UK and EU heading for ‘barbed wire divorce’ unless one budges on trade ‘red lines’

The UK and the EU are heading for a ‘barbed wire divorce’, with each side losing out heavily, unless one or both parties budges on their ‘red lines’ about the make-up of a post-Brexit trade deal, experts have warned.

Economists at the UK Trade Policy Observatory (UKTPO) at the University of Sussex say that no trade option exists that will fully satisfy both parties, if you take into account their respective public statements on which aspects are non-negotiable.

For the UK, this means the government must reconsider its four red lines: no free movement of people; independent trade policy; no compulsory budgetary contribution; and legal oversight by UK courts.

For the EU, they should be prepared to flex on their repeated assertion that the UK cannot cherry-pick parts of the single market.

In a briefing paper published today (Tuesday 15 November 2016) and presented at the British Academy in London, a UKTPO team analyses the five main options for future UK-EU trade and finds that none are achievable without crossing one of the government’s stated ‘red lines’, or losing access to the single market.

Only the option of a Free Trade Area (FTA) with a variety of special sectoral arrangements (e.g. for cars) satisfies all of the UK’s red lines. However, such an arrangement could entail costly compliance requirements, documentation for Rules of Origin and agreement on technical regulations.

The authors, Michael Gasiorek, Jim Rollo and Peter Holmes, say: “If such an arrangement reduced or abolished non-tariff barriers on a wide range of goods and services, much trade would be saved.

“Whether this is acceptable to the EU side is unclear, but the alternative of going from the most integrated bilateral/regional trade relations on the planet to Most Favoured Nation terms ought to be deeply unpalatable to all concerned.”

Applying World Trade Organisation (WTO) ‘Most Favoured Nation’ tariffs would be the easiest option to negotiate, but would lead to significant increases in barriers to UK/EU trade and both sides would lose out significantly.

The authors add: “To leave each other with the choice of the worst possible trade policy outcomes is surely perverse: a barbed wire divorce indeed.

“Not least because the EU has already given better terms to Canada, Ukraine and Korea without any conditionality around the four freedoms being indivisible.”

The group calls for a five-year transitional period to allow time to agree the form of Brexit.

By: James Hakner
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Last updated: Wednesday, 16 November 2016