UK on track to price itself out of EU with ‘Canada-minus’ deal

The European Union has long complained that the UK doesn’t know what kind of post-Brexit relationship it wants with its biggest trade partner.

UK prime minister Boris Johnson has answered the question in a way which confirms the worst fears of those – such as Ireland – who want to see a close future trading relationship with the UK.

Johnson’s advisers have told EU officials that the UK will be seeking a Canada-style free-trade deal, out of the customs union and the single market, and without being bound by ‘level playing field’ rules.

Johnson is, apparently, willing to pay the price of what might be termed ‘Canada-minus’; he accepts that this ends any ambition for ‘frictionless’ trade for goods.

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Johnson’s shift sets the UK on a path to be regulatory competitor – and possibly a US rule-taker. How will the EU respond? A UK trade deal now looks like a defensive game, and not just in supposedly protectionist Paris and Berlin.

Level playing field

Because the UK’s traditional economic allies in Europe, the Dutch, the Nordics – and Ireland – are more exposed to the big UK economy next door, theirs will be among the strongest voices insisting on the UK following level-playing-field rules. We saw as much in in the withdrawal agreement, which gives us a good guide to how the EU will defend its interests.

But it’s precisely those areas – particularly labour and environmental standards, and the regulation of new technology – where Johnson is most keen to be free to diverge from EU rules. A change of government in the UK wouldn’t necessarily remove the problem; Labour leader Jeremy Corbyn is just as keen to escape the imagined constraints of competition and state-aid rules – on which the EU above all insists.

The EU will probably demand closer UK alignment to its rules than with any other major trade partner. If the UK can’t accept accept this, then we should expect to see the EU offer only limited market access – probably including tariffs on some goods, as a way of increasing the EU’s leverage against UK regulatory undercutting. The EU27’s definition of ‘Canada minus’ is very different to what most Brexiteers understand, and the reckoning could be brutal.

The UK will still want a frictionless border between the North and the Republic, if only because it's part of the price of both a US and an EU trade deal

Is this new British policy set in stone? It has not been discussed in cabinet, but the direction of travel is clear and apparently unchallenged within government. It is partly driven by sovereigntist instincts and to make any return to what Johnson calls the EU “regulatory orbit” impossible.

But Johnson’s government has also made a trade deal with the US a symbol of political independence and virility; presented both as a prize which justifies Brexit and as a demonstration that the UK doesn’t need the EU.

Ahead of an election, this policy is mainly about a manifesto commitment. Downing Street wants to avoid any detailed discussion now of what a US trade deal might involve, fearing that there are only electoral downsides in talking about US food standards or drug pricing in the National Health Service.

If Johnson wins an election, the government would still need negotiating mandates for each trade deal, subject to parliamentary scrutiny. Because of those political constraints, Johnson could miss out on the supposed prize of a deep US trade deal, while also severely limiting the UK’s terms of trade with the EU. Since a Westminster election is likely this year, the choice could come early in 2020.

Rebranded backstop

What would this mean for Ireland? The UK will still want a frictionless border between the North and the Republic, if only because it’s part of the price of both a US and an EU trade deal. So a ‘Canada minus’ deal probably only happens alongside a Northern Ireland-only backstop, which a parliamentary majority might allow Johnson push through. That might even include a Northern Ireland-only referendum on a rebranded backstop.

Economically, we should expect to see trade flows within the EU shift to avoid the UK. No one will want UK firms in their supply chains. We can already see this happening ahead of a possible no-deal exit on October 31st. There should be gains for some sectors of the Irish economy, but serious challenges for goods manufacture and especially for agriculture.

Businesses with significant UK exposure should already be thinking about how to engage the British decision-makers, to shape the future trade deal debate.

But these challenges could dominate the agenda for next government here. The UK, under Johnson, is on a track to pricing itself out of much of the EU market. How ready are we to take advantage?

Paul McGrade works for Lexington Communications. Previously, he worked at the UK foreign office, the European Commission and the UK cabinet office as an adviser on EU treaty negotiations