Sunday, 21 August 2016

No the EEA is not a good option

One of the most common statement post BrExit is that if we are out of the EU we should just join the EEA. Superficially it seems to keep us in the single market with the economic benefits whilst acknowledging the results of the referendum. However this is a panglossian view of the EEA which is a really rather terrible option (if indeed it is an option). Norway has a awful deal with the  EU which is hidden by a significant amount of oil money.

One of the reasons why the EEA deal seems superficially appealing it the appearance of staying in the "single market". However the term "single market" is somewhat abused when most people talk about the EEA. Technically Norway (and other EEA countries) are heavily qualified members of the single market. Specifically there are exceptions for agriculture and food and constraints around manufactured products with components sourced externally. Given this an EEA membership would come with a very heavy price for the UK.

Economic costs for the UK
The most obvious impact would be on food and farming. Being outside the EU would result in the lose CAP subsidies and tariffs when exporting to the EU. Norway has responded to this by in two ways, massive agricultural subsides (thanks to their oil money) and their own tariffs on imported food. The results in Norwegian farmers being looked after but expensive food for consumers.

The UK government would not have the luxury of a large oil revenues and a sovereign wealth fund. The savings from leaving the EU - of which there won't be any anyway- have already been promise elsewhere. Consequentially the UK government would need to decide whether to protect farmers (resulting in likely higher consumer prices) or whether to further punish farmers by allowing  competition. 

Meanwhile if Norway is any guide, the EU is likely to cherry pick the agricultural and processed food jobs and industries they would put trade sanctions on. For example, Norway are currently able to export their salmon but not their processed salmon. This means that whilst Norway continues to export Salmon (something it can produce more efficiently than the rest of Europe) the more valuable and mobile Salmon processing jobs having largely been moved out of Norway. A similar process would no doubt happen with our agricultural jobs and industries.

The EEA also would have a significant impact on our financial service industry. Currently EEA countries have limited passporting rights to the rest of the EU because the relevant legislation is not fully harmonised. In theory the UK could perhaps overcome some of these challengers with enough political will. However, given the mobility of this industry (and the potential upside to various European countries of building up their domestic financial services industries), its difficult to see there being the necessary political will. Losing a section of our financial services industry that currently services the EU market would have a significant impact on our tax revenues and therefore reduce public services.

Another side effect of this would be that UK manufactured goods would be subject to "rules of origination". "Rules of Origination" are common with most trade deals where countries don't adhere to the same external tariff rules. In summary, imagine a hypothetical situation where country A can sell country B widgets for with a tariff of 10% on each widgets. However country C has a free trade agreement for widgets with both Countries A and B. In theory a business in country C could circumvent such tariffs and make itself a tidy profit. Rules of origination are there to prevent this.

UK manufacturing exporter would need to provide significant documentation to demonstrate that there were no third party components subject to lower duties. Whilst this no doubt would be a minor headache for large manufacturers it would be prohibitive red tape for smaller businesses who would effectively be shut out of EU markets due to additional regulation. 

Good Friday Agreement
However probably the biggest impact of this would be in Northern Ireland. Once some good are subject customs controls then a customs border is required to monitor all exports. Norway (for example) has custom controls with all its neighbours and there is no "blue channel" option when arriving at an airport from an EU country. Invariably if the UK opted for an EEA arrangement there would likewise need to be a customs barriers between the UK and the EU.

In Northern Ireland, this would mean a customs barriers between Northern Ireland and the Republic (contradicting the promises of Theresa May). Legally there is no possible way around this whilst Northern Ireland is a full part of the UK and the UK is out of the EU. Customs controls would make the movement of good across the border harder and would have an obviously economically cost for the region. However perhaps of more concern is the impact on the peace process. Would new custom controls potentially drive republicans back to a violent struggle. Its difficult to see how Brexit would end well for this region!

Given EEA countries are outside the customs barrier, the only way that Norway can truly be considered part of the "single market" is through regulatory harmonization and adhering to EU rules such as freedom of movement. The advantage of this for Norway is that their exports are not subject to paperwork (and delays) to demonstrate they are compliant with EU standards.

