The Canadians have just walked out of trade talks with the EU after seven frustrating years of negotiations. Chrystia Freeland, the international trade minister, said, “It’s become evident … that the EU isn’t capable now to have an international treaty … even with a country so nice, with a lot of patience, like Canada.” Many other frustrated countries would like to have free trade with the EU, including those who have now jumped at the chance of at least having an agreement with the UK. It may help to explain some background.
The Treaty of Rome determined that the Common Market would be a customs union (CU), not simply a free trade area (FTA). This has major implications for the UK: it costs us proportionately more than other EU countries, requires that we surrender control to an alien legal system and prevents us agreeing independent trade deals with non-members, including historical partners. To continue membership of the Single Market within the CU arrangement would scarcely be to leave the EU at all. An FTA relationship would be desirable but also has some disadvantages.
A customs union is a free trade agreement plus a Common External Tariff (CET). Usually these are set up with a political, rather than just an economic, goal so most trading agreements today are FTAs, not CUs; they typically involve small economies (like the Caribbean Community) hoping to leverage their collective power.
Without a complex and expensive tracking system, negating the point of the CU itself, tariffs on external goods need to be collected into a central pot. This is because the port of entry may not be in the same country as the final customer. The UK is at a disadvantage because it has easily the highest proportion of its trade with countries outside the Union, so we pay more. A CU is discriminatory and protectionist because the best or cheapest supplier might be from outside the CU; we pay more again.
An example is sugar, where European beet trumps Caribbean cane to the disadvantage of UK consumers (and the British company Tate & Lyle). The preference for Euro-beet is pretty unfair on Caribbean growers too – so much for the EU’s benign and helpful presence in the world (see also Shorties )
In an FTA external tariffs may vary so that “Rules of Origin” are required to ensure one nations’ tariffs are not undercut by routing via another with lower entry costs. This introduces administrative overheads.
All trade agreements need a way of clarifying issues and arbitrating disputes. The EU has the European Court of Justice (ECJ, which has also now acquired the human rights jurisdiction). A particular problem here is that the ECJ is charged with being activist in furthering the political goals of the Union, not just narrowly interpreting the law. Further, the ECJ is built on rules alien to our Common Law (Law) and one judge is appointed from each country so swamping our historic mode of justice, as most other European countries base their legal systems on Roman Law. It is wishful thinking to believe that all 28 legal systems are equally fair (this also affects the European Arrest Warrant).
Norway, Iceland and Liechtenstein, the European Economic Area (EEA) nations, have a FTA relationship with the EU so can, and do, have independent trade policies. Switzerland has its own bilateral FTA with the EU and also with the EEA, the pair make up the European Free Trade Area (EFTA). Turkey is in the customs union without being in the EU so is bound by the restrictions this requires. Most other European countries have FTAs with the EU. The default without an explicit trading treaty is the World Trade Organisation (WTO); average tariff rates are low (about 3%) but quite high on some goods (cars about 10%, beef about 17%).
The Canadian deal (CETA) was scuppered by Wallonia, a district of 3.5 million people whose farmers want protection against Canada’s agricultural products. Belgium cannot agree unless its Flemish, Walloon and other regional parliaments accept CETA (Scotland, so far, does not have a similar veto). Although the EU is scrambling to get negotiations back on track, what are the chances of all the EU’s entitled parliaments agreeing a Brexit deal? We have an oven-ready FTA with Canada, after all, we’ve approved it already!