Trade agreements: what lies ahead?
This article was written before the coronavirus pandemic had escalated in the UK, Europe and the USA and first appears in the April 2020 issue of CA magazine.
The Canada-EU agreement could provide a useful model for the evolution of Britain’s future trade agreement with Europe, says James A Ogilvy.
The term “Canada-plus” became common during the UK-EU discussions of their future trading arrangements. But the EU’s insistence on preconditions for the adoption of the Canada-EU Comprehensive Economic and Trade Agreement (CETA) as a reference point for a UK–EU agreement led to acrimonious exchanges. As of mid-February, the EU’s dismissal of it as a prototype casts doubt on the bloc’s willingness to proceed in that direction.
Nevertheless, CETA is an advanced trade agreement that remains a good starting point for negotiations towards a fair relationship between the UK and the EU. As noted in my report CETA, Brexit and Beyond, the UK can use it “as a basis for comparison, a blueprint for defining subject matter, an indicator of the EU’s preferences, and a guide to those areas that will require extra effort to achieve the desired results”.
The UK and the EU have a scant 10 months to agree on the shape of their future relationship. Each has assets that are desirable for the other to work with in a spirit of cooperation and mutual regard. In today’s world, an island nation – particularly a highly developed one – is almost by definition a trading nation. The UK’s future prosperity depends to a great degree on its relations with other countries and trading blocs.
Given the EU did this with a trading partner at a greater distance, its existence may be an indication of how far it would be prepared to go in the ultimate agreement with the UK.
In any trading relationship, each participant must offer something its trade partners want. The interdependent relationship with the EU is the largest of any in which the UK participates, accounting for approximately half its trade with the world. That does not need to be repudiated, but rather customised to honour the UK’s desire for greater independence in setting the rules of engagement with trading partners and shaping its domestic economy and social standards.
Given the critically short time available for negotiation, it is helpful to have a model, either to follow or to modify. CETA does not answer all questions nor go far enough to satisfy all the needs of either the UK or the EU. But it does provide a framework negotiators can adopt to build both the process and product on a tested foundation.
For example, notable in CETA is the elimination of tariffs on almost all goods. Given the EU did this with a trading partner at a greater distance, its existence may be an indication of how far it would be prepared to go in the ultimate agreement with the UK. The UK could regain one of the main benefits of its previous membership of the EU trading zone.
But goods are only part of the trade picture. In recent decades, trade among developed nations has swung towards services. While manufactured goods remain important, services are an increasingly significant part of UK-EU trade.
CETA offers possible guidance in both general and specific areas related to services. The UK can take the lead in many such areas; for example in financial services, which are the lifeblood of the City and also central to Europe’s financial sector.
In January, Boris Johnson presented a list of areas to be dealt with in “a suite of agreements, of which the main elements would be a comprehensive free trade agreement covering substantially all trade”. Notably absent from coverage of that address was public procurement, which forms part of many modern trade agreements. Instead, Johnson included it in his list of areas where he suggested that cooperation agreements would obviate the need for international treaties or shared institutions.
Cooperation agreements can be effective in areas such as immigration and the environment. But public procurement has a significant place in economic and social policy. For example, governments play a major role in procurement for social housing and airport maintenance. In 2015, public procurement, which involves both goods and services, accounted for an estimated £260bn in the UK and £1.5trn across the EU, according to the Institute of Government.
A modern trade agreement, despite all its distinct parts, is a single organism in which every part relates, directly or indirectly, to every other part
Trade agreements create a two-way street. They establish access to domestic markets, but create opportunity in external ones. A carefully crafted procurement chapter can work to the benefit of UK goods and service providers. If the smaller partner – here the UK – has access to EU public markets, the benefits can greatly outweigh the risks of allowing the EU reciprocal access. There is no contradiction with Johnson’s pledge to maintain high standards in this sector.
It is often said in trade negotiations that nothing is agreed until everything is agreed. For good reason: should subject matter be finalised indiscrete bundles, unresolved areas might create a need for adjustment in settled areas. Equally, sections that are signed off could hamper efforts to negotiate freely in areas still unresolved.
A modern trade agreement, despite all its parts, is a single organism in which every part relates, directly or indirectly, to every other part. Although some aspects may be agreed on a tacit understanding, an incomplete agreement contains neither binding terms nor recourse in the case of “violations” of the “understanding”.
The need to complete the process as envisaged presents a serious timing challenge to the UK. The parties can opt to extend negotiations up to two years beyond December 2020, but only if they decide to do so by 30 June, four months after the onset of negotiations.
To establish priorities and measure progress, the UK may wish to establish a conceptual matrix for negotiations.
Johnson has indicated an unwillingness to allow negotiations to go beyond the end of 2020, and more recently refusal by the EU to agree on a Canada-style agreement by June would stop the whole process. Nevertheless, should talks proceed as originally envisaged, they might need to continue, if delayed by a few issues that cannot be resolved in the allocated time.
The UK government needs to be fully cognisant of the implications of following either the short route or the longer one, and be prepared to act on that knowledge by the critical decision date. Realism and pragmatism are the essential ingredients.
To establish priorities and measure progress, the UK may wish to establish a conceptual matrix for negotiations. This could serve as a three-dimensional scaffolding showing the interaction of variables at play – eg, must-haves vs desirable outcomes; long-term vs short-term benefits; the shape of dispute resolution (eg sector by sector vs comprehensive). This would help to identify those provisions that can be built on existing models and those that require pioneering work.
The route ahead is short and eventful, but it can be navigated with vision and perseverance. CETA demonstrates it is possible, and the lessons learned in its seven-year development can serve the UK well as a model.
Read CETA, Brexit and Beyond by James A Ogilvy here.
This article first appeared in the April 2020 issue of CA magazine.