The result of the UK’s general election on 8 June has reignited speculation that the UK government might pursue a softer Brexit. In this update, we provide a reminder of the main “softer” Brexit models which had previously been ruled out. For the time being, though, a hard Brexit is the only option on the table. Businesses are advised not to delay their analysis and planning for that outcome. The UK has already wasted three negotiating months due to the general election. Any delays in businesses understanding how hard Brexit affects them in each of their specific areas of business will lead to further negotiating delays down the line.
Before the election, the UK government was focused on two potential models for future trade with the EU.
The first involved a new strategic partnership with the EU based on an “ambitious and comprehensive” free trade agreement. This would secure preferential access for goods and services while liberating the UK to negotiate trade agreements with other countries and placing it outside the Single Market, the Customs Union, the jurisdiction of the European Court of Justice (ECJ) and obligations to accept EU regulations, immigrants and budget contributions – all of which were seen as key elements which had motivated those voting to leave the EU.
In the event that a “good” deal on these lines could not be achieved, the alternative was simply “no deal”. This would achieve all of the above objectives but trade in goods and services would default to basic World Trade Organisation rules, involving the imposition of tariffs and other restrictions. Besides these two hard Brexit options were at least three others at the softer end of the spectrum. As it is some time since these were the focus of serious discussion, it may be useful to restate their key features.
European Economic Area (EEA – e.g. Norway)
- Who: all the EU Member States plus Norway, Iceland and Liechtenstein.
- Goods: no tariffs (except agriculture and fisheries). Subject to customs procedures. Non-EU EEA states are free to negotiate trade agreements with other countries.
- Services: all have the same level of access to the Single Market for their service providers, including the passporting of financial services.
- Regulations: non-EU EEA members adopt most EU rules to ensure that their domestic law complies with EU requirements. Norway has incorporated about three quarters of EU laws into its domestic legislation, including in areas such as competition, state aid, social policy and consumer protection.
- ECJ: adjudicates cases involving an EU Member State.
- Immigration and EU budget: obliged to accept the free movement of people and to contribute to the budget. Norway has a higher proportion of EU migrants than the UK and contributes some 90% per capita of what the UK contributes to the EU budget.
European Free Trade Association (EFTA) plus Bilateral Agreements (e.g. Switzerland)
- Who: Iceland, Liechtenstein, Norway and Switzerland.
- Goods: no tariffs (except agriculture and fisheries). Subject to customs procedures. Each EFTA member is free to negotiate trade agreements with other countries.
- Services: Switzerland (not a member of the EEA) has negotiated over 100 bilateral agreements with the EU giving it non-discriminatory access in a range of sectors. But these are not comprehensive and in particular do not include passporting of financial services.
- Regulations: since exporters to the EU must comply with EU rules and any divergence risks acting as a barrier to trade, Switzerland chooses in most cases to align its domestic laws with new EU laws as they are adopted, including on competition, state aid and environmental standards. Nonetheless, the EU does not recognize most Swiss assessments of the conformity of its products with EU standards, making them dependent on separate approval by EU conformity assessment bodies before they can be sold in the EU.
- ECJ: adjudicates cases involving an EU Member State. Disputes between non-EU members are subject to the EFTA Court, which in practice follows ECJ rulings where applicable.
- Immigration and EU budget: although in principle there are no obligations, under its bilateral agreements Switzerland has undertaken to do both, while giving priority to Swiss-based job seekers. (An attempt to introduce restrictions on immigration was met with the suspension of Swiss access to some EU programmes and of negotiations on further access to the EU market).
Customs Union (e.g. Turkey)
- Who: all the EU Member States plus Monaco, the Channel Islands, Turkey, Andorra, San Marino and UK sovereign bases in Cyprus.
- Goods: no tariffs (except, for Turkey, unprocessed agricultural products). No or simplified customs procedures. Not free to negotiate trade agreements with other countries that would establish different tariffs than those with the EU. When the EU signs a trade agreement with a third country, Turkey must give that country access to its market on the same terms; Turkey must negotiate a separate agreement with that country in order to obtain preferential access to its market.
- Services: not covered so subject to WTO rules.
- Regulations: required to enforce rules that are equivalent to those in the EU including in areas such as competition, product, state aid and environmental standards.
- ECJ: jurisdiction in some areas, other areas are settled by arbitration.
- Immigration and EU budget: no obligation to accept the free movement of people nor to contribute to the EU budget.
What Does this Mean for Businesses?
Political realignments following the elections could in theory lead these options, or variants of them, to be dusted off and reconsidered, either on a permanent or on a temporary basis. But none of these is straightforward, and for the time being, a hard Brexit remains the government’s objective and the only model that meets all of the government’s previously-stated objectives. Businesses and industry associations are advised not to delay their analysis and planning for a hard Brexit. The start of the negotiations is set for 19 June and Brexit for 30 March 2019. The clock is still ticking.