Why 'Cherry Picking' is a bad description of the UK's aims in the Brexit negotiations.

Derrick Wyatt provides an account of his talk given at the European University Institute on 4 November 2016 at a Workshop on Brexit.


Time to read

6 Minutes

For the sake of argument I assume that the UK’s aims in the Brexit trade negotiations will be to achieve an ambitious and comprehensive free trade agreement. But the expression 'cherry-picking' has entered the discourse around the Brexit negotiations. It implies that market access rights associated with EU membership come as a package, or not at all. There is perhaps a suggestion of an underlying ethical constraint - it would be wrong for the EU to bargain away certain market access rights without ensuring that they are linked to others, in particular, to the free movement of persons.

But is there a hard and fast distinction between market access rights for EU members, and market access rights for third countries and their market operators? My answer is unequivocally no. The distinctions are fluid, and, in recent years, market access rights for EU members, and their businesses, have come to overlap with market access rights for third countries, and their businesses. 

To establish this proposition, I shall refer to some EU single market rights, and compare them with market access rights under the EU-Canada Comprehensive Economic and Trade Agreement (CETA). The point of referring to CETA is not to argue that the CETA regime has the same scope as the single market, but to show that elements of single market freedoms are the subject of trade negotiations between the EU and third countries. To reinforce the point that market access rights available to EU members may overlap with those extended to third country economic operators, I refer to market access rights granted unilaterally to third country operators subject solely to the condition that they comply with EU standards.

The market freedom which usually receives first mention is the free movement of goods. Elements of this market freedom are clearly divisible from single market membership, in that they feature in trade agreements between the EU and third countries. For example CETA provides for tariff free trade in most products, and contains provisions to address technical barriers to trade, which build on WTO rules. It will be noted that in any future trade agreement between the UK and the EU the starting point for the parties would be total convergence on product standards and specifications. An agreement between the UK and the EU which provided for across the board tariff free trade, combined with a national treatment guarantee, would in practice give the UK market access to the EU equivalent to single market access, as far as originating products are concerned. This is the same free trade in goods which exists between the three EFTA countries and the EU within the framework of the EEA. It is the same free trade in goods to which the EU is committed under numerous trade agreements, and in only the EEA agreement is there provision for the free movement of persons, subject to unilateral safeguards.

The free movement of capital within the EU is valuable for UK businesses and for EU based investors in UK businesses. The free movement of capital includes the right of an economic operator based in one Member State to acquire a controlling stake in a business based in another. This latter right is certainly a single market feature which the EU is willing to include in free trade agreements with third countries. CETA contains provisions on equal treatment of investors and on investment protection. Some options to block foreign acquisitions are maintained. The UK might itself wish to reserve such a power in a future trade agreement with the EU. The Prime Minister recently referred to the possibility of the UK government wishing to block unwelcome foreign take-overs of UK companies.

The EU has made considerable advances in the mutual recognition of qualifications, but in only a handful of cases has this led to EU harmonisation of the content of qualifications (the list includes doctors, nurses and midwives). Lawyers get a uniquely favourable deal, in being entitled to practise across Europe on the basis of their home-country title, and then to use that practical experience to acquire a host state legal qualification. And there is some general scope for cross border service provision on the basis of home-country title. But, for the most part, EU rules provide a framework for assessing the practical equivalence of qualifications, and confine mutual recognition to cases where that practical equivalence is established. The legal basis for EU rules of this kind is the right of free movement of employed and self-employed persons. 

The EU has shown itself to be willing to negotiate mechanisms for establishing equivalence of professional qualifications as part of free trade agreements with third countries. CETA provides a framework for mutual recognition of qualifications in regulated professions. It is based on the same principles as the EU’s equivalency rules, though admittedly it does not provide the special treatment for lawyers accorded to nationals of Member States! In any future negotiations between the UK and the EU, a similar framework could be agreed, and a good starting point for the workability in practice of such a framework would be the fact that a number of mutually recognised professional qualifications in regulated professions already exist.

Turning to the service sector, it is worthy of remark that CETA is the first third country agreement in which the EU has agreed to open market access on the basis of a negative list, meaning that all service markets are liberalised except those explicitly excluded. This would provide a promising starting point for negotiations between the UK and the EU on freedom to provide services. Once again, there is already a high degree of convergence of trade relevant national regulations in the UK and the rest of the EU, by virtue of the very fact that the UK is currently a member of the EU.

In any discussions of the likely aims of the UK in Brexit trade negotiations, the importance of “passporting” of financial operators is a recurring theme. This is not surprising. A financial services provider such as a bank or insurance company, capitalised and regulated in an EEA country in accordance with EU and EEA wide rules, can provide its services in any other EEA country directly or through a branch and without setting up a further capitalised and regulated subsidiary. 

Brexit would on the face of it see UK financial services providers unable to rely on their UK capitalised and regulated corporate bases but would have to set up a further capitalised subsidiary within an EU country, in order to provide services directly or through branches in the whole EU.

However, some recent and still evolving EU regimes could mitigate this, since they provide for recognition of third country regulatory regimes and access for third country financial operators. 

For example, UK banks otherwise losing “passporting rights” after Brexit might find some mitigation under the new rules in MiFID II and MiFIR (the Markets in Financial Instruments Directive 2014/65/EU, and Regulation 600/2014).  The mitigation would result from highly likely recognition of the equivalence of the UK’s regulatory regime with EU regulatory standards (since the UK regime is clearly currently equivalent, it would be punitive to deny this equivalence after Brexit). 

MiFID II / MiFIR rules will allow third country banks and asset managers to passport wholesale investment services within the EU. Retail services would still face country by country authorisation. UK hedgefund managers would also expect to benefit from passporting for third country operators under AIFMD, the Alternative Investment Fund Managers Directive (2011/61/EU) after authorisation by the European Securities Marketing Authority (ESMA).

Developments like those I have just mentioned indicate that “passporting” rights for financial service providers cannot be said to be tied to the status of EU/EEA membership, or conditioned on the free movement of persons, or confined to financial operators with some special link to the single market. Some “passporting” for third country financial operators, potentially including UK businesses when the UK withdraws from the EU, will be available as the result of unilateral EU measures. Some further “passporting” for UK financial operators could in principle figure in a trade agreement between the UK and the EU (say, for example, passporting of wholesale banking services), without involving any great departure from current EU practice. The starting point for discussion would be the known reality that the UK fully complies with all EU financial regulatory requirements.

The future trade relationship between the UK and the EU should have the clear aim of maintaining the economic prosperity and growth prospects of all countries concerned. That does not necessarily mean that the economic arrangements of the future will be identical to the status quo. There is a bargain to be struck. But it is a bargain which should be based on rational calculation, rather than on the mistaken assertion that the bundle of market access rights which together make up what we call the single market is indivisible, or that aiming for extensive market access rights can usefully be described as “cherry-picking”.

The core mission of the EU27 is overwhelmingly a political mission, as is demonstrated by the euro, by Schengen, and by the very concept of Citizenship of the Union. The political vocation of the EU is achieved, rather than undermined, when it makes ambitious trade deals with third countries which ensure the prosperity of its peoples.  Making a bad and punitive trade deal with the UK would weaken the EU and the UK both economically and politically. Only a serious failure of self-confidence would deliver such an outcome, and there is still plenty of time for EU institutions and national governments to make a cool assessment of where their real interests lie. 

Found within

Brexit: Trade Implications