Compounding anxieties about the foreign trade effects of Brexit, Britain’s international business community voices growing uncertainty over the modality of a post-Brexit trade deal between the UK and EU.
One possibility is the “Norway Model”. As a non-member state with deep commercial and economic ties to the European Union, Norway has secured access to the Single Market via entry to the European Economic Area (EEA) under the auspices of EFTA (European Free Trade Association). Two other EFTA states (Iceland and Lichtenstein) have joined Norway in that arrangement. The remaining EFTA member (Switzerland) has achieved Single Market access through a set of bilateral agreements with the European Union.
However, it is not clear that the Norway Model represents a plausible solution for the United Kingdom. Norway and the other EFTA countries have secured Common Market access while eluding some (if not all) of the political and bureaucratic encumbrances of full EU membership. But the price of such market access is compliance with the regulatory requirements of the EU’s Four Freedoms, including free movement of people across borders. That concession appears to be a non-starter for the United Kingdom, where the victory of the “Leave” campaign in the June 2016 referendum stemmed in large part from popular unrest over immigration. The UK's voluntary exclusion from the passport-free Schengen Zone (in which all of the EFTA countries are members) raises further doubts about the feasibility of Britain’s engagement in a Norwegian-type agreement on labour market access.
The Norway Model also entails significant financial payments (approaching those of full-fledged EU members in per capita income terms) that clash with the political realities of the United Kingdom’s Brexit movement. Furthermore, the EEA/EFTA formula has spurred criticism in Norway and other participating countries, which shoulder regulatory and financial commitments comparable to those of EU member states but lack any voting rights in that organisation.
In view of the factors impeding an agreement within the EEA/EFTA framework, the likeliest scenario for the UK is a Free Trade Agreement following the lines of FTAs the EU has signed with countries outside of Europe. This includes the recently consummated agreement with Canada as well as FTAs with Colombia, Ecuador, Mexico, Peru, and South Korea. While such an arms-length FTA would be politically easier for the British government than a Norway-type agreement, it would deny British companies the economic benefits of a free trade deal embedded in the EEA/EFTA structure–namely the reduced transaction costs of intra-European commerce based on free movement of goods, services, capital, and people.
This article was written by David Bartlett. David Bartlett is an Economic Adviser and Writer for RSM. He is Executive in Residence and MBA Director at the Kogod School of Business, American University in Washington, DC. Bartlett’s research, teaching, and consulting focus on International Corporate Strategy with special attention to emerging markets and emerging technologies. He has published widely on these topics while leading interdisciplinary research projects on the global economy.