23 March 2018

EU27 leaders have today approved the EU’s formal negotiating guidelines for talks on the future bilateral partnership between the UK and the EU. This now paves the way for the UK and the EU to begin negotiating in earnest on future trading relations and the broader strategic partnership.

The final version of the EU’s guidelines is largely similar to the leaked draft that emerged earlier this month. However, there are some notable amendments:

  1. On goods, the EU has softened its aim for all sectors “to be subject to” zero tariffs, no quantitative restrictions and appropriate rules of origin – they are now instead “seeking to maintain” a zero-tariff arrangement with reduced technical barriers to trade. This is likely to reflect member state sensitivities on agriculture products. The guidelines also maintain a call for “existing reciprocal rights to fishing waters and resources”, which is of key interest to the EU. The arbitrary connection set up between fishing rights and tariff-free trade in the earlier draft has, however, been slightly softened – the guidelines now suggest an arrangement on fishing should be concluded in the context of the overall free trade agreement.
  2. On services, a new clause calls for the future deal to “safeguard financial stability in the Union and respect its regulatory and supervisory regime.” This addition is likely a signpost that trade in financial services post-Brexit could continue under the EU’s equivalence regime for third-countries. While no mention is made of financial services in the substance of the guidelines, the EU is expected to publish an annex calling for “improved equivalence mechanisms” to cover financial services post-Brexit. Elsewhere, the suggestion for a new bilateral agreement on aviation has been expanded to include “agreements on other modes of transport” as well.
  3. While the EU had previously called for a new partnership to “include ambitious provisions on movement of natural persons,” the new guidelines intend this to be “based on full reciprocity and non-discrimination among Member States.” This amendment seems intended to block any plans by the UK government to pursue bilateral agreements on immigration with key member states. The guidelines also consider exploring continued coordination of social security systems, and judicial cooperation on family matters such as matrimonial or parental responsibilities.
  4. The EU has significantly softened their call for there to be “no gap” in UK-EU cooperation on defence, security and foreign policy. Instead, the guidelines now suggest “there should be strong UK-EU cooperation” in these fields. The softening of position here is likely more to avoid challenges of “cherry-picking” on the EU’s part, rather than a tempering of ambition on the future defence and security relationship.
  5. A new clause has been added for the future partnership to “address global challenges, in particular in areas of climate change and sustainable development, as well as cross-border pollution.”
  6. The EU has also moved its “evolution clause” towards the opening of the guidelines. This clause suggests the EU would be willing to offer the UK a closer relationship if Britain softens its position on leaving the EU single market and the customs union.

Following today’s guidelines from the EU, and Prime Minister Theresa May’s recent speech on the future economic partnership, the building blocks of a new UK-EU relationship are now becoming apparent. A cross-comparison of UK-EU positions demonstrate where there is significant room for agreement, and where talks will need to yield compromise in order to forge the ambitious new UK-EU partnership both sides aim to secure.

Goods – high overlap in UK-EU positions

The UK and EU negotiating positions both recognise the highly integrated nature of UK-EU trade in goods, and aim to obtain an ambitious agreement to reduce tariff and non-tariff barriers in all sectors. The UK government has in particular stressed the importance of achieving an agreement that maintains existing complex UK-EU supply chains for manufactured goods.

Both the UK and the EU aim to agree tariff-free trade in goods covering all sectors, and are keen to address the obstacle that rules of origin requirements can present – these are technical and administrative requirements that increase costs to trade in goods. Both sides also appear to be open to the UK obtaining an “observer status” in key EU agencies – this would allow Britain to participate in these bodies as a third-country, but it would limit its decision-making abilities. For instance, in her “Road to Brexit” speech, Prime Minister Theresa May called for the UK to remain part of the European Medicines Agency, the European Aviation Safety Agency, and the European Chemicals Agency. She accepted that this would involve “abiding by the rules of those agencies,” respecting “the remit of the ECJ [the European Court of Justice] in that regard,” and paying appropriate financial contributions. Meanwhile, the EU has shifted its position from excluding the UK from participating in EU agencies post-Brexit, to restricting the UK from contributing to the “the decision-making” of EU agencies.

The key area for negotiation will be on regulatory barriers to trade. Unless the UK and EU reach an agreement to recognise either other’s regulations as equivalent, cross-border trade in goods will be subject to new costly testing and approval procedures – this would be highly disruptive for supply chain industries that frequently move component parts across borders. To overcome regulatory barriers, the UK government has suggested a “comprehensive system of mutual recognition,” where the UK would make a “strong commitment” to maintain regulatory standards as high as the EU and ensure these remain “substantially similar” in the future. The EU’s guidelines do not discuss mutual recognition, but indicate a willingness to agree measures on technical barriers to trade, and particular health and safety standards for agrifood trade. They also include a separate clause on “a framework for voluntary regulatory cooperation.”

It is important to note that the EU has already agreed to recognise Switzerland’s goods as directly equivalent to EU’s in key sectors, to avoid burdensome regulatory checks – although Switzerland is outside the EU and the Single Market, it holds a comprehensive mutual recognition agreement with the EU. This is possible because Switzerland agrees to adopt EU rules and regulations in domestic law for the sectors covered by the agreement.  The key question is therefore whether the UK commitment to maintain “substantially similar” rules will mean agreeing to apply EU rules in key sectors. Indeed, this is a path the government may be considering, given the Prime Minister’s willingness to “abide by” EU rules in important supply-chain sectors (pharmaceutical, chemicals and aerospace sectors) in order to participate in EU agencies.

