Iceland needs pragmatism to avoid northern exposure

Lilja Alfreðsdóttir is Iceland’s Minister for Foreign Affairs

Never has global trade been so complex and inter-dependent. So it was no surprise that the initial shock of the UK referendum result was wide-reaching, prompting policymakers and analysts everywhere to ponder the new situation.
The dust is starting to settle, and we are starting that as well as challenges, there are also ample opportunities for economic growth, competitive advantage and innovation in the market. Given the global importance of the UK’s economy, the Brexit vote has sharpened the focus on the road ahead in shaping international trade.

Like all our European partners, Iceland is working to adapt to the new realities before us. The Icelandic government is advocating a pragmatic and realistic approach that assumes relations with Britain will continue to be as strong as they have been in years gone by. There are clear reasons behind this conviction. Today, Britain is Iceland’s largest trading partner, accounting for 11% of all our exports and imports. For the Icelandic economy, the future relationship with Britain is of critical importance.

In recent times, Iceland and the UK have had similar approaches to regional economic integration. In 1970, Iceland joined the European Free Trade Association (EFTA), which Britain helped to found in 1960. And although our common journey within the EFTA turned out to be brief, with Britain joining the European Economic Community in 1973, the EFTA remains under British influence to this day: English is the working language, and pragmatism is the magic word. The four EFTA countries – Iceland, Norway, Switzerland, Liechtenstein – have cast a wide-reaching net of free trade agreements with the EU and partners around the globe, and continue to be pragmatic and flexible in expanding and deepening their network.

The course has now been set for Britain to leave the EU. This poses a challenge for Iceland’s trade with the UK in goods and services, the free movement of people and participation in various programmes and projects that have been functioning on the basis of the European Economic Area Agreement with the EU. In short, there is an urgent need to find a new contractual basis for these processes with the UK. The first priority for the Icelandic government is to safeguard our common interests and maintain our access to the British market. The first priority of the British government will presumably be to safeguard British interests and preferential access to the single market, although it’s clear that negotiations can only begin in earnest after the British government has invoked Article 50 of the Lisbon Treaty.

EFTA has, in the past, often joined various EU agreements with third countries after the EU has concluded negotiations. But given the importance of our relationship with Britain, it’s not an option to sit idly by and wait for the final outcome. In this context, there are three scenarios that Iceland is working with as possible outcomes for its future relationship with Britain. The first is simply a bilateral free trade agreement, with substantial provisions for the abolition of tariffs and technical barriers to trade (TBTs), opening up trade in services and cooperation on research and development, education and culture, mutual recognition of standards, and other areas.

The second possibility is that the four EFTA countries negotiate an agreement with the UK. We already enjoy excellent cooperation and, from our viewpoint in Iceland, we see no reason to fear a conflict of interests. And should Britain at any time in the future consider re-joining the EFTA, I am confident I will not be the only Icelandic politician willing to take that into favourable consideration. But Iceland is a full member of the EU’s internal market through the EEA agreement, and for the UK to join the EEA is an entirely different matter that would entail complications of almost the same order as re-joining the EU.

The third scenario on the table is that Britain and the EU make an exit agreement and EEA countries opt into the terms not long after to safeguard their interests. It’s my firm belief that all three options should be seriously considered: there’s a great deal of uncertainty around these processes and it’s difficult to forecast what the future relationship between Britain and the EU will look like.

For Iceland, there are important aspects of our relations that aren’t directly a part of the EEA Agreement but will still be affected by Brexit. Britain will leave the Common Fisheries Policy and enter international fisheries agreements on straddling stocks in its own right. This shouldn’t change much in substance, but certain elements of Iceland’s fisheries policy may well be of interest to the British authorities now that they must establish a fisheries policy of their own – and these must be the subject of any upcoming discussions. Britain outside a common trade policy will, however, have leeway to negotiate independently on tariff reductions and market access. If the will is there and British interests permit, the UK could, for instance, be free to negotiate on full free trade in fisheries products. Maybe Britain on its own will be quicker in seizing opportunities with partners like Iceland and Norway.

It’s still too early to assess what Brexit’s regional implications will be, let alone its long-term influence on international trade structures. Whatever the outcome, 2016 has marked an important milestone, and it’s clear to Iceland that the next two years are pivotal in setting the parameters that will govern trade relations between us and our largest trading partner. Iceland will use this time well and approach the imminent tasks with a combination of pragmatism and a progressive approach, with the end goal of developing closer trade relations.