2 December 2018

Open Europe has today published a new briefing, “The Proposed UK-EU Brexit Deal: An explainer.”

The UK and EU have reached agreement on the terms of Brexit. This Deal will be put to the House of Commons for a vote on the 11th December. According to some counts over 90 Conservative MPs have so far publicly opposed the Deal. Some of these may be bought off, but the momentum in Parliament is not yet with the Government. Even Labour Brexiteers plan to vote against it. However, there is some evidence that the deal is growing in popularity with the public.

If the vote is lost the UK will presumably attempt to tweak the Deal. There are two broad options – either seek to soften it or make it harder. Softening the Deal could include setting out explicit options to create a permanent Customs Union (Labour’s policy) or otherwise to retain membership of the Single Market and a Customs Union (as suggested by Nick Boles MP). Open Europe has proposed improving the backstop, including by creating a ‘Stormont’ Lock.

Calls simply to ditch the backstop will surely be rejected by the EU at this stage. There is clearly no path to a negotiated agreement without some form of a backstop. Both a Canada (or indeed “Super Canada”) deal and a “Norway plus” relationship would require a backstop.

Ultimately, the UK faces two broad Brexit choices:

  • Either accept the Deal (in its current form or with minor tweaks)
  • Or reject the Deal – leading to No Deal and no transition

Neither a General Election nor a Referendum would fundamentally alter these choices.

We explore the implications of the Deal in more detail below, focusing on the backstop which is the most problematic element. It is difficult in constitutional terms for Northern Ireland, and would not allow the UK a fully independent trade policy until a future relationship is agreed. It also creates a baseline for a future UK relationship with the EU.

On the other hand, some degree of special arrangements are arguably inevitable for Northern Ireland. Brexit will lead to divergence between the UK and EU. Northern Ireland could either remain in alignment with Ireland, so moving away from the rest of the UK (and upsetting Unionists), or move away from Ireland and stay with Great Britain (upsetting Nationalists). Some form of hybrid arrangements for Northern Ireland were always likely to be an appropriate answer, but the backstop tilts those arrangements towards the EU.

Equally, although Open Europe backs leaving the Customs Union and does not think it is politically sustainable in the medium term for the UK to not have control over trade policy as a non-EU member, we have also argued that we will need more time to prepare to do so. Open Europe did not believe the new customs systems required would be ready by the scheduled end of the standstill transition and therefore suggested that a period in a customs union beyond that was inevitable. The backstop provides for that, but without a clear workable exit mechanism.

The backstop, in certain respects takes us back to a position before the 1986 Single European Act which created the Single Market, extending the then EEC’s political powers with greater Qualified Majority Voting. We would be returning to something more akin to a customs union with a common market in goods, and the tap of future regulations turned off. Over time regulations would diverge in many areas, but goods trade could continue without tariffs or quotas. The backstop lacks a clear exit mechanism but, as the experience of exiting the EU via the deficient Article 50 is showing, even exit mechanisms can be problematic.

The biggest challenge remains how the future relationship can be reconciled with ending the backstop. This question has not been resolved and is punted into the future negotiations.

What are the implications of the UK-EU Deal?

  • The Deal comprises a (legally-binding) Withdrawal Agreement (WA) and a Political Declaration (PD) on the future UK-EU relationship.
  • The WA is more significant, providing for various things including a transition period, a protocol establishing the backstop, protections for UK citizens in the EU and EU citizens in the UK, and settlement of the UK’s budget contributions.
  • The PD sets out the direction of travel for future negotiations. Although not binding legally, it has moral authority and political weight.
  • If the WA is ratified, a standstill transition will run to 31 December 2020. This transition provides for continued UK membership of the EU’s Single Market and Customs Union. The UK will no longer be represented in EU institutions but the ECJ would have direct jurisdiction during this period.
  • If the WA is not ratified, then it is No Deal and no transition.
  • At the end of the transition, on 1 January 2021, three scenarios are possible:
  1. A new UK-EU future relationship comes into force – this is highly unlikely since the deal isn’t expected to be negotiated by this point.
  2. The UK and EU can jointly decide (before 1 July 2020) to extend the standstill transition for a single extension of up to two years (as a maximum until 31 December 2022).
  3. The backstop enters into force – either on 1 January 2021 or after a transition extension – until replaced, in whole or part, by a future relationship.

