Chapter 4: An isolated island

“There is a free trade zone stretching from Iceland to Turkey that all European nations have access to … after we vote to leave we will remain in this zone.”
Michael Gove, 2016

Thanks to the ‘red lines’ that the government imposed early on in the Brexit negotiations, the UK is now much further from the EU in trade terms than Vote Leave claimed it would be. To look at it through Gove’s quote, not only are we are not an EEA member like Iceland, we are not even in a customs union with the EU, meaning it is now harder for goods to move from the UK to the EU than it is from Turkey.

The level of distancing here is absurd for a country in the UK’s geographical location, bordering the Republic of Ireland and a stone’s throw from France. It is not a sustainable situation, and this is at the root of many of the controversies over meat, fish, and other time-sensitive fresh produce. Until now supply chains have been integrated, fishing waters have been shared, transport across borders has been easy, and much else besides.

A spectrum of relationships

Beyond thinking of EU membership as an ‘on’ or ‘off’ binary, there is in practice a wide spectrum of positions that European countries have in relationship to the EU.

If we start from the inside and work outwards, then closest to the EU we find the eurozone countries. These are countries that have embraced EU membership with no or few opt-outs. Slightly further out from them we find the UK’s former position, still a full EU member but not in the euro and with more opt-outs – this is currently the status of Denmark, for example.

Moving to our next layer of orbits, we find the closely related European Economic Area (EEA), for example Norway, and European Free Trade Area (EFTA), Switzerland. These are affiliate membership type statuses. (EEA states are also in EFTA, but Switzerland remains outside the EEA – though the various EU-Swiss deals mean there is little difference in practice.) EEA countries are part of the Single Market, and must follow the Four Freedoms: free movement of goods, capital, services and people.

Realistically this section of the spectrum is the furthest-out position that any remotely sensible government would have moved the UK to after the Brexit vote. The Vote Leave quote – “free trade zone stretching from Iceland to Turkey” – refers to Turkey’s participation in a customs union with the EU. But while that’s quite clearly a promise of at least that status after Brexit, that isn’t what has happened.

On the next orbit out we find association agreements. This is the category that includes Kosovo, Serbia, Ukraine and many others around the edges of the EU. These limited, varying deals grant participation in the Single Market for some sectors, and include some obligations. Finally we find free trade agreements – the Canada-EU deal (CETA) as well as deals with Japan and South Korea.

As ever with the EU, there are some complexities – for example, confusingly, EEA countries are not actually part of the customs union, and Turkey’s deal is slightly distinct from the main EU customs union and has some exceptions. There are plenty of differences between countries that are in the same broad categories. That is why it is better to see it as a spectrum than a set of rigid boxes.

So where on this spectrum does the UK currently sit? The Brexit deal, the EU-UK Trade and Cooperation Agreement, was supposedly modelled instead on trade deals the EU had previously done with far-away countries such as Canada – this was the UK side’s stated preference. However, the Brexit deal resembles an association agreement in many ways, and is handled under the same legal framework (Article 217 TFEU). It seems to be intended as a ‘halfway house’ between an association agreement and a free trade agreement. A ‘pure’ trade agreement would not include the provisions added because of the UK’s geographical proximity and the wish to continue some previous arrangements, such as fisheries and security, and ensure a ‘level playing field’, which basically means that the UK is not allowed to launch a deregulation drive if it wants to keep its tariff-free market access.

Finance sacrificed for fish?

The deal includes almost nothing on on services, even though the UK has a primarily services-based economy, or more specifically on finance, one of Britain’s largest sectors.

At the end of the transition period the UK financial sector moved more than £1 trillion in assets and thousands of jobs to the EU almost overnight, to ensure it would be able to continue to operate in Europe. Billions of pounds of stock and derivatives trading has shifted from London to alternative financial hubs in Amsterdam, Paris and Frankfurt.

The finance sector is publicly unpopular, to say the least, but it provides an estimated 11 percent of UK tax revenue and over a million jobs, according to the Office for National Statistics. The government made reassuring noises about negotiating a finance sector deal (known as ‘financial equivalence’) later in 2021, only for chancellor Rishi Sunak to admit at the start of July that the government has given up on equivalence, and make statements about deregulation that make it even less likely. Having previously relied on the City of London as a financial centre, the EU appears to be quietly trying to build up its own hubs, to lessen its reliance on infrastructure it can no longer regulate.

At every step, the government’s priority appears to have been distancing ahead of access; isolation ahead of securing UK interests – even the ones the Conservatives are usually thought to represent. It spent a lot of negotiating capital on issues that are (in economic terms) small and where it did not secure a good deal in any case, such as fishing, putting symbolism and ideology ahead of economics.

Since there is not much further to go in moving further from the EU, and the current deal is riddled with problems, it follows that future governments’ attempts to fix the glaring problems in the deal are likely to move the UK gradually closer back towards the EU. Helpfully, as we will see in the next chapter, the EU made sure to build avenues into the deal for exactly that.