The second deal will be some sort of FTA, probably similar in scope to that recently negotiated by Canada and the EU. The much-discussed ‘Norwegian model’ is not viable: Norway, as part of the European Economic Area (EEA), participates in the single market, but pays into the EU budget and has to accept free movement. The latter condition, and perhaps the former, would be unacceptable to the British Parliament. Although most MPs supported Remain, many of them now believe that the referendum result means that free movement must be restricted.
But even a Canadian-style FTA will require the British government to make painful trade-offs. The FTA may well eliminate tariffs on manufactured goods – but only if the UK agrees to comply with EU environmental, social and health and safety rules; otherwise the 27 would worry about unfair competition or ‘dumping’ by British firms. The UK’s FTA, like that of Canada, will probably provide only limited access to the single market for services. In return for deeper access, the 27 would ask the UK to accept free movement, budget contributions and the relevant EU rules. Therefore UK-based financial firms will almost certainly lose the ‘passporting’ that currently enables them to do business across the EU whilst being UK-regulated. Other industries would suffer, too, such as tourism, accountancy, law, air transport, freight and shipping. Like Canadian firms, British ones would probably have limited access to European public procurement markets, and vice versa, to the detriment of taxpayers on both sides. As a general principle, the UK will gain fuller access to European markets to the extent that it retains existing EU regulations and directives.
Both the European Commission and Donald Tusk, the president of the European Council, have said that work on the FTA should not start until the UK has left the EU. Perhaps they worry that if the UK negotiates on trade while still an EU member, it will be a more awkward customer. But their hard line would extend the period of uncertainty afflicting the UK economy. Many member-states, including Germany, suggest that the UK be allowed to work on the FTA at the same time as the divorce settlement. That softer line will probably prevail, but in any case the FTA will take many more years to negotiate and ratify than the Article 50 deal (which does not require ratification by the member-states); the EU-Canada FTA took seven years to negotiate and may take many more years to ratify in national parliaments. So there will be a period of several years between Britain leaving the EU and the FTA coming into effect.
That gap requires a third negotiation, for an interim deal. Without such a deal, British companies would face great uncertainty and depend on WTO rules – which set maximum levels for tariffs – to prevent unfair decisions or practices by EU countries. One possible interim solution, floated by the eurosceptic MEP Daniel Hannan, would be for the UK to become an EEA country for a limited period, while it works on the FTA (technically, the UK would have to join EFTA, the European Free Trade Association, in order to make EEA membership work). But ardent British eurosceptics might jib at the price of EEA membership – substantial budget payments, free movement of labour, most of the EU’s single market rules and judgements by the EFTA court. Furthermore, the existing EEA countries (Iceland and Liechtenstein, in addition to Norway) show little desire to reconstruct their own treaties and institutions to accommodate temporary British visitors.