Services – positions diverge, but agreement is possible in specific areas

On services, the UK and the EU remain more distant in their respective positions. In her “Road to Brexit” speech, Prime Minister Theresa May recognised that “certain aspects of trade in services are intrinsically linked to the [EU] single market,” meaning the UK will face new barriers to the EU’s services market after it leaves. However, the government has set forward an ambitious proposal for services trade, including suggestions for unprecedented mutual recognition agreements in key sectors (mutual recognition agreements would guarantee reciprocal access based on the alignment of independent UK and EU regulatory frameworks). Chancellor Philip Hammond has called for trade in financial services to be covered by “the principle of mutual recognition and reciprocal regulatory equivalence.” Prime Minister Theresa May also urged the UK and the EU to explore “creative options…including mutual recognition” for trade in broadcasting services.

By contrast, the EU’s guidelines propose a traditional free trade agreement with limited provisions for liberalising trade in services. They highlight that the future FTA would only aim to allow the provision of services “under host state rules.” This means that a UK company that wanted to provide services in France post-Brexit would need to comply with French rules and regulations covering that industry. This would be highly disruptive for particular sectors, including financial services, broadcasting and transport sectors, in which at present companies can largely operate in the EU under domestic rules.

Despite the general divergence of views, the UK and EU share similar aims in key sectors. In transport, the EU guidelines call for “continued connectivity” to be achieved “through an air transport agreement, combined with aviation safety and security agreements” but also through “agreements on other modes of transport.” This echoes the UK government’s desire “to ensure the continuity of air, maritime and rail services.”

Agreement might be possible also on cross-cutting issues such as data sharing and movement of professionals. Both the UK and the EU aim to secure an “adequacy arrangement” to facilitate cross-border provision of data. Both also aim to reach an agreement that includes some form of mutual recognition of professional qualifications.

Even on the delicate question of financial services, a path towards agreement is beginning to emerge. A leaked draft of an annex to the guidelines suggested that the EU is considering “reviewed and improved equivalence mechanisms” for trade in financial services. This suggests there is appetite on the EU side to go beyond the current equivalence mechanisms used to grant access to third-countries, which do not offer the legal certainty the UK government is seeking. The European Banking Authority has also previously stated that third-country equivalence mechanisms would not be sufficient for the UK-EU trading relationship as they were not designed “with such an integrated third-country in mind.”

However, while the EU may be willing to consider ambitious arrangements in key services sectors, they are also clear that this will come with strong conditions for a “level playing field.” These “level playing field” obligations aim to prevent unfair competition through state aid, tax, social or environmental practices. They don’t just regulate traded goods and services – they establish ground rules about the wider economy, including employment law, environmental protections and climate policy. In its recent guidelines, the European Council has confirmed “its readiness to initiate work towards a balanced, ambitious and wide-ranging free trade agreement (FTA)” – which appears to envisage a more comprehensive agreement than CETA – but only “insofar as there are sufficient guarantees for a level playing field.” In particular, the EU wants an agreement to cover “competition and state aid, tax, social, environment and regulatory measures and practices.” The UK government should be aware that the more preferential access it seeks for services, the more likely the EU is to push for stronger level playing field obligations.

Governance and dispute settlement – both sides have set forward key principles

Earlier this week, the EU’s chief Brexit negotiator, Michel Barnier, said that there are “significant areas of divergence” between the UK and the EU on questions of governance and dispute settlement. Barnier was referring specifically to arrangements for the Withdrawal Agreement, but the question of who will supervise and enforce the future bilateral relationship also remains to be answered. Still, the principles now set forth by the UK and EU demonstrate some common ground.

The EU’s guidelines call for the future governance system to respect “the autonomy of the EU legal order” and the role of the ECJ as the sole interpreter of EU law, but they do not call for the ECJ to oversee the agreement. They also highlight the need for the dispute settlement mechanism “to ensure effectiveness and legal certainty.” The EU therefore wants future disagreements to be solved via a judicial system, and not (just) a political forum.

The UK has ruled out the ECJ or the UK Supreme Court as the ultimate arbiter of the future relationship, and has instead called for a dispute settlement mechanism that is “completely independent.” Yet, Prime Minister Theresa May made a point in her “Road to Brexit” speech of noting that “the jurisdiction of the ECJ, EU law and the decisions of the ECJ will continue to affect [the UK]” after its withdrawal. This is an important signal to the EU that the UK is not seeking to undermine its legal order. The Prime Minister’s commitment to accept the ECJ’s remit over key EU agencies also aims to indicate that the UK will respect the independence of the ECJ in the future agreement.

Negotiations remain at a very early stage on this issue. Indeed, discussions for a dispute settlement mechanism covering the Withdrawal Agreement have yet to produce an agreement. However, arrangements for an independent judicial body, with input from the EU, the UK and third-country representative may be possible under the terms set by the UK and the EU.

 

The positions set forward by both the UK and the EU are opening negotiating stances, and some key questions remain unanswered. As negotiations progress, discussions over level playing field obligations and the governance arrangements for the final deal will present the biggest challenges. However, the framework for an ambitious free trade agreement is beginning to emerge.