Progress: but progress to what?

Professor Ian Wooton, Department of Economics & Fraser of Allander Institute, University of Strathclyde

Today we have had the first demonstrable progress in the Brexit negotiations with the deal on Stage 1 of the process for the UK leaving the EU.

The deal covers key issues such as the financial terms of the UK’s exit, the status of EU citizens in the UK (and UK citizens living in the EU), and the border-issue between Northern Ireland and the Republic of Ireland.

What can we unpick from today’s deal in terms of what the future trading relationship might look like between the UK and the EU?

Trade with the EU is important for the Scottish economy. As we outlined in our report for GMB Scotland on Brexit and the sectors of the Scottish economy, trade with the EU accounts for over 40% of Scottish international exports – more than we trade with North America, Asia, South America and the Middle East combined.

Scottish trade with the EU

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From an international trade perspective, the key phrase in the document published by the UK Government is in para 49  –

“The United Kingdom remains committed to protecting North-South cooperation and to its guarantee of avoiding a hard border. Any future arrangements must be compatible with these overarching requirements. The United Kingdom’s intention is to achieve these objectives through the overall EU-UK relationship. Should this not be possible, the United Kingdom will propose specific solutions to address the unique circumstances of the island of Ireland. In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement.” Joint Report from the negotiators of the European Union and the United Kingdom Government.

This makes clear that both the UK and the EU are committed to avoiding a hard border on the island of Ireland. Whilst there are important political, cultural, social and economic issues underpinning this, a knock-on effect of this is that it carries significant implications for the UK’s future international trade relationships not just with the EU but beyond.

To consider the implications, it’s important to remember the subtle distinctions between a customs union, a free trade area and the Single Market.

Two key issues are worth highlighting.

Firstly, the phrase ‘maintain full alignment’ means that whilst the UK may not be part of the Single Market it is likely to have to adopt very similar – indeed identical – regulatory regimes as elsewhere in the EU. This is similar to the EEA where whilst countries like Norway are outside the Single Market they effectively take the rules and regulations set in Brussels and adopt something similar in their own country.

The UK Government might be hoping that in some areas – perhaps not directly linked to the Northern Ireland/Republic of Ireland issue – that different regulations could be implemented. But these are likely to be relatively insignificant.

Many will then ask the obvious question, “what political autonomy has been gained from having to ensure alignment if you cannot influence the rules in the first place?”

Secondly, what about tariffs and customs controls? The ‘guarantee of avoiding a hard border’ between the North and the South implies that there will not be any customs controls on the island of Ireland. A the same time, the DUP have made clear that they will not accept customs controls between Northern Ireland and the rest of the UK.

Reconciling both of these issues limits the options open to the UK on international trade. If there are to be no customs controls, the UK and the EU must sign a free-trade agreement, at the very least. But that alone will not meet the commitments that the UK Government has just made.

To see this, consider the following example. A key goal of many advocating leaving the EU was that this would give the UK the opportunity to negotiate new trade deals with other countries. Suppose that the UK signs a free-trade deal with the US. This would mean that tariffs could be reduced on goods and services bought and sold between the UK and the US.

But if the EU does not have a similar trade deal with the US, some form of economic border will be required to ensure that US goods do not enter the EU via the backdoor and thus avoid the EU’s own tariffs on EU-US trade.

The only solution to this is not a free trade deal with the EU, but remaining in the customs union.  This then carries the significant implication that the UK could not – or would be heavily constrained in its ability to — negotiate new trade deals with 3rd countries.

There is still much detail to pour over on today’s settlement and the negotiations on trade will only now just begin. There is of course much to be discussed and agreed but it seems that the reality of preferential trade arrangements – which many economists have been highlighting for over a year now – has finally been acknowledged.

It seems clear that today’s deal – and crucially the issue of where the economic border might be – has moved the UK back significantly from the ‘hardest of Brexits’.

Businesses will no doubt cautiously welcome today’s developments. Those who wanted a much more significant break from the EU will be more disappointed.