Would an 'independent' UK get a better US trade deal than the EU?

Could the UK sucessfully negotiate a trade deal with the US?

Yesterday MEPs voted on a resolution to back defensive measures to exclude cultural and some agricultural products, such as genetically modified foods from a proposed free trade deal with the US (TTIP).

Understandably US farmers have already taken exception to what they see as EU protectionism. This raises concerns that the potential gain from an EU/US trade deal may be watered down, delayed or even blocked all together by vested interests on both sides of the Atlantic.

As a member of the EU the UK's foreign trade is governed by the EU's common commercial policy and so has to be done via an EU deal. After the EU the US is the UK's most important trading partner. Some involved in the UK-EU debate - particularly Outers - suggest that if the UK left the EU it could negotiate a deal with the US on better terms than it could potentially gain via the EU. But is that the case? Here are some of the factors that could be important.

UK exports to the US in £bn (ONS 2011) are big...

A mismatch in negotiating power. Although the UK exports a lot to the US, as a % of it's total exports, the US sends only 4% to the UK. So although a trade deal should be mutually beneficial, reaching a solution would be disproportionately in the UK's interests. Therefore, there would be an imbalance of negotiating power. For this the EU's weight could help on issues where the UK's interests are aligned with it.

Would the US want to go through the hassle? Given this asymmetry, and the relative small market the UK is for the US, one question is if the US would go through all the political hurdles -  approval in Congress, taking on the unions etc. Indeed, talk to people in Washington and there's some scepticism about this. (However, the US has signed agreements with 23 states, some very small, so perhaps it is more a matter of the terms you would get?)

But US exports to UK (US BEA 2011) are small...

Fewer protectionist hold ups. At the same time, the US and the UK are more compatible economies than are the US and EU. The UK negotiating on its own account would not be hindered by protectionist issues emanating largely from France and MEPs, that could hold up US agreement or require concessions, such as the protection of agriculture, genetically modified foods or geographical indicators. However the UK is still unlikely to wish to see the US allowed to subsidise its agricultural exports, so tough negotiations would still be required.

Access for financial services could be a tough negotiation. The UK negotiating with the US on financial services would come up against a powerful US lobby attempting to protect its banks from what is New York's main rival - London. However, the UK negotiating on its own would arguably have a better chance to strike a deal on 'reciprocity' with US funds, a more generous arrangement than that which currently exists under regulations such as the AIFM Directive or UCITS. Additionally the UK would not bear the burden of having risky eurozone banks getting in on the deal. In recent negotiations with Singapore the US gained a better deal than the EU on financial services, partly because while Singapore was happy with UK banks it was wary of giving access to all eurozone banks (a big untold story in all of this).

If the idea is that an 'independent' UK can automatically join some gigantic Transatlantic free trade zone, in place of its current EU membership, there will be plenty of hurdles and a good deal is by no means guaranteed. Added to that there's also the small matter of negotiating an equivalent free trade deal with the EU....

EEA plus: a model for the future of the UK in Europe?

For all the noise about Europe in the UK, British sceptics (with some exceptions) aren't necessarily great at thinking outside the box. 

We have previously looked at the existing models used by countries that have decided against/been refused EU membership (i.e. Norway's EEA membership, Switzerland's Free Trade Agreements, Turkey's customs union with the EU, or simply the WTO) and concluded that they would all have drawbacks for a country and economy as large and diverse as the UK. In particular, the Norwegian model is pretty much a non-starter.

However, there is another hypothetical model, which we will set out in a forthcoming briefing, that could be more attractive if it could be secured: let's call it 'EEA plus'.

Now, we don't necessarily advocate this particular option and this is only a blogpost, but intellectually and politically, it's far more attractive than anything we've seen so far in terms of a fundamental replacement for the current EU structure. 

Over the last decade, several figures, including Jacques Delors, former EU Commission President, and Valery Giscard d’Estaing, former French President and author of the EU Constitution, have suggested the UK be given ‘associate membership’ or ‘special status’. Neither concepts have been fully fleshed out, but Giscard d’Estaing suggested that a ‘special status’ could allow the UK to opt-out of future EU policies, which could allow it to continue to vote on policies it took part in but not on those it didn’t. Lord Owen has made a similar argument - which he will expand on in a speech today.

