Sunday, 10 December 2017

Brexit: the case retaining the EEA

If the UK is set on having only an FTA with the EU then it is seeking a relationship governed by a particular set of WTO rules. Preferences extended to the UK may well have to be granted to others holding an FTA with the EU. That means, even if the UK gets the best FTA of all, it is still going to be only marginally better than the second best. Warning shots have already been fired across the bow of the EU. 

In leaving the EEA (a deep and special partnership) the UK is moving into uncharted waters of negotiating an FTA that can never be as good. One where UK interests could very well be cannibalised. This is what makes retaining EEA membership a no brainer - not least because it is governed by different set of rules where WTO principles do not apply in quite the same way.

From an idealistic perspective, I totally understand leavers who prefer a Canada style FTA. It's the one mode of exit short of no deal that really honours the referendum as is understood by most who campaigned for Brexit. But let's head down real street.

It is conceivable we could cook up an FTA and even one that includes market particpation rights for airlines and services. It would avoid a calamity but would still be a huge hit to trade we would struggle to compensate for. Having left the single market, over the following years we would seek to rebuild a lot of the lost trade we threw away - and in so doing would end up like Switzerland, gradually ceding sovereignty on EU terms under jurisdiction of the ECJ.

One way or another we are going to have to respect EU conditions of market entry and the effects of that will be extensive. So really what we want is a means of adopting rules with a proper means of veto and adequate safeguards. That's Efta+EEA. The only other way to enjoy the same market participation is full adoption of the EU acquis, subject to the jurisdiction of the ECJ without any representation. This is the worst of all possible worlds.

What's important is not the extent of alignment, rather the shape and scope of those institutions and bodies formed for the administration of any future relationship. They must be independent, not the ECJ. This is why EEA-Efta is the obvious choice. Independent tried and tested frameworks.

This prompts Brexiters to argue that our ability to strike "trade deals" will be restricted. That much is true if you think only in terms of FTAs and deregulation as your means of liberalisation. There are problems with this approach. Relaxation of standards would have ramifications for the EUs risk profile of the UK leading to a higher frequency of inspections with all the costs and delays that go with it. Though the EU nominally opens its borders to competition there are any number of means for it to protect domestic producers.

One high profile example of this is EU inspections for Citrus Black Spot. Typically reports cite "EU regulations". It isn't that. It's an EFSA risk assessment leading to increased inspections. Delays causing South Africa to voluntarily terminate trade even though it meets the standards and qualifies for trade preferences.

Again on these such issues we find the EUs risk assessment is a means of creating barriers. The basis of the risk assessment being scientifically questionable and likely the result of internal protectionist lobbying. This is where the UK, retaking its own vote on global bodies can have an impact. The issue was referred to IPPC secretariat to establish an expert committee which will rule on whether the EU risk assessment is justified.

Moreover, our policy within the many global forums is crucial. The bottom feeders at the FT keep dribbling out tired mantras about "The Brussels Effect" but when it comes to the mechanics of trade it's the global standards that matter. Both parties in FTAs work toward aligning on OIE/Codex/IPPC. The EU-Japan economic partnership agreement re-announced yesterday is no different.

As we have discussed previously all modern EU FTAs are largely an affirmation of commitments under the WTO TBT agreement. Out of interest, it would be good to know why they go to the trouble. Having scoured several EU FTAs I notice massive duplication of WTO TBT tract. You could quite easily delete whole chapters of EU agreements without it making the slightest difference. 

The truth is that there are no grand gestures or shortcuts to trade liberalisation. There is no magic bullet to unlock trade. The sweeping unilateral gestures as preferred by the libertarian right are suicidal. Achievements in trade are incremental and the result of thousands of hours of backroom work over increasingly arcane aspects of standards and regulations. Moreover, nothing happens without considerable investment - not least to win backing of new multilateral initiatives.

Even if we do stay in the single market, maintaining the EEA acquis, we still have a lot of new scope in terms of how we interact globally - and the UK is not without allies in a number of standards bodies - who are not best pleased with EU anti-competitive practices. Our strategy should be to seek out and build sectoral alliances through Economic Partnership Agreements.

That requires considerable investment to increase and enhance the participation of LDCs ensuring that they can meet market entry conditions. We then strengthen the global rules based system while seeking to stack the deck in our favour.

