By Simon Nixon March 2, 2016
Trade is one of the main battlegrounds in the Brexit debate—and one of the most confusing. All sides agree on its importance. No one disputes that the U.K. would continue to trade with the rest of Europe after quitting the EU; the question is on what terms.

Much of the confusion hinges on the difference between membership of a single market and a free-trade agreement. The key point to bear in mind is that the term “free trade” gets used to describe a wide variety of trading relationships, some of which aren’t very free at all. For example, euroskeptics often talk whimsically about the “Common Market” that Britain joined in the 1970s and ask why the EU can’t simply return to being a free-trade area.

But the Common Market was never a true free-trade area; it was largely a customs union: an agreement between nations to abolish internal tariffs and apply a common external tariff. Under the old common market, governments still had plenty of opportunities to protect domestic companies from foreign competition via regulation and state intervention.

It took two titans of European integration— Margaret Thatcher and Jacques Delors—to sweep away all those non-tariff barriers to trade with their radical single-market program based on common rules. Of course, some of the regulations have proved irksome, though hardly as irksome for exporters as complying with 28 different sets of national rules.

Today, the EU isn’t just the world’s most complete free-trade area; it is also one of the most pro-free trade jurisdictions in the world. That is reflected both in its low weighted-average external tariff of just over 3% and in the number of its bilateral trade deals: currently 53 with a further 20 in the pipeline.

To see how seriously the EU takes free trade, one need only look at the EU-Canada Comprehensive Economic and Trade Agreement (CETA), which took a major step closer to finalization this week and which, when ratified by the European Parliament, will have a claim to be the most ambitious bilateral trade deal ever. Tariffs will ultimately be eliminated on nearly 99% of goods on both sides of the Atlantic, most of them immediately.

Although CETA has taken seven years and counting to agree, what is remarkable is that it is has been agreed at all. Previous EU efforts to break open the highly protected Canadian market have foundered not only because Ottawa has proved reluctant to repeal its own barriers to foreign firms but because many of the biggest barriers to free trade are in the hands of Canada’s provincial governments, over which Ottawa has little control.

Yet under CETA, both Ottawa and the provinces have committed to lift many restrictions for European firms, including opening up potentially lucrative opportunities in areas such as public procurement, foodstuffs and services.

The EU was able to do this because it had something valuable to sell: access to the EU’s vast single market—and particularly the EU’s protected agricultural products markets. Yet CETA still falls short of genuine free trade between Canada and the EU. Canadian exports will still have to comply with EU rules over which it has no say and which can change at any time.

The deal doesn’t give Canada full direct access to the single market for services, particularly financial services. And Canadian firms will have to abide by the EU’s strict “Rule of Origin” requirements, which determine whether a product is sufficiently Canadian to qualify for exemption from EU tariffs.

Indeed, Canada had to be given a special derogation from the rules to allow it to sell a quota of cars in the EU because under European definitions, there is no such thing as a Canadian car.

Could the U.K. really get as good a deal as CETA on its own outside the EU? The U.K. may be the world’s fifth-biggest economy, but it is already among the world’s most open. What could it offer to persuade other countries to open up their markets?

The potential gains from offering preferential access to a market of 60 million people are never going to be as lucrative as those from a market of 500 million; the U.K. might therefore be forced to offer bigger concessions on its own than under an EU deal. To seal its recent trade deal with China, Switzerland agreed to eliminate almost all its tariffs immediately, while China only agreed to eliminate 80% of its tariffs over 15 years.

Besides, most countries will likely want to wait to see what deal the U.K. agrees with the EU before deciding what sort of deal to seek with the U.K. themselves, since that will determine to a large extent the U.K.’s post-Brexit tariffs.

That EU deal in turn will depend on just how much extra sovereignty a post-Brexit U.K. is willing to cede to secure preferential trade terms. The more willing it is to continue to abide by EU rules, despite no longer having any say in them, the easier the terms will be.

In that respect, euroskeptics are right to suggest that CETA could provide a template. But it won’t be as comprehensive as the deal the U.K. has already; nor will it be free trade.