(Bloomberg) -- With a deal in hand on the initial terms of the Brexit divorce, U.K. Prime Minister Theresa May now turns her attention to Britain’s future trade ties with the European Union. What sort of relationship will the two sides have after the U.K. leaves? The EU says its landmark free-trade agreement with Canada is the model. But that would mean a considerable downgrade from what Britain enjoys now, and the U.K. still reckons it can do better.
1. What is the Canada model?
The EU’s free-trade accord with Canada, known as CETA (for Comprehensive Economic and Trade Agreement), is the bloc’s most ambitious commercial deal to date. When it entered into force provisionally in September, the accord ended 98 percent of tariffs on goods, and will remove 99 percent of them after seven years. Each side plans to dismantle all industrial tariffs and more than 90 percent of agricultural duties. CETA also opens up markets for public procurement -- so for example European suppliers can bid for municipal contracts. And to a limited extent it opens up services such as banking, telecommunications and transport.
2. How is that different from membership in the single market?
Membership of the European single market involves far deeper economic integration because it entails harmonized rules. Because the regulatory standards are the same in every member state, there’s no need for checks as goods, services, capital and people move freely across borders. The single market’s rules are upheld by the European Court of Justice. In the case of finance, the Canada deal falls far short of the continent-wide open access that U.K.-based banks now enjoy. And that access is possible because "passporting" rights allow finance firms to provide services across borders without local licenses.
3. What would a Canada-style deal mean for British businesses?
It could mean very different things for different industries. Here are three examples:
- Food: While EU tariffs on most British foods would presumably be zero, the U.K. could face restrictions on shipments to the bloc of “sensitive” products. In the case of Canada, these include beef, pork, poultry and eggs.
- Finance: British operations in the EU would generally be governed on the basis of the World Trade Organization’s General Agreement on Trade in Services, or GATS, which enshrines the principle of non-discrimination. U.K.-based banks would lose the "passporting" rights that allow firms to provide services across borders
- Automobiles: The EU would refrain from introducing its 10 percent tariff on foreign cars, and Britain would ensure duty-free imports of vehicles from Germany, France and elsewhere in Europe.
4. What made Canada a possible model for Brexit?
May’s determination to regain control of immigration to the U.K. from other EU countries, her opposition to letting European judges retain jurisdiction in Britain, and her sensitivity to making payments to the bloc meant that staying in the single market was a no-go. That puts the Norway option, which includes free movement of people and single-market membership, off the table. The EU says that May’s red lines make Canada the best model.
5. What’s the downside of the Canada model?
Tariffs are only part of the problem. Businesses say it’s the other barriers to trade that really get in the way, such as customs checks and differing regulations. CETA gets rid of only some of those obstacles and wouldn’t prevent the re-emergence of customs controls for trucks and ships traveling between the EU and U.K. CETA also doesn’t do much for services, which make up most of the U.K. economy. It took five years to negotiate CETA and then another two more of political wrangling. It still faces political hurdles in Europe during the final ratification process. The U.K. says its negotiation would be quicker as the two sides are starting from a position of perfect alignment so there’s less regulation to haggle over.
6. How enthusiastic is support for the Canada model?
In the U.K.. lukewarm at best. May said in September that a replica of the Canada trade agreement, “compared with what exists between Britain and the EU today," would "represent such a restriction on our mutual market access that it would benefit neither of our economies." All of which has prompted talk in Britain of a “Canada-plus” accord after Brexit. Britain would like “Canada plus plus plus,” where one of those add-ons is financial services. The EU is unlikely to agree.
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