Brexit: Staying in EEA could facilitate EU-UK trade - HSBC

Douglas Lippoldt, Senior Trade Economist at HSBC, argues that staying in EEA could facilitate EU-UK trade, enable non-EU trade deals for UK, and deliver some of the Brexit agenda, but shortfalls in meeting many key Brexit goals - including controls on EU migration - make the political feasibility of EEA a challenge.

Key Quotes

“From a trade perspective the European Economic Area (EEA) could provide a viable post-Brexit EU-UK trade framework. It would limit disruption to existing relations while opening opportunities for the UK to strike trade deals with new partners. As a free trade area covering all EU members, plus Norway, Iceland and Liechtenstein, the EEA would offer the UK continued access to the EU single market. It would also ensure that the UK maintains substantial regulatory consistency with the EU on trade-related matters (important for ensuring effective market access).” 

“The EEA could serve as an interim deal (perhaps facilitating a softer Brexit as advocated by Philip Hammond, the UK chancellor, recently) or as a long-term framework. Admittedly, the EEA does not satisfy the demands of many Brexit proponents to cease all budget payments to the EU, exclude the European Court of Justice (ECJ) from all UK affairs, or directly control EU migration to the UK. But the EEA could go some of the way, potentially cutting UK budget contributions to the EU by 15% or more and reducing the future scope of competence for the ECJ in UK affairs (primarily to EEA related matters). The EEA could also restore UK sovereignty in such policy areas as agriculture and fisheries. And it is acceptable to the EU.”

“The failure of the EEA to deliver a means to strictly limit EU migration, in particular, poses a real political challenge. The UK might be able to discourage EU inward migration by tightening access to social benefits or instituting other administrative requirements. But the UK would not be able to directly control EU inflows. Many Brexit proponents would consider the failure to hit such a key goal as unacceptable. Similarly, migration is one of the four freedoms of the single market (the others being free movement of goods, services, and capital), which the EU considers inviolable.”

“Although the EEA may seem an unrealistic option at this stage, things could change. If the UK economy markedly worsens in the coming year, then the EEA could become more palatable to MPs and voters. This paper considers seven questions raised by clients in relation to EEA feasibility.”