From where we sit, there is one absolutely vital element that has to be added if this is going to work for the UK: voting rights. The great weakness of the EEA model at the moment is that a country like Norway, as we have noted repeatedly, is out of the EU but run by the EU. It just wouldn't work for the UK (which is home to 36% of the EU's wholesale finance market, for example).

So what 'EEA plus' would involve is single market access but with votes on all laws which are EEA relevant. For EU geeks, it would be a bit like EEA-EU co-decision over single market laws. There are several ways in which this could work. For example, an "EEA council" already exists with members from both the EU and EEA states. This could be expanded to be the effective decision-making body for the EU as a whole in the fields that apply to both constituencies. Alternatively, a majority could be needed in both the EU Council of Ministers and a comparable EEA body for it to become law in both. A range of other issues, such as an arbitrage mechanism and ECJ jurisdiction, would have to be thought through. Also, it would have to be designed so that only genuine single market measures made it into the agreement - not the add-ons such as employment laws (which Norway has to accept) - whilst the UK may wish to stay inside the EU customs union (which Norway and Switzerland are not part of). The UK may also want to be part of other areas, such as crime and police cooperation (perhaps on a bilateral opt-in basis) and there would also need to be consideration about the merits of retaining its veto over EU foreign policy for example.

But, crucially, such an arrangement would get around the massive drawbacks inherent in the Norwegian model. Another great advantage of this model is that it could provide an institutional wrapping for all those countries that for one reason or another cannot be full EU members, and certainly not eurozone members: the UK, Norway, Switzerland and maybe even Turkey. It would be a new mode of European membership - and, if the UK can get its act together, very much the "economic growth" tier.

If you think this is far-fetched, you might be right, but it's actually not a new idea. In 1989, ahead of the negotiations that would establish the EEA agreement, Delors mooted a “more structured partnership with common decision-making and administrative institutions”, which would have potentially given those countries market access and decision making powers, rather than the limited right of refusal that EEA countries currently have.

In a speech in 1989, discussing the potential approach to those countries who had remained in the European Free Trade Association (EFTA), Delors said:

“There are two options:

(i) we can stick to our present relations, essentially bilateral, with the ultimate aim of creating a free trade area encompassing the Community and EFTA;

(ii) or, alternatively, we can look for a new, more structured partnership with common decision-making and administrative institutions to make our activities more effective and to highlight the political dimension of our cooperation in the economic, social, financial and cultural spheres.

It would be premature to go into the details of this institutional framework. I have my own ideas, but they need to be discussed by the new Commission and then informally, without obligation, with the countries concerned. It should be noted however that the options would change if EFTA were to strengthen its own structures. In that case the framework for cooperation would rest on the two pillars of our organizations. If it did not, we would simply have a system based on Community rules, which could be extended — in specific areas — to interested EFTA countries and then perhaps, at some date in the future, to other European nations.

But if we leave the institutional aspect of such a venture aside for a moment and focus on the substance of this broader-based cooperation, several delicate questions arise. It becomes clear in fact that our EFTA friends are basically attracted, in varying degrees, by the prospect of enjoying the benefits of a frontier-free market. But we all know that the single market forms a whole with its advantages and disadvantages, its possibilities and limitations. Can our EFTA friends be allowed to pick and choose? I have some misgivings here.”

This option could probably qualify as both "in" and "out". For one, it would be very similar to the Single Market plus deal that Boris Johnson has argued for in the past and, could be defined as staying in the EU, although on a radically different basis.

A final sobering thought: the final result of the EEA talks only granted EEA states ‘decision-shaping’ powers through representation on non-legislative committees and consultation with the EU Commission and a right of refusal that is relatively weak becuase it can result in loss of market access – giving an indication that this will be a challenge to achieve.

A brave and democratically honest strategy - but will Cameron be able to stick to his timetable?

