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Re-invigorating the European Neighbourhood Policy: An enhanced DCFTA between the UK and the EU?

 1 st July 2016

Author Michael Gasiorek

Prior to the Brexit referendum those in favour of leave were very successful in refusing to address the issue of how they envisaged the UK’s relations with the EU and the rest of the world. Since the referendum this issue is finally receiving more prominence. The EU Council has made it clear that there will be no a la carte access to the single market. If the UK wants access to the single market, this can only come with the free movement of capital, services and labour. In turn this means continuation of the status quo with regard to EU migration. This would appear unacceptable to the Brexiteers as they fought the campaigning precisely over the issue of gaining control.

The actual outcome will of course depend on the interests of all parties to the negotiation – the UK and the 27 remaining member states. It is possible that when it comes to it that the EU may be prepared to negotiate over this. It is also possible that somewhere down the line the Brexit vote will be overturned either via a general election fought on this issue and/or a second referendum. Both these outcomes, however, are unlikely.

The EU will almost certainly stick hard to its position on no a la carte access to the single market. This is both a matter of principle and being practical in the face of domestic politics. The issue of principle is that the EU is built on the four freedoms of movement and that any dilution of this is seen to fundamentally undermine the EU project. The practical issue is the disaffection within many EU countries regarding people’s economic and social circumstances, which is in turn reflected in negative popular perceptions of the EU. EU politicians fear Frexit, Dexit, Nexit… There is a genuine concern over European disintegration. If it were perceived that a country (the UK) could obtain a la carte access to the single market this is likely to fuel the process of possible disintegration, which the remaining EU 27 countries desperately wish to avoid.

So what is the likely outcome? Various possibilities have been mooted over the last few weeks, such as the EEA option, EU-Turkey, EU-Switzerland and EU-Canada. Each of these is likely to be unsatisfactory to the UK, either because it calls for free labour mobility (EEA, Switzerland), or because it means giving up control over domestic tariff policy (Turkey), or because of the lack of mutual recognition of standards, and lack of treatment of migration (Canada).

There is, however, an alternative which already exists. That is that the UK effectively becomes part of the EU’s European Neighbourhood policy and signs an ‘enhanced’ deep and comprehensive free trade agreement with the EU (EDCFTA). On tariffs this should not be hard to negotiate, though domestic political economy considerations may play a role. And, as the UK has/had been a member of the EU for so many years, arguably many of the other provisions such as those on technical barriers, intellectual property rights, government procurement, competition policy and even services should be relatively easier to agree on. This could then be coupled with an enhanced Mobility Partnership with a visa-free regime. Such an enhanced DCFTA would thus go much further than existing DCFTAs such as with Moldova and Georgia – and that fits well with the EU’s current differentiated approach to its neighbourhood partners.

For the EU this too, under the circumstances of Brexit, this may be an attractive proposition. Since its inception in 2004, the European Neighbourhood policy has struggled to be effective. One of the (many) reasons for its lack of effectiveness is that despite the supposed principle of ‘full partnership but without membership’, the de facto degree of market access being offered was not seen as sufficiently attractive or important for the neighbourhood countries. An EU-UK enhanced deep and comprehensive free trade agreement and mobility partnership gives the EU the opportunity to demonstrate the principle of full partnership without membership, which may in turn help to actually reinvigorate and help the ENP process.

How attractive would this be to the UK? Again, under the circumstances of no single market access a la carte, this may be the only way for the UK to retain control over tariffs and trade policy, yet to negotiate some deal on migration and labour mobility, as well as to have some management of trade remedies.

The economic consequences are extremely hard to predict. The discussion above has only focussed on UK relations with the EU, and a lot will depend on the future evolution of the UK’s trading relations with non-EU countries. Eventually the UK would no doubt (wish to) sign trade deals with other key trading partners, such as the USA, China, or South Korea but this will take considerable time and what will be negotiated is highly uncertain and will no doubt will be subject to considerable pressure from interest groups. In terms of access to the EU market alone an enhanced DCFTA might give the UK comparable access to what it has now. For that to be the case, however, de facto UK firms would have to produce to EU determined standards and regulations, and they may be subject to trade remedies. A lot would also depend on the details of any enhanced mobility partnership which will be particularly important for the UK’s service exports.

In the shorter run, while all this is being negotiated and in the face of uncertainty, EU firms faced with a choice between importing from the UK, or from an alternative supplier from the EU27 are more likely to choose the alternative than they were prior to the referendum. EU firms considering new investments, building new relationships with suppliers, increasing their exports are more likely to focus attention away from the UK. Many of these considerations will also matter in the medium and longer run. Of course, there are circumstances where there may be specific advantage from trading with the UK, or from investing in the UK. Where there are such specific advantages trade will continue and will grow. Where there are no such specific advantages, there is much more likely to be a negative impact on UK firms, jobs and the economy.

 

Department of Economics, Centre for the Analysis of Regional Integration, & InterAnalysis Limited.

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