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Britain Heads for Canada Plus Plus Plus Agreement with the EU: What Does it Mean?

Canada plus plus plus

Above: Official UK government photograph of the Chequers cabinet meeting.

Signs are mounting that the preferred future relationship the UK will seek with the European Union is a so-called Canada Plus Plus deal.

What is Canada Plus Plus Plus though?

According to reports, the UK cabinet have endorsed a proposal dubbed “Canada plus plus plus” by David Davis at meeting held at Chequers on Thursday, February 22. 

Owing to the UK and EU both deploying a series of red lines in Brexit negotiations, the path forward is becoming clear for the British.

"This only leaves a Canada-style free trade agreement in which the partner countries still have self-determination over their own external tariffs. Although the UK wants sovereignty over its external borders, a free trade agreement alone would not suffice," says Peter Dixon, an economist with Commerzbank.

"Trade would probably no longer be quite so free. We expect a 'Canada plus' agreement that would guarantee tariff-free trade in goods – although agricultural products would probably be excluded. In addition, services are likely to enjoy some degree of tariff-free access, although we do not expect financial services to be included," says Dixon.

The UK government has long been divided over the type of Brexit it wants to pursue thanks to long-held divisions on Europe held within the ruling Conservative party.

The divisions have in turn resulted in a muddled approach to negotiations with Europeans saying they simply don't know what the British want from Brexit.

The Government has acknowledged the time to put this uncertainty to bed has come and Theresa May took the step of locking her senior ministers in the Prime Minister's Chequers country retreat to thrash out a unified position.

Britain's red lines have long been clear:

  1. Freedom from the European Court of Justice.
  2. No more EU budget contributions.
  3. Immigration controls.
  4. The UK reclaims regulatory autonomy for its own economy and wants to regain control
    over trade agreements.

Type of Brexit deals on offer

"So long as these red lines persist, a number of the models that were previously discussed for the shape of future relations between the EU and the UK become obsolete," says Dixon. "Even relations such as those between the EU and Ukraine or Turkey would not be possible so long as these red lines persist."

Ukraine enjoys access to the EU's single market and in return Ukraine aligns its laws in relevant areas with EU legislation.

Turkey is in a customs union with the EU in which goods are traded duty-free but because of the common external tariffs for third countries, Turkey cannot autonomously determine its external tariffs.

"This only leaves a Canada-style free trade agreement in which the partner countries still have self-determination over their own external tariffs. Although the UK wants sovereignty over its external borders, a free trade agreement alone would not suffice," says Dixon.

 

"The Brits will Pay, and so too will the Germans"

Dixon says that even if this is a form of "soft" Brexit, such an agreement would put the UK and the rest of the EU in a worse position than they currently are in today.

Indeed, a leaked report ("EU Exit Analysis - Cross Whitehall Briefing") for the British government estimates that if a comprehensive free trade agreement were to be concluded with the EU, the post-Brexit UK economy would be 5% smaller over a period of 15 years compared to the alternative of staying in the EU.

"That said, such results are usually based on the expectation of negative trade effects. In reality, many factors play a role, such as future UK economic policies," says Dixon. "The UK government could increase the competitiveness of the UK economy via growth-enhancing policies and thus dampen the negative effect."

Notably - and this is a point analysts tend to gloss over - Commerzbank say the Brexit impact on the EU will be negative as well, "due on the one hand from the additional barriers to trade".

Furthermore, the EU budget will lose the second most important net contributor in the medium-term, resulting in a loss of €10bn to €12bn per year.

Various calls have been made for the EU budget of the (smaller) Union to be adjusted - in other words, cut back.

Amid France’s and Germany’s efforts to strengthen the EU, Dixon believes this remains a forlorn hope.

"Germany will probably have to bear a considerable part of the British burden. This will have a noticeable effect on the EU's next five-year financial framework from 2021 onwards," says Dixon.