The British people will this morning be promised an In/Out referendum on Europe. In his speech, David Cameron will say that, if re-elected, he will legislate for a referendum to be held in the first half of the next Parliament (by end of 2017). He will negotiate a new deal in Europe, put it to the people, and campaign for a Yes. Think back two years, one year or even six months, and you can see just how far the debate has moved.

Given how difficult a task he had, his speech ticks most of the boxes. He'll set out a plausible and powerful case for Europe-wide reform, based on five principles, correctly pointing to three main challenges: how to reconcile euro and non-euro member states to EU membership, dwindling competitiveness and popular discontent.

These are his main target groups:

The British electorate: His speech should appeal to the majority of the British electorate that consistently says in polls it would prefer a better, slimmed down EU – rather than a Brixit or the status quo – if that's on offer. Whether the speech will lead to a poll bounce is anyone's guess.

His own party: The vast majority of Tory MPs who want a new deal in Europe, before contemplating Brixit, have got exactly what they wanted. Yes, there are those who think he said too much, others too little; those who want him to legislate for a (possibly "mandating") referendum in this Parliament. But within the constraints of the Coalition, while these discussions are important, surely they are secondary to the fact that the Prime Minister has outlined a clear course towards precisely the type of slimmed down Europe for which Conservatives have been calling for years? And Tory "outists" have got the chance to make their case in a referendum. It's intellectually and democratically honest.

There will be some cynicism as to whether it'll be 1975 all over again: token renegotiation followed by a referendum. But to think that Cameron could recommend staying in on basis that "access for New Zealand butter should continue indefinitely" (which was one main "achievement" Harold Wilson presented to Parliament), is pretty implausible. He wouldn't last a day.

European partners: Europeans who feared an imminent dawn raid on Brussels will be relieved. We're committed to European cooperation, Cameron will say, but the EU needs to adapt and change – become more flexible and democratic. There'll be mutterings of discontent, but for his basic pitch, he will get a fair hearing in national capitals. The more EU-wide he can make the case for reform, the better.

Cameron has the great merit of actually being on the right side of the argument in pointing out the changes Europe needs to thrive. And given that virtually all of the seven broad proposals for more Eurozone integration floating around require some re-opening of EU treaties to be completed, we suspect that Cameron will get at least one good shot at it. We also suspect that European partners will play ball given that, if the British were to leave, the single market would shrink by 15%, with £261.4bn in annual European exports facing extra costs; the EU budget would be some €14bn light; and Germany, the Netherlands and Finland (who write the cheques) will be awfully alone in that Northern bloc.

But, is his strategy, negotiation followed by an In/Out referendum by 2017, achievable? Cameron will not set out a specific "shopping list" of powers that he wants back - and he's right not to this far in advance. Trying to do so would only aggravate partners for little UK benefit. But, of course, Cameron's approach still contains a number of "ifs" and risks. He has set himself a concrete timetable, despite the fact that timetables in Europe are notoriously difficult to control. A Treaty change discussion could drag on for years. This is the trade-off in his speech: as insurance to his own party and the electorate he's now on a timetable, which may or may not coincide with that of the eurozone. Is he willing to recommend Out in 2017, if he doesn't get concessions?

If Cameron is to pull this off it will require a major diplomatic effort, and clever positioning, but Britain has seen through far greater challenges in the past. And Europe gone through much more fundamental changes. Both will come out better on the other side.

"Single Market yes. Federal Europe No"

As we argued here, though there has been quite a bit of noise from the business community over recent weeks, few interventions are actually dealing with the sharp end of the policy debate, e.g. what is the greatest threat to business: Trying to artificially lock in the status quo - and risk voters throwing out the baby with the bathwater; or seek a new deal that will put the UK's relationship with the EU on a sustainable footing? Car manufacturers, for example, rightly warn that Britain leaving the EU would be bad for their industry. However, they fail to explain - as do many of the usual suspects - how to square UK public opinion and further eurozone integration, with continued EU membership. To wish away the debate - saying that it causes "uncertainty" - is hardly credible, since for so many different reasons, the debate is happening any way, whether we like it or not.

