The European Union is all about free trade. The ability to easily export and import produce across borders has been central to it ever since the days of the European Coal and Steel Community. And while out to extend its continental reach, it’s also created many different trade deals with nations outside the EU. However, as well as benefits, each one comes with unique drawbacks. “The main differentiation between them all is different levels of economic integration,” says Agelos Delis, an economics professor at Aston University.
Even though each deal comes with special caveats and rules, every nation desiring to trade with the EU must always do one thing. “A country wanting free trade with the EU must have controls [on its] borders because it may have different trade agreements with other countries,” explains Delis. He points to Norway, which is a member of the European Economic Area (EEA) and not the EU. As such, it’s able to independently strike trade agreements with other non-EU nations and that’s where it becomes tricky. “For example, assume Norway has a free trade agreement with the United States,” Delis explains. “If there are no controls on the border then US exports to Norway can enter an EU country with zero tariffs and then there’s no control over them entering the whole EU.”
As Brexit looms, let’s take a deeper look at the three different ways non-EU countries have managed to craft trade deals with the EU – customs unions, the EEA and bespoke trade deals.
It’s easy to equate the European Union Customs Union (EUCU) with the EU as all member states are part of the customs union. However, not all in the EUCU are EU nations – including Monaco and some UK territories like the Isle of Man. To make it even more confusing, the EU has created customs unions with Andorra, San Marino and Turkey that aren’t part of the EUCU but exist through different bilateral agreements. However, what all these nations have in common is – mostly – tariff-free trade with one another. But there are sacrifices to be made.
For instance, the EU decides all their trade deals and they must impose a common external tariff on imports from outside the customs union, meaning exports to the customs union are the same no matter what country they enter from. “Countries don’t have independent trade policies so avoid the common external tariff,” Delis explains. In other words, joining the customs union means giving up some of your agency to strike trade deals and put up tariffs on your own. “So the more integrated you become, the more you lose sovereignty,” Delis continues.
It may sound like a rotten deal to some but constantly checking exports to fit the EU’s criteria can be time-consuming and costly, especially if you regularly trade with the EU. So with the EU picking your trade agreements from the ground up, your exports are guaranteed to be compliant and free trade-worthy without needing taxation or tight border controls. “If you’re [not a] member of the customs union your goods are going to be stopped at the border and this adds additional costs,” Delis summarises.
But for non-EU members of the EUCU there are a couple more caveats at play. As they’re not in the single market they don’t have access to all of the EU’s four freedoms – the free movement of people, goods, services and capital between borders. “In the single market you agree that several rules and regulations about goods are the same across member countries,” Delis says. And there are yet more footnotes needed for the EU’s bilaterally agreed customs unions, with Turkey excluding essential economic areas like agriculture, coal and steel from tariff-free policies, Andorra only including industrial products and processed agricultural products and San Marino exempting goods listed in the European Coal and Steel Community treaty. As a result, it seems there’s no definitive way a customs union agreement should look when a country’s outside the single market.
European Economic Area
Another way to dodge EU tariffs is by joining the EEA, which three countries – Iceland, Liechtenstein and Norway – have. Instead of ceding power to forge trade deals like with the EUCU, these states must enforce the EU’s four freedoms, put money into the Union and prove exported goods are made largely within the EEA. The latter’s otherwise known as rules of origin, which can put brakes and cost on exports with a need to check and verify where everything’s made. “[If] your goods have to cross many times between your country and the EU, you’re in trouble,” Delis says. But once that’s all taken care of, the gateway to the single market lifts. “They’re not members of the single market per se but can use it,” Delis says.
EEA members must also obey EU laws – including health and safety, environmental and social protections – but can’t vote over them. However, they do get some wriggle room in exchange for being outside the law-making process and can opt out of certain rules. For example, competition regulations over agriculture and fisheries aren’t enforced by Norway. “Norway didn’t want to go to the full single market,” Delis says. “So it’s outside the EU common agricultural and fisheries policies but still has to make contributions to the EU.” So a lot of freedom and benefits but no ability to infuence laws and regulations like EU members can.
Bespoke trade deals
Forget the Customs Union or EEA – the EU can drum up customised trade agreement’s with any country it fancies without a pre-existing model, with recent examples including the likes of Japan and Mexico. Although, this is perhaps the most difficult kind of deal to reach.
Take Canada for instance, which in 2016 signed the Comprehensive Economic and Trade Agreement (CETA), specifically outlining tariffless commerce between Canada and the Union. “It’s a shallow way of economic integration because they’re eliminating tariffs only,” Delis says. “And there are some agreements about services, copyrights and intellectual property but again, these are not going very deep.” Despite only needing surface-level integration CETA will see Canada save £529m in import tax while the EU will enjoy reduced tariffs for 9,000 Canuck products as a result of free trade.
It still means Canada must implement border checks and ensure exported goods meet EU standards but doesn’t restrict the nation’s trade deals or integrate EU law. However, CETA has taken ten years to ratify and is still to be implemented.
Canada’s far from the only nation looking for a trade deal. Talks over the proposed US-EU Transatlantic Trade and Investment Partnership kicked off in 2014 under US president Barack Obama but has met difficulty after difficulty, including president Donald Trump halting the agreement in 2018. And if it sees the light of day, it’d require approval by all EU member states, the majority of the European Parliament, both houses of the US Congress as well as the US president.
At the time of writing, UK members of parliament are still trying to figure out what they actually want out of Brexit. However, as this rundown shows they can never expect to have their cake and eat it. “There are always trade-offs, there’s no win-win,” Delis warns. “The more independence and sovereignty you want to design your own trade policy, the less business you’ll have with the EU because there will be rules.” It’s certainly a line the EU’s repeated loud and clear for Britain. But whether negotiators can make a breakthrough in the eleventh hour remains to be seen – and Delis isn’t confident about the final deal in any case. “From an economic point of view it’s very difficult to think of scenarios where [Britain] can gain from Brexit,” he concludes.