After recent declarations by Theresa May and David Davis, the UK’s conservative government seems to be convinced that a “hard” Brexit is the best option for the country. Discussions with the EU over the UK’s participation in the single market seem to have been halted and the Norwegian European model rejected. This is terrible news for UK trade and especially for the services sector which is the UK’s most important trading sector, with a trade surplus equating to 5% of the national income (about $138 billion).
The EU single market is an “upgraded” economic free trade territory created in 1957 during the Treaty of Rome. This means it allows “the abolition, as between Member States, of obstacles to freedom of movement for goods, persons, services and capital”. In addition, not only does it get rid of tariff barriers like most free trade agreements but it also targets non-tariff barriers which can be obstacles for the services sector of the economy.
After Brexit, the UK had, and still has for the next few weeks, a tough decision to make. Either follow through with the stance taken by the “Leave” campaign and confront the EU with a “hard”, no deal Brexit, or follow a more moderate way, as Norway.
Norway is not a member of the European Union. It is nonetheless part of the European Economic Area (EEA) and is a member of the European Free Trade Association (EFTA), just like Iceland, Liechtenstein and Switzerland. Norway has 80% of its exports and 65% of its imports with EU member states. Their participation in the EEA and the EFTA is thus perfectly understandable as their economy is very dependent on trade with the EU. The same can be said of UK trade. Indeed, the UK has 49% of its exports of goods and services to EU countries, with about 18% of those exports going to France and Germany.
A post Brexit agreement in which no single market deal is reached would mean an absolute loss of economic stability for the UK considering the importance of their EU trading partners. The only alternative to staying in the single market would be establishing new free trade deals with each partner country. That, of course, is a lengthy and daunting task.
The UK’s services sector has already been showing low growth over the last few months in reaction to the uncertainty of trade deals with the EU. Such concerns are legitimate. The individual renegotiation of treaties such as the CETA or the EU-Korea trade deals will be near impossible for the UK to replicate once it has become isolated. Indeed, the EU membership gave the UK a preferential position when it came to services trade which will be lost after Brexit. The membership of the EFTA would at least allow the UK to keep trading with its biggest partners, EU member states.
The main reason for the UK government’s reluctance at signing a Norway style deal with the EU is that it goes against many demands made by the victorious “Leave” campaign. The EFTA membership for the UK is seen as a denial of the democratic vote. And rightfully so. Access to the single market and the EFTA membership come at a price. For instance, the “Leave” campaign’s wish to take back control of immigration in the UK, will be disrupted by the “freedom of movement of persons” that is included in EFTA membership. Moreover, EFTA members are bound by economic and trade rules and regulations which they have no way of controlling, as they are not members of the EU.
Although EFTA membership is a lesser deal for the UK than the EU membership, it seems to be their only option after Brexit. Will the 2.5 million people who have jobs that are directly linked to the UK’s trade with the EU have enough patience to wait for new individual trade deals? Where will the billions of dollars brought in by UK trade in services come from if there is no UK-EU trade deal? These are the questions Theresa May and her government are now facing. Indeed, they have been elected to implement a tough version of Brexit, for the UK.
The Norway model will provide economic stability and a real long term solution to the current havoc in which Brexit has plunged the UK. The services sector which is essential to the UK economy needs the government to choose the Norway model in order to keep prospering, creating jobs and simply to stay competitive. The next few weeks will be decisive for the UK economy. The example of the services sector shows us that May has to make a tough but necessary decision and stop saying no way to Norway.