Which is why this piece by John Longworth, the director general of the British Chambers of Commerce, was so timely. He writes:

What may surprise some in the Westminster bubble is that the view from the coal face is different from the one trotted out by some high-profile captains of industry and the chief executives of multinationals. In fact, it doesn't follow either the classic Europhile or Europhobe lines [ a point we made here - OE remark]. Britain's business community, many of whom export, wants to see real and substantive change in our relationship with the European Union. While four out of five insist that they want to remain part of the European single market, an even larger number say they are against further integration and transfers of power from Westminster to Brussels.

The prime minister's preferred approach of "renegotiation and referendum", then, is an option that chimes with the thinking of many pragmatic businesspeople whose primary interest in the European debate is ensuring that they can trade, hire, export and flourish. Forty-seven per cent of our members, a large plurality, think this is the right approach. In the simplest terms, a settlement that supports their business interests would simultaneously safeguard the UK's economic interest. It is premature to talk of extreme solutions to Britain's European question.

Yet maintaining the status quo, which both Europhiles and approximately one-quarter of companies favour, is simply not a viable option. Europe is changing. Britain cannot expect the EU to simply stand still while it navel-gazes and debates its future involvement. Nor can it just seek to negotiate favourable reforms within the club's existing rules, because the club's rulebook is changing. If Britain does nothing to renegotiate its position now, it will be dragged down the road of ever-closer union in the wake of the Eurozone. That raises the spectre of an "in/out" referendum in future that no pro-European campaign could realistically hope to win.

Similarly, Lord Wolfson - Chief Executive of Next - in the Sunday Telegraph:

I have listened carefully to the arguments of certain business people who oppose the renegotiation of our position in Europe. All their fears revolve round the loss of the single market. They rarely espouse the need for more regulation, less democracy or wider EU powers over our justice system. Implicitly, they argue that these burdens are the price we must pay for remaining in the EU. They claim it is risky for the Prime Minister to even try to negotiate a better deal for Britain. They assert that the uncertainty of renegotiation will undermine our economy. This is nonsense. Investors already know that British support for the EU is fragile. Unless we call time on the process of EU aggrandisement, democratic opposition will make our place in the EU even more uncertain. In the real world, very little investment is lost as a result of this so-called uncertainty, because it is already a fact of life. These scare tactics are all too familiar to me. They were the same threats used by the same people when they urged us to join the euro. I remember their warnings of economic isolation and ruin.

 He concludes:

Those Europhiles who argue that we must either accept a federal Europe or lose our place in the EU unwittingly act as recruiting sergeants for their opponents who say we should leave. Before adopting either extreme, we should at least try to negotiate a middle way – an EU that the majority of us would be happy and proud to be a part of. The message is clear: single market yes, federal Europe no.

Spot on.

A bit more on the 'EU speech to end all EU speeches'

David Cameron, interviewed on Radio 4's Today programme, has given some more details about his forthcoming big EU speech to end all EU speeches (well...). So what should we expect? Here are some key excerpts:

He said a new EU settlement "is not something we should be frightened of, it is something we should embrace."

He believes there's a "real chance" of it happening and that

"The Dutch and German Prime Ministers have both been making arguments along those lines."

That he floats Germany is interesting. He was not to be drawn on what exactly the referendum would be on or when:

"We will have a new settlement and  then will put that to the British people in a very straightforward way so that they can give or not give their consent to those changes"

But what if the reform-sceptics - on all sides - are right and reform is not on the table, would he ever consider leaving the EU?

"If you are saying to me, would Britain collapse if it left the European Union? No, of course not. You could chose a different path. The question is what is in our national interest and I have always been very clear it is in our national interest as a trading nation to be in the single market but not like Norway just accept all the rules of the single market pay for the privilege of being part of it and as it were be governed by fax from Brussels."

This is all familiar stuff: Cameron thinks the UK is better off in (he's been saying that for ages), is committed to the UK public being given "fresh consent", implicitly via a referendum, and he denies all charges of "blackmailing" or inadvertently risking the UK's EU membership via renegotiation.