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Brexit: Edging Towards Norway

(Photo: TT News Agency/Bjorn Larsson Rosvall/via Reuters)

In response to Saving Brexit

In the course of a characteristically sharp post yesterday on Brexit and its woes, John O’Sullivan wrote this:

I remain agnostic about which route [out of the EU] to take. My opinion is that the WTO route would be the best one in economic terms, providing disruption in the short term but long-term opportunities for greater prosperity in the long term, but politically hard to sell when the Remainers control most of the forums of debate. Unless those politics change, I’ll be compelled to accept the argument long made by Andrew Stuttaford (and repeated yesterday in this space) that we will have to accept a Brexit-in-installments, leaving the EU but remaining in the EEA [the Single Market] through EFTA. (I write this through gritted teeth, which is no easy task.)

The EEA/EFTA route is a reference to the “Norway option” (or some variant of it).

It’s worth taking a look at the WTO option mentioned by John. To summarize, this assumes that the U.K. can simply drop out of the EU without any deal, and then trade with the EU on the same basis (allegedly) as just about anybody else.

Back in May 2017, and drawing extensively on the work on this topic by The Leave Alliance, I argued that the WTO option was not as attractive as its reassuring name might suggest.

The Leave Alliance’s research has (I think) been updated since then, but is no more cheery than before. The key point is still this:

The general thrust of the WTO Option argument is that: “Were the UK to leave the EU, it would continue to have access to the EU’s markets, as World Trade Organisation rules prevent the EU from imposing unfair, punitive tariffs on UK exports”. In reality, the WTO rules only afford very limited protection against discrimination, and then only in respect of tariffs — which are no longer central to trade matters.

What matters more than the EU’s tariffs is the fact that the WTO effectively permits Regional Trade Agreements (such as the EU) to discriminate against third countries (and that’s what a post-Brexit U.K. would be to the EU) through the operation of their regulatory regimes. And the EU’s regulatory regime would throw up some very effective non-tariff barriers [NTB].

The Leave Alliance:

To access the Single Market, goods must comply with EU rules. Conformity is the way of overcoming the NTB. But what advocates of the WTO option have not realised is that there is more to it than that . Much more. Potential exporters not only have to ensure their goods conform, they must provide evidence of their so doing. This requires putting the goods through a recognised system of what is known as “conformity assessment”.

Goods imported from Britain (including, crucially, if we are looking at the longer-term economic consequences of all this, as part of manufacturing supply chains) would have to be tested to ensure that they conformed with the relevant EU rules. That testing takes time (read the full article to see what the implications of that might be), which is why many of the EU’s largest trading partners supplement WTO rules with supplementary agreements, such as Mutual Recognition Agreements on conformity assessment:

This gets round the problem of border checks, as the EU will then recognise the paperwork on product testing and conformity certification. Throw in an agreement on Customs cooperation  —  to ensure that official paperwork and systems mesh  —  and you are on your way to trouble-free border crossings.

Failure to have such agreements alongside the WTO rules would mean chaos. But that failure is what simply falling out of the EU would imply, and that’s why the WTO option is not an option that any Brit should want. Could the U.K. negotiate such supplementary agreements with the EU? Probably, yes, in time, but that time could easily be years, years in which the U.K. would be stuck (if it was “lucky”) in a transitional relationship with the EU that would neither be favorable and nor would it provide the certainty that businesses need.

In his post, John refers to another alternative, “Canada Plus.” That essentially would reproduce and supplement the existing free-trade agreement the EU has with Canada (CETA). Cutting and pasting CETA would be likely to fly with the EU, although the cutting and pasting would, again, take some time, as would preparing the infrastructure to make it work. Supplementing CETA, however, would be far more complicated, not least because the EU would (thanks to the Most Favored Nation provision included in CETA) have to offer the same deal to Canada. Once again, we are talking about the U.K. languishing for years in that extended transitional agreement.

By contrast, remaining in the EEA by switching from the EU to EFTA is a relatively straightforward and speedy process.

The road to Oslo still beckons.

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