Everything you wanted to know about the EEA, WTO and customs union but were afraid to ask

Even political nerds will be glad when the Brexit debate dies down…. in about five years. Far from calming down the debate has been renewed by the election debacle and the question of how we leave has remerged. Now all the talk is of a “soft Brexit” being put back on the table. Hard Brexit, soft Brexit, clean Brexit, a la carte Brexit, crème brûlée Brexit, al dente Brexit, when will it end? Do we go soft or hard? Should we stay in the Single Market? Should we stay in the Customs Union? What about joining the EEA? Questions, questions, questions. Dear Reaction reader, allow me to explain.

What is a “hard Brexit?”

The “hard Brexit” scenario has, I believe, changed meaning over time and can be hard to pin down as different people have their own definitions. It used to mean leaving with no deal at all. The meaning has seemingly now settled on a situation in which we leave the Single Market and the Customs Union, thereby seceding from the entire EU apparatus and replacing them with new, bespoke arrangements e.g. A comprehensive Free Trade Agreement.

The economic risks of this scenario are higher, particularly in the short term, but it is certainly the most unequivocal reversal of economic integration and the end of political union; hence why its supporters call it a “clean Brexit”.  It means, among other things, a fully independent immigration policy, no contribution to the EU budget and greater freedom to diverge from EU regulation.

What does a “no deal” scenario mean?

This refers to a situation in which we leave the negotiating  table with no agreement at all and revert to the default rules of the World Trade Organisation. It is often said that the EU trades under these terms with many countries, such as China and the USA; this is false. There are a wide range of Treaties, both bilateral and multilateral, that govern trade between the EU and China and the EU and the USA. The EU does not in-fact trade with any major economy in the world under WTO rules alone and it is certainly a totally inappropriate and inadequate arrangement for UK-EU trade relations.

Dropping down to WTO rules only would be falling off an economic cliff. Not only would we have tariffs to contend with, which would be the least of our problems, we’d have an array of technical barriers to trade arising that would greatly hinder cross border trade. Crashing out of the EU with no deal is a totally unviable option that neither the UK nor our EU trading partners can afford; hence why it will not be allowed to happen.

What is a “soft Brexit?”

Again, the definition of this seems to be shifting, but I maintain that a soft Brexit means leaving the EU but remaining in the Single Market; thereby ending political union but maintaining our economic integration.

What is the Customs Union?

The Customs Union removes tariffs between EU members and sets up a common system of tariffs and import quotas that applies to non-members; this is called the common external tariff or CET. One of the main advantages of the Customs Union is dealing with “rules of origin” issues.

For example, if the UK has 0% tariffs on imports of whiskey from the US, but France has imposed tariffs of 10% on the same products, then it would be profitable to export US whiskey into the UK and export to France from there, thus evading the tariffs. To prevent this, France would have to monitor imports of whiskey from the UK in order to impose the correct tariffs on US whiskey products. The CET eliminates the need for this.

There seems to be much confusion over the Customs Union, which has become the priority for some who wish to soften Brexit because they erroneously believe it allows for “frictionless” trade and will solve the Irish border issue. The Customs Union does not abolish border controls. The Single Market, and the “four freedoms” embodied in it, is far more important in facilitating trade and easing border issues.

Crucially, the legal basis of the Customs Union is tied up with EU membership; our continued long-term membership of it is therefore not possible. Nor would it be desirable, because the EU Customs Union is combined with a Common Commercial Policy which means the Commission has exclusive competence over trade policy.

The fact is that we can easily agree to trade with the EU on a tariff free basis and a customs cooperation agreement in eminently achievable. Customs barriers can be eliminated and/or mitigated to a great extent with replacement agreements and new systems.

What is the Single Market?

The Single Market is a common regulatory area; it abolishes technical barriers to trade via harmonised regulations and mutually recognised standards. It guarantees the “four freedoms; the free movement of goods, capital, services and labour. It is the most comprehensive and ambitious Regional Trade Agreement in the world, greatly facilitating trade between its members and allowing businesses within it to export freely between members (hence the attractiveness for foreign investors of Single Market members).

Its supporters point to tangible economic benefits and the freedom for people to live and work across Europe. Its detractors believe it to be restrictive because members are bound by regulation, and inherently political because it is dominated by the EU, which is perceived to use the market to advance political integration and exert its influence.

What is the EEA?

The European Economic Area (EEA) is the area in which the EEA Agreement provides for the four freedoms within the Single Market; it is open to members of the EU or the European Free Trade Association. The non-EU members of the EEA – Norway, Iceland and Lichtenstein – are not members of the Customs Union, they have separate agreements covering customs barriers. The agreement is arbitrated by the EFTA court.

If the UK was to leave the EU but stay in the Single Market, as in the “soft Brexit” scenario I have outlined, it would remain part of the EEA via EFTA. The advantage of which is to neutralise the economic risk of leaving and facilitating negotiations while still ending political union. It would go some way to answering the questions over Ireland and Gibraltar.

Some of the disadvantages of the EEA option have been exaggerated and become canards. For example, the “no say, still pay” slogan. There is some confusion over what contributions EEA members make; it is miniscule compared to EU membership fees. The biggest contributor to the EFTA budget is Norway, which will pay £9.7 million pounds in 2017. The EEA Agreement also allows for a variety of areas of cooperation with the EU (Horizon 2020, Erasmus etc) with further payments required, figures which are tiny compared to EU membership fee. The structure of EFTA also allows for extensive consultation which allows EEA members to have a say on the rules of the market.

The reality, however, is that this option does mean free movement of people remains; there may be scope to restrict immigration further but ultimately this will not represent a fully independent immigration policy. The detractors of this option also decry the necessity of full regulatory convergence without a vote in EU institutions; meaning the UK will be prevented from de-regulating areas of its economy and will have its hands tied to an extent in future trade deals. They also claim the EFTA court is a mere transmitter of the rulings of the European Court of Justice and consider EEA members to be subordinate to the EU.

There. Simple, isn’t it?