How Europe and the U.K. Can Reach a Fair Free Trade Deal
Ever since the United Kingdom unexpectedly voted to leave the EU back in 2016, there has been an ongoing debate about what kind of relationship the U.K. and the EU should have in the future. As part of the then-28 member state bloc, the U.K. subscribed to the “four freedoms” of the EU: freedom of movement, freedom of trade, freedom of capital, and freedom to establish and provide services.
Hardly anyone who voted for Brexit opposed the latter three of these freedoms. Freedom of trade enjoys broad support in the U.K., including from the political establishment led by Boris Johnson (who is often unfairly compared to Donald Trump). By contrast, freedom of movement, which provides for unfettered immigration within the member states, has long been unpopular in Great Britain.
The EU, however, has refused to contemplate free trade without freedom of movement, arguing that the four freedoms are inseparable and that the U.K. can’t be allowed to pick the chocolate chips out of the cookie. The U.K., on the other hand, has made it clear that it will not give up border control in exchange for free trade, and have already legislated to introduce a new immigration system, based on Australia’s points system, that is set to go into force on January 1.
Completely free trade is thus a very unlikely outcome, and the ongoing trade negotiations instead aim to achieve some type of tariff-reduction scheme. In the U.K., this is referred to as a Canadian-style trade agreement after the Comprehensive Economic and Trade Agreement between Canada and the EU that went into effect in 2017. Even this, however, has been hard to achieve due to a number of the demands from the EU.
Most importantly, the EU wants to ensure “regulatory alignment” and a “level playing field” between the EU and the U.K. What this means in practice is that, unlike Canada, the U.K. would be unable to deregulate in such a way as to make its products and services cheaper and more competitive than those of the EU. Since one major reason why Brits voted to leave the EU was to get rid of the Brussels bureaucracy, this is an unacceptable demand. The U.K. would still have to follow EU rules, only now without having a say in how those rules are made. Any new regulations issued by the EU would have to be adopted by the U.K.
The demand for a level playing field is rather revealing: While supporters of the EU insist that the U.K. on its own will become more or less an uncompetitive economic wasteland, the insistence of a level playing field is an implicit admission that, freed from the restrictions of EU membership, the U.K may become a serious economic competitor. The EU fears a “Singapore on the Thames”—a low-tax, deregulated economy that will be geographically close enough that businesses can easily relocate there.
Second, the EU demands that the U.K. continue to abide by EU rules on state aid. It may be surprising to Americans who picture Europe as a cornucopia of government intervention, but, state aid for businesses is heavily restricted. Any subsidies targeted at a specific sector have to be approved by the EU, and approval is difficult to get. This is to ensure that no country gives its own businesses an unfair advantage versus the competition in the rest of the single market. While any EU-U.K. agreement would still be subject to WTO rules on subsidies, the EU’s definition of what counts as a subsidy is much broader, and its regulation much stricter.
Given that the U.K. has a conservative government, one may wonder why state aid is so important. The answer is, once again, rather revealing of unspoken fears, except this time on the U.K.’s side: The British government is well aware of the fact that an end to freedom of movement means that labor costs will increase, in particular in the agricultural sector, which is heavily reliant on cheap, seasonal labor from Eastern Europe. Without subsidies far greater than those permitted by the EU, and with new trade agreements with countries like Australia and Brazil portending a massive inflow of cheap meat into the U.K., significant portions of the British agricultural sector are likely to go bankrupt. Ironically, British farmerssupported Brexit by a margin of almost 2-1.
Third, the EU wants continued access to British waters. Under EU rules, any area more than 12 nautical miles from the coast of a member state is open to all EU fishermen (with some restrictions regarding quotas). In the event that an agreement is not reached before the end of the transition period, this will automatically revert to 200 nautical miles—the international standard. On the surface, fishing ought not to be a major issue in these negotiations, seeing as it represents only 0.12 percent of the British economy and employs just 0.06 percent of the workforce.
