism and a model of international relations characterised by power politics.

  • Piet Eeckhout is Professor of EU Law, Dean of the UCL Faculty of Laws, and Academic Director of the European Institute.
  • Clément Leroy is Research and Policy Engagement Associate for Brexit at the UCL European Institute and the Office for the Vice-Provost (Research). Prior to this, he worked for the French Government on Brexit and EU economic policies.

Photo by chuttersnap on UnsplashSaveSave

Photo by chuttersnap on Unsplash

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