The thing is about EPAs, however, is they are only as good as the scientific, technical and material resources your throw at them. That's why we need DfID to grow up and stop playing White Saviour Barbie. It must learn that if it is to exist at all then it is to promote the direct national interest. That means no more spending on UN gender equality window dressing and more spending on trade facilitation. We need to get hardass and lose the virtue signalling.

If we stay in the single market via Efta then we stay in the top ten economies and we stand a better chance of playing the EU at it own game - not least since the EU will be short of a net contributor. From there we can use any number of means to navigate the complexities of the system to grant access to the single market whether the EU likes it or not. It will be a soft trade war. And not before time.

It's actually about time that the EU was exposed for the fortress of bureaucracy it is. It talks about FTAs and reducing tariffs while using every means such as ROO and EFSA to stop competition. We can subvert this quite easily without breaking EU/WTO rules. Though the EU does have clout, the one thing the Northern Ireland issue shows us is that it does not have agility or flexibility. That is its greatest weakness and if we are savvy about it we can run rings around them.

Increments in trade will most likely come from new trade facilitation measures. Small but significant measures to increase profitability of existing value chains - not big headline EU deals. The EU will spend year upon year bogged down in talks to produce FTAs which only notionally add value, but the more they have the less they can afford to usefully service them. The UK does not have that problem. We can use our aid budget to finance them entirely legitimately.

The lazy mantra that the UK becomes a passive rule taker is largely gaslighting from remainers whose horizons extend no further than Brussels - most commonly people who have never bothered to read an EU FTA. With every FTA the EU signs it further reinforces the dominance of global standards and international forums. 

We also note that the buzzword in trade right now is Blockchain. The blockchain aspect is really just the technological platform but the methodology of Single Window is what should concern us. It is revolutionary. There is only so much we can do by tinkering with tariffs and standards. The big gains are to be made in customs cooperation, where again we find UNECE and ISO spearheading advancements. The frameworks are also crucial. Again we find in the EU-Japan agreement the WCO takes primacy. 

I was also completely unsurprised to find this tract:

Being that the UK is a first world economy and a scientific technological leader at the forefront of a number of industries, we are very often the first movers on a number of standards and BSI is a global standards powerhouse. Even if it were the case that that EEA members were "sitting by the fax machine" for EU regulations (which they aren't), the standards therein are not the exclusive domain of the EU. We are not helpless. 

Nobody should underestimate the scale of the challenge Brexit presents nor should we expect an easy ride of it. The EU will fiercely defend its own interests and it will seek to frustrate an independent UK trade policy. But we should also note that as the global rules based system matures the EU won't always get its own way and the leverage the UK can wield, along with Efta and those other states who may follow Britain's lead, means that there will be give and take between the UK and EU. It will vary according to the sector and the platform. With guile and patience we can still shape the rules of the game - possibly even to greater effect. 

For me the case for staying in the EEA has never been stronger. There are plenty of good reasons to leave the EU but deregulation is not one of them. There is, however, every advantage in being an independent actor in trade forums as a distinct customs entity - and from a sovereignty perspective, in the modern context, having the ability to say no matters more now than it ever did. The EU offers us no such protection and can railroad us into adopting job killing standards for entirely political reasons. 

Brexit will require that we think differently about trade, and it requires that we take off the Brussels blinkers and learn to think globally. There are a number of approaches and dozens of mechanisms other than FTAs to enhance and improve our trade. There is far more to trade than tinkering with tariffs and and there is still much to do. Measures to tackle counterfeiting and fraud between key trading partners can have substantially more impact than an agreement on tariffs. This all depends on a network of interagency cooperation where we would be foolish to turn our backs on the EU.

Whichever way it goes, the UK will be committed to spending considerable sums on cooperation. Brexit means we repatriate a lot of the spending decisions but the one thing we cannot afford to do is is neglect our participation on the world stage. The opportunities are there but we must be active players and we must be prepared to invest. 

If the UK leaves the single market, thereby voluntarily relinquishing substantial sources of income, we cannot expect to play high stakes games in the same league. Likely it will take decades to  recover lost influence and trade - if we recover it at all. Leaving the EEA most likely means becoming the supplicant of the EU that many,incorrectly, say Norway is. 

Taking our place in Efta means that we remain part of the European trade ecosystem but it formalises the natural drift between the UK and Eurozone EU and empowers both tiers to configure their interests accordingly. The EU is then free to further integrate while the UK can cast a wider net. It is a more harmonious configuration for Europe and beneficial for both. Neither is served by permanently weakening the UK. Leaving the EEA would be an unforced error - and a sledgehammer to miss the nut.

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