No deal isn’t going to happen – but next year’s trade negotiations will be fiendishly complicated

When Brexit is done, what then? It’s the trade deal with Europe – and other deals with the rest of the world.

The bill coming to the Commons on Friday will just cover the exit arrangements, clearing the bar and room invoices for the club we’re leaving at the end of January or soon after. Future access to EU club facilities, and its members’ reciprocal access to the UK’s, will be the next negotiation. That, in theory, should be completed by the end of 2020.

I say “in theory” because enshrining the final date for leaving in UK law is a negotiating tactic designed to focus minds.

The prospect of leaving the EU without a trade deal frightened the markets, because it revived fears of a so-called hard Brexit. But as we have seen in the past few months, we have to have that threat in our negotiating toolbox. In practice, it is not going to happen.

Meanwhile, to carry on the club analogy, we will open up discussions with other clubs, notably the US, but also a group of other developed nations who are assembling a Pacific Rim club. Again, we will be offering reciprocal rights in return for access.

If that sounds complicated enough, it gets worse. The closer our links with the EU, the harder it will be to do deals with the US, the Pacific Rim, and the other global trading groups. We also have to consider whether to focus on agreements on physical trade, or whether to prioritise trade in services.

Trade in goods is larger, about three-quarters of the total, but trade in services is growing faster. We also have a competitive advantage in services – we’re the second-largest exporter, after the US – but not so much in goods, where we are a net importer, particularly from Europe.

So what should we try to prioritise? Existing trade relations with Europe to minimise disruption, or potentially more attractive deals with other, faster-growing regions? Difficult.

We do know some things. It will be very much in the self-interest of both the UK and the EU to make a success of the trade negotiations this coming year. The UK needs to protect as far as it can its access to the region that takes more than 40 per cent of its exports.

The EU has a huge surplus with the UK, approaching £100bn a year, and it will want as far as it can to protect that. So the dynamics will be different from those that undermined (and nearly destroyed) the exit talks, when European negotiators thought that provided they held out for what they wanted, the UK side would see it was all too difficult, rescind Article 50 and stay in.

You can glimpse a vague outline of how these talks might go by looking at the trade agreement between Canada and the EU, but that one does little for services. In short, what could work reasonably well would be a Canada-style trade deal, plus something more for our service industries, especially finance.

Anyway, there will be lots of stories about how difficult it will be to do a comprehensive deal with Europe by the end of next year. But it would be an enormous failure of diplomacy were that to be allowed to happen. Both sides will have learnt from the Brexit talks and will try to lift their game.

What about talks with the US on the great trade deal promised by Donald Trump?

The starting point is that we already export a huge amount to the US. It’s our biggest single export market, taking about 22 per cent of the total, much more than we sell to Germany and France put together. We do that without a trade deal, so we would be building on something solid.

However, the “ambitious free trade agreement” discussed on the phone call between Donald Trump and Boris Johnson on Monday will not replace an accommodation with Europe. Taking a 10-year view, I would expect our exports to the US to exceed those to Europe, partly because it’s already a larger economy but more because it will continue to grow more swiftly.

But it’s silly to pretend that one would replace the other. Physical proximity matters less for trade than it used to, but it still matters.

Aside from the US, what else is there? There is China of course, which will become the world’s biggest economy by 2030. But it would be naive to expect anything much there. We are not a priority for China. If at some stage China does a deal with Europe, we could aim to piggyback on it, but while that might suit the Chinese, it might not suit the Americans.

Of the other trade groups, there is the Latin American group, Mercosur, and the African Free Trade Zone, but neither are directly relevant to the UK.

The most interesting prospect is the Pacific Rim, the revised version of the Trans-Pacific Partnership – revised when the US dropped out. This includes Canada, Australia, and Japan, and some 8 per cent of our exports go there. Japan wants us to join and in the long term there is an argument for doing so. But it is not a substitute for the EU, or indeed the US.

And there’s the rub. Two-thirds of our exports go to the EU and the US. We need good relations with both of them. Simple as that.