After watching successive debates about the EU, each more mundane than the last, you will have heard the ‘leave’ side talk about life after Brexit, and the UK’s position ‘out’ of the EU; but what would ‘out’ really mean? There are a series of alternative relationships that the UK could forge with the EU, and I will explore the following: the Norwegian, the Swiss and the ‘clean break’ models. Each model offers potential benefits, negatives, and would potentially have huge implications on the UK economically.
It is irrefutable that leaving the EU would cause a significant economic dislocation for at least the first two years post-Brexit. Both the UK and EU would have to negotiate on what trade negotiation the UK would have. There is one model which is referenced more than others: the critically acclaimed ‘Norwegian Model’. Under the Norwegian model, the UK would join and gain access to the EEA (European Economic Area) otherwise known as the ‘common market’ thus being able to trade with the other 27 member states freely. This scenario would not be all fun and games. The UK would still be subject the EU’s rules and regulations without having any say in shaping them. More significantly, the UK would still be subject to the founding principles of the EU, and more specifically, the two most divisive of all: the freedom of movement of labour and people. Although the UK would obtain some more economic flexibility, it would still be stuck to the rigidities of EU regulations
The ‘Swiss Model’ is predicated on a series of bilateral agreements developed over the past 30 years, as opposed to direct access to the European Economic Area (EEA). Switzerland adheres to some basic EU principles, like the free movement of labour and people. Most significantly, the Swiss model does cover financial services, but Swiss financial firms are obliged to follow licensing and other regulatory barriers that British firms do not currently face. Adoption of the Swiss model could be detrimental to the British economy, as in 2011, the financial services sector contributed 9.6% to the British economy, and the industry as a whole contributed £1 to every £8.62 the Exchequer collected, paying a total of 13% of corporation tax. In short, the industry is not only important; but it is also integral to the economic vibrancy of the UK. Although the UK does have a trade deficit with goods to the EU, it has a surplus trade in services vis-à-vis the EU, meaning that the UK exports more financial services to the EU than it currently imports, indicating that the Swiss model would be incompatible with the UK’s economic needs. The UK would also have to adhere to the principle of ‘regulatory equivalence,’ meaning that the UK could not allow its regulatory regime to differ from the EU’s, while not having a say in forming the regulations. Therefore, it is not hard to imagine a post-Brexit scenario where the UK adopts the Swiss Model, and it has to adhere to regulations which could be detrimental to the UK’s interests while not having a say to alter them to suit the UK’s needs.
Clean Break/World Trade Organisation Model
A model which is heavily purported by the Brexiteers is the ‘clean break’ or World Trade Organisation (WTO) model, which other non-EU states who do not currently have a trade deal with the EU follow. Under the WTO’s ‘Most Favoured Nation’ principle, states are forbidden to arbitrarily implement punitive tariff barriers against another country’s exports, meaning that in a post-Brexit scenario, the EU could not hike up import taxes higher than they are in other nations. In short, the EU could not spitefully punish the UK by implementing extraordinarily high tariffs on British goods and services. This aside, the EU’s common external tariff on certain goods like cars is 10%. That would mean a tariff of 10% would be added onto the price of every single one of the 688,800 cars the UK exports to the EU. Evidently, there are some frailties with the clean break/WTO model. Although it gives the UK room for regulatory manoeuvre, it places unnecessary constraints on British commercial activity, which would inevitably damage business.