Follow Jersey, not Norway or Canada

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Now that the divorce is largely agreed and the negotiations are moving on to trade and the transition, the UK and EU’s positions are becoming clearer. The UK will push for Britain to maintain regulatory alignment with the EU in some sectors, while being free to diverge in others. The EU, led by France and Germany, has said that, given Theresa May’s red lines, there can be no half-way house between a free trade agreement and full membership of the single market.

The British government is considering the idea of ‘managed divergence’: the UK and EU commit to regulatory alignment in some sectors, while allowing the UK to diverge from new rules in others in the future. The EU would be permitted to curtail market access in those sectors as a result.

There are obvious attractions to such a half-way house for Britain. For the UK, it would soften the economic blow that a free trade agreement (FTA) would entail: even the most ambitious FTAs do not provide the regulatory alignment needed to allow goods and services to flow across borders without checks. Full participation in the single market through membership of the European Economic Area is too costly politically, since the UK would have to apply the EU’s rules but would have little say on adopting them. By reducing the number of sectors to which that nasty soft Brexit logic applies, the UK could limit the economic damage while regaining the perception of sovereignty over parts of its economy.

Yet managed divergence is unlikely to gain traction among the 27.

For one, these proposals amount to cherry-picking, which the EU has made a red line. It is naïve to expect that the EU-27 will agree a system where the UK converges when deemed to be in its interests, but diverges in those sectors in which it could gain competitive advantage with the rest of the world. The point of the single market is that all its members sign up to all rules, which cover the entire economy; if the UK wins opt-outs, then other countries will seek them too.

Second, the process of managed divergence would prove difficult to manage. It would be a political feat for the EU and UK to agree which rules are crucial for maintaining a level playing field, and which matter less. And, since the economic impact of regulations is very hard to identify objectively, any disputes could prove impossible to manage. If the UK chose to diverge from one part of the EU’s insurance regime, should the EU have the right to curtail market access in the sector as a whole? 

The EU is unlikely to countenance any model which undermines the single market’s political integrity. However, a model that may limit the damage and prove politically palatable to the EU-27 exists: the UK remains in a comprehensive customs union with the EU and the single market, but only for goods. There would be no managed divergence: the UK would remain in the part of the single market that is valuable to both sides, but more so to the EU-27 given the UK’s advantage in services.

One could call this ‘the Jersey option’ (because the Crown Dependencies enjoy a similar relationship with the EU). The agreement would need to include the following features:

• Services access for UK firms would need to be roughly the same as that of any other third country. The UK, theoretically, could take to the world and try to sign services-only trade deals.
• The UK would need to agree to follow all of the rules of the customs union, single market rules in goods and the EU’s VAT regime. All industrial goods and agriculture would have to be covered. Anything less would create a situation where checks on origin and standards, among other things, would still be required at the border.
• The UK would have to agree to rules on state aid, industrial emissions and social and employment laws, to avoid the risk of environmental and social ‘dumping’.
• The agreement would need a surveillance mechanism, to check that the UK is complying with EU rules, and a court to settle disputes between the EU and the UK. Any new court would have to take account of the case law of the European Court of Justice.
• The EU would insist upon a financial contribution to the economic development of Central and Eastern Europe, among other things. The Swiss, for example, contribute around half the UK’s current payments per head. They have a similar level of access to the single market as the proposal outlined here.
• The biggest question is whether the EU would insist upon free movement of EU workers as it stands, or whether it might be possible for the UK to negotiate controls on free movement, in exchange for the obvious damage that this agreement would do to the City of London.

The Jersey option would also, unlike managed divergence, solve the Irish border issue: there would be no need for border checks of any sort, since all goods shipped across it would be produced according to EU rules, and no tariffs would be payable.

But it would require Theresa May to soften many of her red lines, and her party would be highly likely to defenestrate her if she did so. Perhaps a Labour government would be capable of delivering such a plan, but it would have to force an election – and win it – first.