Brexit update: The Swiss model

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Highlights

  • Switzerland is considered a ‘quasi-member’ of the single market and has the freedom to strike its own trade deals, but must also accept the free movement of people
  • A Swiss-style relationship for the UK could present opportunities for Ireland, particularly in the short term
  • But the Irish government would have a legal responsibility to enforce the external border of the customs union, and there are concerns about what form that border would take
  • Switzerland spent years negotiating its own unique arrangements with the EU. If the UK were able to copy it, what might a Swiss Brexit look like, and would it be good for Irish business?

What is the Swiss model?

The arrangements between Switzerland and the EU are complex and completely unlike those in place with Iceland, Norway or other comparable countries.

Switzerland is described now as a ‘quasi-member’ of the single market, but the process to get there was long and tough. The country spent most of the 1990s negotiating with the EU for its own bespoke settlement.

“The Swiss model has been built up over so many years, so it makes it an unlikely template for what the UK relationship might look like,” said Arnold Dillon, Brexit campaign lead at Irish business body Ibec.

In a referendum in 1992, Swiss voters rejected full single-market membership via membership of the European Economic Area (EEA). In doing so, they rejected the EU’s policies on the free movement of people. But in the subsequent negotiations, the Swiss government reluctantly accepted these. It has battled the EU over it ever since, but has not won. The Swiss model comes with free movement of people.

There are likely to be problems. “The EU isn’t very happy with the Swiss arrangement – it has too many bilateral arrangements,” says Joe Owen of think tank the Institute for Government. “It seems highly unlikely the EU would go with something like the Swiss model for the UK.”

Perhaps so, but it’s also unlikely that the UK would seek to replicate all of Switzerland’s terms of market access. The EU’s chief negotiator, Michel Barnier, has said he hopes an “ambitious” deal can be signed, but a transitional deal would almost certainly have to be established first, giving time for a new deal to be worked out.

In the meantime, Switzerland’s arrangements come with great opportunities. The country has the freedom to strike its own trade deals, for example, and recently did so with China.

What might it mean for Ireland?

“If the UK could get to the place where it ends up with Swiss-style arrangements, which is fairly fluid arrangements in terms of tariff and non-tariff barriers, and the broad acceptance of EU regulatory standards, there would have to be a border in Ireland that is different from the one that’s currently in place,” says Vinny McCullagh, a tax partner at Grant Thornton International.

If the UK leaves the EU’s customs union, which would be central to the Swiss model, it will mean that there will be an external border of the customs union on the island of Ireland. This would have consequences that Arnold Dillon describes as “dramatic”.

 

“There are opportunities; the obvious one is that Ireland will attract some of the financial services trade that will have to migrate from the UK”

Vinny McCullagh, tax partner, Grant Thornton International

 

“The UK leaving the customs union would dramatically increase the workload on customs authorities.” he says. “It would raise significant issues around the capacity of customs officials in Ireland and the UK to manage the new relationship.”

Since the referendum result and indeed before, Irish, UK and EU politicians have all discussed a range of solutions, each requiring “creativity and flexibility”, with the ideal end goal being technology-based solutions that do not require goods lorries to stop or even slow down.

But the Irish government knows it has a legal responsibility to the EU to enforce the external border of the customs union.

“It’s difficult to know what that border would look like,” says McCullagh. “There has been a lot of talk of technical borders – or a virtual border, that you won’t even know it’s there. You also now have the M1 going straight between Belfast and Dublin. You could divert a customs point on there but the rest is smallish roads, single carriageways. There’s no easy solution,” he says.

Beyond the border

“That border is unlikely to be the real concern, or the real impact,” McCullagh continues. “The vast majority of Ireland’s trade is with mainland UK. And the Republic of Ireland doesn’t access the mainland through Northern Ireland. It accesses it through the ports.

“The issue here is one of a log jam. The lorries come off the ferries at Holyhead, Fishguard and Liverpool. If you start putting those through customs checks then that could lead to severe delays. It could impact those goods.”

Opportunities for Ireland

Ireland’s preferential corporation tax rates and English language have long made it the UK’s closest competitor for attracting foreign investment.

There is no doubt that in many areas, certainly in the short to medium term and probably in the long term too, that the UK’s loss will be Ireland’s gain.

The Swiss model took years to negotiate. Any kind of bespoke UK deal would likely require the same time frame, and in the meantime, prolonged uncertainty about the UK could be to Ireland’s benefit.

“The balance of the Irish economy has fundamentally shifted since it voted to join the EEC [European Economic Community] in 1972,” says Dillon. “In 1972, 60% of goods exported from Ireland went to the UK, compared to 17% for the rest of the EU.

“Now, 40% of Irish goods are exported to the (non-UK) EU. And 35% of Irish services trade is done with other EU countries.”

Ireland would appear to be in a strong position to take advantage of short-term difficulties in the UK.

Moreover, just as the Swiss model has required Swiss banks to headquarter themselves in London, so the global banking giants of the City will need to relocate staff to within the EU. Many are already doing so.

“There are opportunities,” says McCullagh. “The obvious one is that Ireland will attract some of the financial services trade that will have to migrate from the UK.

“How much of that will Dublin win, and how much will go to the Continent? It’s hard to tell – but Dublin is well placed. The Bank of England warned that London could lose 75,000 financial services jobs. How many of those could go to Ireland?”

Worth the wait?

Ireland is one of the most exposed of all EU member states. But that also presents it with some of the biggest opportunities. If a workable solution to the border issue can be found, and there is determination to find one from all sides, then Ireland could yet make the most of the upsides.

But if the UK is to pursue a Swiss-style arrangement, the devil will be in the detail, and it will likely be many years before those details become clear.

 

Comments 1

Yvonne Kennedy on Tuesday, 16 January 2018 15:33

Great article - interesting to see how the Swiss model works.. The important thing for Ireland is to keep focussing on the opportunities that Brexit presents!

Great article - interesting to see how the Swiss model works.. The important thing for Ireland is to keep focussing on the opportunities that Brexit presents!
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