After a period of dormancy, the debate over the shape of the UK’s post-Brexit trading arrangements has been suddenly reawakened after senior government figures in Rishi Sunak’s administration mooted that they were looking for a closer relationship with the EU.
Downing Street swiftly denied reports that the government anticipated a “Swiss-style” relationship developing over the next decade after a backlash from the Brexiters on the rightwing of the party.
But in an interview on BBC Radio 4’s Today programme on Monday, Robert Jenrick, the immigration minister, said the government does “want to improve our trading relationship” with the EU, while sticking to the “fundamental terms” of the trade deal the UK agreed with Brussels in 2020.
How could the EU-UK Trade and Cooperation Agreement (TCA) be improved, both within the current government’s red lines, but also what might be possible if a future government were to take a different approach?
How does the TCA work?
The EU-UK trade deal is a basic “Canada-style” free trade agreement that leaves the UK outside the EU’s customs union and single market. It is a “zero tariff, zero quota” deal.
That means that goods that are sufficiently “made in the UK” to qualify can enter the EU tariff-free. But they have to prove they qualify for this access and also comply with myriad EU rules and regulations, for example on food safety rules or industrial standards. This adds cost and delays to EU-UK trade.
The TCA also ends the “free movement of people”, which presents challenges for some UK businesses, such as hospitality and construction, that relied on access to flexible labour from the EU.
Finally, the agreement removes any jurisdiction for the European Court of Justice in the UK, except in Northern Ireland which remained in the EU single market for goods to avoid the return of a trade border on the island of Ireland.
How could the TCA be improved?
If the UK government sticks to its red lines on EU law, budget contributions and regulatory alignment, it cannot be improved that much according to trade and economic experts.
Tony Danker, the CBI’s director-general, exhorted the government to “get round the table; do the deal; unlock the TCA” at the trade body’s annual conference, but there are limits to what can be achieved within the parameters espoused by Jenrick.
Resolving the long-running row over the implementation of post-Brexit trading arrangements for Northern Ireland would certainly improve the mood music. It might also unlock some currently blocked areas — such as UK participation in the €95bn Horizon science programme — but it would not change the fundamentals of the TCA.
UK traders would still be outside the EU’s regulatory framework, still have to prove their goods qualified for zero-tariff entry into the EU single market and still have to fill out forms showing they conformed to EU standards.
The UK Treasury and the Office for Budget Responsibility, the fiscal watchdog, estimate this friction will inflict a 4 per cent hit to UK GDP in the medium term. But small tweaks to the TCA would not fundamentally alter that assessment, according to Anand Menon, head of the UK in a Changing Europe think-tank.
“You can tinker all you like around the margins, it’ll make the relationship easier and might help with security, but in economic terms it will make very little difference at all,” he said.
What can the UK do to lesson Brexit’s negative impact?
Any moves to mitigate the negative effects of the TCA would involve blurring the current government’s red lines, particularly on accepting European Court of Justice oversight over key areas — say, regulations governing autos, chemicals or food standards — that the UK refused in the 2020 trade talks.
The British Chambers of Commerce has identified five key areas it would like to see improved. They include a veterinary agreement to reduce the cost of paperwork to export animal and plant products; an overarching deal to simplify VAT arrangements so they do not differ from EU country to country; a deal to recognise the EU’s CE mark on industrial and electrical goods; and bilateral agreements with individual EU member states to allow better access for UK professional services.
The challenge, according to Anton Spisak, trade and EU specialist at the Tony Blair Institute for Global Change, is that to deliver meaningful benefits in these areas would require much higher levels of regulatory alignment than the current government can accept.
Such a move would run directly contrary to the government’s stated desire to seek “benefits of Brexit” by actively diverging from EU regulation via the retained EU law bill, which is currently in Parliament.
“Ministers could make unilateral decisions to align to EU rules where consistency of rules evidently benefits business. This would alleviate some business costs, but it wouldn’t mean frictionless trade unless the UK can formalise this in a bilateral agreement with the EU — and for this, agreeing to the ECJ jurisdiction would be unavoidable,” said Spisak.
What about a ‘Swiss’ deal?
A Swiss deal, which is based on a network of 120 bilateral deals with Brussels, sits in an entirely different regulatory and political orbit to the UK’s basic Canada-style deal. It is also completely off the table in the current circumstances, as Sunak acknowledged at the CBI today.
As a member of the European Free Trade Association, Switzerland is selectively but deeply integrated into the EU single market and has to “dynamically align” its laws with EU law in relevant areas to maintain that access. It also pays into the bloc’s coffers.
This alignment principle was emphatically rejected by former Brexit negotiator Lord David Frost and, as is clear from the reaction to media reports that the government favoured a Swiss-style trade arrangement over time, it still touches a raw political nerve among Brexiters.