To achieve this level of harmonisation Norway has to include relevant EU legislation into its domestic law (what remainers have termed "fax democracy"). Any issues arising are then escalated to the EFTA courts. The EFTA courts adjudications are not always legally binding on EEA countries (as liberal leavers often like to point out).

However this misses a key point, should Norway fail to include a recommendation from an EFTA court into its law it could easily find itself non compliant with single market rules. As a result it would lose the full access it has to the single market. Norway's parliament therefore tends to pass any such regulations into law unanimously. [Indeed the fact that "Liberal leavers" think that EEA membership gives Norway significant latitude shows that monomaniacal zeal for their cause which is closer to that of creationists than serious open minded thinkers] 

For Norway this lack of influence is not such a huge burden. Norway is a small country that would in any case have a limited voice inside the EU. For the UK. this would be a much more significant loss as we would lose any ability to shape the rules out of Brussels. Indeed given the UK voted to leave the EU to "take back control" and "controlling immigration", it's difficult to see how this situation would be acceptable.

Is it feasible
Even if a significant majority could be persuaded that EEA membership was an "improvement" on our current relationship, its difficult to see how this any arrangement would be stable for long. When the EU next demands new regulations be implemented in our law, will the politicians and tabloids who campaigned for the UK to leave be happy to see this implemented. It is not difficult to see how such as relationship could break down quickly! Based on the recent past, other EU countries could easily conclude that (unlike Norway) the UK will not be a reliable EEA partner and will veto our perspective EEA application.

Even if all EU member states could be persuaded this was an appropriate path, would other EEA countries be convinced? At the moment this seems unlikely. Norway has indicated that it would potentially block such a deal. This is because the only influence Norway has on EEA regulations comes from being the largest country in the EEA. Consequently the EFTA courts which evaluate EU legislation are heavily influenced by Norway. If the UK joined the EEA this dynamic would change. The EEA bodies would become more dominated by the UK interests and the judgements would reflect British legal concerns. The net effect is that Norway would be marginalised in an organisation where it sees itself as the dominant player!  

The EEA upsides
The big upside that "Liberal Leavers" see in the EEA option (assuming it can be achieved) is the ability to make trade deals with the rest of the world independently of the EU. No doubt there are a few areas where this would be beneficial. However, any deal that requires another country to open up its market would almost certainly required a "quid pro quo". Given that many UK industries are likely to be suffering from the lose of the single market, its difficult to see how removing tariffs and further punishing domestic producers would be politically viable. 

In any case significant trade deals are likely to involve changes to domestic legislation that may not be politically popular. Perhaps a good example of this again comes from Norway. Recently they started discussion on a prospective trade deal with India, however, reports quickly surfaced in the Norwegian media about a proposed deal. It was alleged that the proposed deal involved India opening its salmon market (for high quality Norwegian Salmon) in exchange for easier visa access for Indian IT consultants. In theory the UK could do similar deals with India and China. Although given the anti-immigrant sentiment that drove a lot of the Brexit vote, its difficult to see how this would be popular. 

Perhaps the biggest EEA upside is simply all the other BrExit options are either less feasible or a lot worse. A "Canada style" agreement for example would involve a completely new free trade agreement and almost certainly could not be negotiated in two years. Any such agreement would probably involve more compromises that would be on the EU's terms.

Given all of this the Norway options should not be dismissed as EU-lite. It is far far worse than that. The marginal benefits (of WTO membership and the ability to strike trade deals independently of the EU) would be offset by customs barriers, additional regulations and loss of full single market access (particularly for food and agriculture). 

In any case it probably is not politically feasible. Domestically its unlikely to abate the anti-EU rabble. Externally it could easily be vetoed by any number of EU countries and Norway. Its a bad option, indeed its only merit it is less economically disastrous than any equally feasible BrExit option! Really the only good EU option is staying in. Remainers need to start saying this confidently. Pretending that we can do workable compromises is dishonest only emboldens leavers who having been sold an impossible dream of being rich through trade and "taking back control" who collectively will never be happy anyway.