The UK is looking for a broad-based, ambitious, bespoke trade deal, but with the flexibility to opt in and out of various parts of the single market.
This would give it the freedom to set its own rules and regulations for the sectors that don’t have full access, as well as negotiate trade deals with other countries.
This is seen as “cherry picking” by the EU, which has completely ruled out “a pick-and-mix approach for a non-EU member” to the single market.
The EU has indicated that there is “no possibility to have some exclusive form of single market for some part of our economies”.
It says this is simply not in the EU’s interests.
The EU believes the UK’s decision to leave the customs union and single market, its intention to set and enforce its own rules and regulations, and leave the jurisdiction of the European Court of Justice, as well as its desire to negotiate trade deals with other countries, imply that only a limited form of post-Brexit trade deal is possible.
Thus, the most that the EU is prepared to offer the UK at present is a Canadian style deal, largely based on tariff-free trade in goods.
The EU points out that any deal will not make trade between the UK and EU frictionless or smoother.
Instead, Brexit will make trade more complicated and costly for both sides.
It notes that whatever free trade deal is put in place will be inferior to the single market. Customs is a major obstacle to be overcome in the trade talks.
It also incorporates the issue of how to resolve the very tricky Irish border question and avoid a hard border here.
This will be difficult to achieve in the absence of some form of common EU-UK customs area or union.
Diverging on tariffs and regulations would almost certainly mean that customs checks would be required between the EU and UK, even if a free trade deal is agreed.
Services are not normally covered in free trade agreements either and this sector is likely to be the biggest casualty of the UK’s decision to leave the single market.
The UK is pressing hard to include financial services as part of any trade deal as it is a key part of the UK economy.
The EU is resisting this, although it is open to allowing some market access for services in a trade deal.
However, it is likely to be a very much watered down version of the current single market in services.
While there are major obstacles to be overcome, we expect that the withdrawal agreement to be concluded between the EU and UK, probably later this year, will include a transition period and pave the way for a soft Brexit in March 2019.
To a large extent, we think the final terms of the withdrawal agreement will be shaped by the attitude of the UK.
The more the UK wants to “take back control” and set its own rules and regulations and do third-country trade deals, the poorer the access it will have to the single market.
Customs controls are likely in this scenario and a free trade deal will be limited in scope to mainly avoiding tariffs on goods.
This is the difficult choice facing the UK.