The backstop

  • The backstop avoids a hardening of the Irish border by establishing a UK-EU customs union, avoiding customs checks or tariffs between the EU, NI and GB.
  • The EU had previously insisted on just NI remaining in the EU’s customs union, so creating an East-West customs border. A UK-wide customs union is a ‘win’.
  • However, the backstop is problematic with respect to NI:
    • NI must maintain and enforce certain single market and customs union regulations. These include EU regulations on industrial goods; agriculture, fisheries and the environment; energy efficiency; intellectual property; Single Electricity Market; VAT; and excise duties.
    • This potentially creates East-West regulatory barriers to trade since GB would not be required to enforce these regulations (and could de-regulate immediately). The UK could ensure NI goods can be imported to GB without barriers, but GB goods exported to NI are likely to face regulatory checks – although these will primarily be in market checks and will be conducted by UK authorities. [Note some GB-NI animal trade is already subject to SPS checks.]
    • Future EU rules in areas covered by the backstop would be considered by a Joint Committee where the UK could block the application of new rules to NI. However, NI must align with amendments to existing rules covered under the backstop. Future rules in other areas would not apply to the rest of the UK (with the exception of rules on state aid and competition).
    • The backstop can only easily be terminated by joint UK-EU agreement.
  • For GB and the UK as a whole, the backstop is a much looser relationship than the Single Market:
    • The UK would be out of the Single Market for services. Free movement of people would end. The UK would be out of agricultural and fisheries policies. There would be no requirement to make budgetary contributions and the UK could keep all customs revenue raised on imports from outside the EU.
    • On so-called ‘level playing field’ issues, the UK would no longer be subject to any future EU social, employment or environmental laws. It would maintain existing EU standards in these areas, although there is acknowledgment that shared principles can be achieved in different ways. However, the UK would align with future EU rules on state aid and competition.
    • Level playing field issues are not subject to arbitration, so disagreements would be resolved politically not judicially.
    • The ECJ will have indirect jurisdiction in the UK, where the UK aligns with EU regulation. ECJ will have direct jurisdiction in NI in certain areas where NI is required to enforce EU law – goods regulation and some level playing field issues, but not services.
    • The customs union would not allow the UK to differ from EU trade/tariff policy on goods but it could strike independent deals on services, investor protections and so on, and would have some ability to resist new EU trade deals.
    • The backstop only applies to customs/goods and so new regimes will be needed for aviation, financial services, data, security and foreign policy coordination.
  • The backstop is hard to swallow and will inevitably become a baseline for the future relationship – this does not mean however that it cannot be improved upon. The UK loses some leverage due to the lack of a unilateral exit.
  • However, unlike the negotiations of the WA itself under Article 50, it is not a case of ‘nothing is agreed until everything is agreed’. By forcing resolution on other aspects of the post-Brexit relationship in non-goods sectors, the ‘cliff edge’ is reduced. By the time we are in the backstop most of the UK economy will be out the EU. This gives the UK more leverage than now.
  • While the backstop is theoretically indefinite, it is an unhappy compromise that is unlikely to be sustainable for more than 5-10 years. The EU view it as too soft on level playing field issues given the extent of UK market access for goods.

The Political Declaration on the future UK-EU relationship

  • The PD sets out a choice of options for the future, ranging from a “Canada-plus” comprehensive Free Trade Agreement, to what might be termed a “Chequers-minus” deal depending on the degree of UK alignment with EU rules. It envisions a more distant relationship for services and would end free movement of people.
  • The PD is necessarily a fudge, where future negotiations could shape a wide range of outcomes. It suggests the future would “build and improve on” the customs union in the backstop while also enabling an independent UK trade policy.
  • It doesn’t set a path to a Chequers-style economic agreement and doesn’t hold out the prospect of “frictionless” trade. This is a concession from HMG, but it sets more realistic expectations of what Brexit must mean. Frictionless was not an achievable goal if the UK is to exit the EU’s single market and obtain an independent trade policy.

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