What makes fishing important is that a great selling point of the Leave campaign was to take back control of British waters, preventing overfishing by less scrupulous foreign fishermen. British national identity also places a greater-than-normal emphasis on its waters: “Britannia rule the waves,” etc. The loss of control over home waters was one of the worst humiliations to the British national ego accompanying membership in the EU. Perhaps most importantly, many local communities depend on fishing in the same way that coal-mining towns depended on coal. Abandoning the fishing industry could potentially doom Johnson’s Conservative party in many coastal towns, flipping currently-safe seats to political opponents. There is a precedent for this: Large parts of Scotland used to be heavily reliant on coal. After Margaret Thatcher more or less dismantled the coal industry and crushed the coal miners’ union, the Tories rapidly went from winning close to a third of Scottish seats in Parliament to winning almost none. At its lowest point, in the 1997 election, the Tories failed to win a single seat in Scotland, and in the following three elections they won only one.
How to resolve these conflicts? Free trade is mutually beneficial, and should be maintained. The EU to insistence that free movement is inseparable from free trade makes no sense: Free trade exists between countless nations around the world, and free movement is virtually never a part of the deal. NAFTA did not mean free movement between the U.S., Mexico, and Canada.
By accusing the U.K. of only wanting the “good parts” of an EU membership, such as free trade, the EU is implicitly admitting that free movement in its current form has failed. If free trade is the only good thing about the EU, then why not dismantle the political union and reshape the EU into a purely free trade zone, similar to NAFTA? If EU negotiators really believe the benefits of free movement outweigh the costs (and there are some reasons to think so), then their position should be pity for what the Brits are losing, not intransigence at what they won’t accept.
Regulatory alignment is also an unreasonable demand. If U.K. deregulation meant that businesses based in Britain could offer goods and services at a lower price than businesses in the EU, this would benefit EU consumers. Rather than view British deregulation as a threat, the EU should take the opportunity to reform its own vast bureaucracy to remain competitive. If it doesn’t, the EU will require ever-increasing tariffs on foreign goods and services to protect its own industries from businesses in other economies where regulations are less rigid.
Since free trade, with or without regulatory alignment, would benefit the EU, it is hard not to see these demands as vindictive: From the very beginning, there has been a strong faction within the EU which has sought to “make an example” out of the U.K., to discredit euroskepticism as a political project and prevent other countries from following in its path. To many EU leaders, Brexit is not just a disappointing political move, but a personal insult. The EU has demonstrated that it seeks not merely a mutually beneficial arrangement, but rather to punish the U.K.
Europe’s vindictiveness is reciprocated by the more radical elements of the Leave coalition, notably Nigel Farage. A dogmatic determination to go at it alone will not benefit the U.K. The desire to “take back control” is all well and good, but every agreement will mean giving up some control. On free movement, a reasonable compromise would be to allow for unrestricted movement for those with advanced degrees, and generous immigration quotas with fast-track application for seasonal agricultural workers. As long as these migrants don’t have access to the welfare state, it’s virtually impossible to imagine a scenario where this would be a net negative to the British economy. For everyone else, the points-based system could be implemented as it has been designed.
On state aid, a reasonable compromise would be to allow a degree of support for the agricultural sector, proportionate to any increase in the cost of doing business that may come from leaving the EU. A similar solution is also viable for the fishing industry: The EU can keep its current fishing quotas in British waters, but in exchange the U.K. would be allowed to subsidize its fishing industry to make up the difference; i.e. supplement revenue of the industry to the levels they would have been estimated to be, had the EU not had access to British waters.
Whether they like it or not, the U.K. and the EU will remain neighbors even after the transition period. Neither fanatic nationalism nor dogmatic euro-federalism will change that, and both need to be shelved in favor of sound pragmatism that will preserve free trade under fair terms, that will allow both the EU and the U.K. to pursue their own regulatory regimes and immigration rules. In a world with a rising China and an aggressive Russia, vindictive infighting between Western countries is something neither can afford.