The British imagination has long associated Canada with liberalism, friendliness and ice hockey; now, thanks to Brexit, we may be able to add economic ruin to the list. In a recently leaked European Union document, chief negotiator Michel Barnier apparently confirmed that the UK would have to settle for a post-Brexit trade deal along the lines of the EU's agreement with Ottawa, and not the bespoke arrangement sought by Theresa May. The good news is that this will not kill us. The bad news is that it will incapacitate us instead.
Why is the Canada deal so bad? The answer is not that it is bad economically for the EU and Canada, as it has brought them closer than they have ever been. (There have been some political concerns on the two sides, but these have not focused on the increased trade. Rather, they incorporate broader disaffection with globalisation.) If the EU and UK were to replicate it, however, the deal would represent an economic severance rather than integration—or as the prime minister put it in her Florence speech, “such a restriction on our mutual market access that it would benefit neither of our economies.” The key reasons centre on non-tariff barriers, traditional tariffs and quotas, and services.
Non-tariff barriers are a consequence of differences in regulation. Outside the single market, the UK will no longer harmonise its rules and standards with the EU, and in fact may need to change them if it wants to sign, for example, a trade deal with the United States. This will present an array of entirely new obstacles to free and frictionless trade. For example, Canadian food exports are still subject to controls to ensure conformity with EU standards; British replication would necessitate lengthy checks on the Irish border and at any ports dealing with UK-EU food trade.
“Rules-of-origin” requirements present a further barrier. Even goods traded tariff-free must comply with them—thus Canada cannot freely export a largely non-Canadian product to the EU. Given the complexity of the UK’s supply chains, this would cause profound difficulties in the manufacturing sector. Further manufacturing problems would ensue from the lack of regulatory harmonisation in, among others, the automotive and pharmaceutical sectors.
Although the Canada deal eliminates most tariffs, in the agricultural sector significant duties and quotas remain. Brussels has only marginally improved Canada’s market access in beef and pork, for example, while neither side is liberalising trade in poultry and eggs. If duplicated, this could prove catastrophic for Northern Irish farmers, who would suddenly be facing significant tariffs on their exports across the border, and the destruction of existing supply chains. The price of imported food would also rise.
“We may soon discover that the EU is not as toothless on trade matters as Brexiters have had us believe”Britain’s economy is largely service-based, and in this area the Canada deal makes only limited inroads. If we copy the agreement, new restrictions on transfers of personnel could prevent British firms from establishing branches or maintaining current levels of business with the EU, while mutual recognition of professional standards and qualifications would be dramatically curtailed. Widespread discrimination against British service providers would once again be permitted, and in the key sector of financial services, automatic passporting provisions would end—as Michel Barnier confirmed definitively in his speech on Monday. If this damages the City, the EU’s coup de grace could be new regulations deliberately designed to bolster their financial centres at London’s expense—and of course such regulatory cunning might not be limited to the financial sector. Britain could certainly retaliate by reforming its own regulations, but as with everything else in the Brexit debate, the UK is more exposed than the EU, and stands to lose more from any commercial hostility.
Elsewhere, it goes without saying that a Canada-style deal would not ensure UK workers’ rights or environmental protections. Moreover, British exports would have to confront any new Brussels initiatives designed to boost the EU’s competitiveness, market attractiveness or productivity. We may soon discover that the EU is not as toothless on trade matters as Brexiters have had us believe. The EU, after all, exists to serve its members’ interests—and will not concern itself with ours.
If this sounds unappealing, remember that it is not even assured. Such a deal—which, despite its major shortcomings, will still take years to negotiate—depends on Britain jumping through numerous hoops. First, Britain must make significant financial contributions well in advance of what it has already promised. Second, the UK and EU must agree the terms of a transitional arrangement, or Article 50 extension, while it is being negotiated. And third, Britain must provide adequate assurances for EU citizens and, above all, Ireland, that our weak but dogmatic government currently finds impossible.
The EU is not offering us a Canada-style deal out of spite. It is a logical consequence of our departure from the single market and customs union. If we refuse to abide by the four freedoms of the single market, or retain our current levels of regulatory harmonisation with the EU, a deal must also reflect those limitations. It is an agreement not to cement our coming together, but recognise our drifting apart.
Contrary to some of the Brexiters' pipe dreams, the current weakness of Angela Merkel and the German government does not change these basic facts at all—or the fundamental power dynamics of Brexit. The EU will continue to be bigger, richer and more adept no matter how many months it takes to form a German government—and whoever eventually forms it will take the same view of Britain's trade relationship.
What, then, are our other possibilities? The Canada deal represents what used to be known as a “hard Brexit,” before that mantle was assumed by the no-deal cliff-edge. A no-deal scenario, with its lack of aviation or security arrangement, is catastrophic enough to be unconscionable. No deal would likely mean no Brexit at all. And so Canada really is the most painful of our current viable options.
“The EU is not offering us a Canada-style deal out of spite. It is a logical consequence of our departure from the single market and customs union”The softer choice—and a compromise May has repeatedly ruled out—is the so-called Norway model. This involves membership of the single market via the European Economic Area (EEA), and almost certainly its non-EU pillar, the European Free Trade Association (EFTA). But this does not prevent a hard border in Ireland because we will no longer share a customs union. Goods will thus still need to be checked to ensure they originate in the UK, and some products crossing the border will have to incur tariffs.
The disaster here is, once again, agricultural. An off-the-shelf EEA agreement offers no agricultural liberalisation at all; the resulting WTO tariffs frequently exceed 50 per cent. Article 19 of the EEA Agreement provides for agricultural free trade, but this is no fait accompli. Norway's agricultural deal with the EU took two years to negotiate and did not eliminate all tariffs—and although the UK and EU currently enjoy tariff-free trade in agriculture, some EU member states may wish to shut out UK competition. Fisheries are also excluded from the EEA—this could gravely harm the UK's fish exports and processed fishing industry.
The most painless option, of course, is to negotiate a Norway-plus arrangement: that is, the EEA, with fully tariff-free trade in agriculture and fish, and membership of the customs union in order to preserve the open Irish border, and to ensure seamless customs procedures so vital for cross-border manufacturing and a generally well-functioning economy. Such a pragmatic option currently appears as likely as cancelling Brexit altogether.
It is worth remembering that only one thing prevents the basic Norway scenario: ending free movement of people. This prime ministerial obsession, which can be addressed within EU rules, is set to ensure a Canada-style agreement which will wreck British livelihoods. A hard Irish border, meanwhile, with its manifold threats to peace and prosperity, must be the consequence of Britain’s rigid insistence that it should be able to negotiate its own trade deals—even though the EU is in most cases pursuing the very same agreements.
Theresa May has no referendum mandate to leave the single market or customs union, and the results of doing so will debilitate us for a generation or more. It is not too late to change course—but we may first have to change prime minister.
