16 January 2018

I have been a relatively optimistic Brexit observer. As complex as the process may be, the fact that a deal on the “divorce stage” of Brexit has been reached and that we’re now moving to talks about transition and then trade is a positive signal. It is worth noting that a few months ago, it was by no means a foregone conclusion that sufficient progress would be reached, with many observers suggesting that it was an impossible task. However, the agreement reached in December 2017 illustrates that both sides have a motivation to avoid as much disruption for businesses and citizens as possible.

So, what might the next few months have in store? Below is a summary of Open Europe’s recent roundtable of Brussels observers’ thoughts on what has been agreed already and what to look for in the transition and trade talks.

With regards to the “divorce deal”:

  • Given the EU’s opening position, it’s quite remarkable that Britain managed to secure a deal whereby it will largely escape supervision by the European Court of Justice over the rights of EU nationals in the UK. The compromise reached was that the role of the ECJ will be phased out under a sunset clause that kicks in after eight years. This is a significant departure from the EU’s opening bid and could prove to be an important precedent in the future talks. If the UK is not bound by ECJ jurisdiction in this area here, why should it be for other issues? Or, for that matter, why should other states such as Switzerland submit themselves to ECJ jurisdiction, as desired by the European Commission?
  • The deal regarding the commitment to avoid a “hard border” in Northern Ireland was largely for presentation and lacks substance, given that the EU and the UK seem to have a different understanding of what the UK’s commitment to “regulatory alignment” means (Open Europe set this out in its response to the deal). Most recognise that this topic was almost impossible to resolve in the “divorce stage” of the talks because, when it comes to the border, so much depends on the future trade deal. In any case, the EU now realises how sensitive this matter is, particularly for the DUP, on which Theresa May’s government depends.

With regards to the “transition”:

  • It’s likely that the EU and the UK will manage to avoid trade disruption immediately after March 2019, given that the UK government seems prepared to become a “rule-taker” for a time-limited transitional period. The EU treaties and international trade rules make a long period of transition legally complicated, however an extension of the transition period beyond December 2020 can’t be entirely ruled out.
  • Avoiding disruption to UK trade flows with the rest of the world during the transition may be more complicated. It’s important to understand that, even if a transitional arrangement for UK-EU trade is concluded as part of the Article 50 deal, the UK will no longer benefit from the trade deals it has become party to as an EU member unless new arrangements are put in place. Even if the EU and the UK would conclude a temporary customs union agreement, as suggested by the UK government, the benefits for the UK derived from the EU-South Korea or EU-Mexico trade deals will in theory no longer automatically be available.
  • Effectively, all countries with which the EU has concluded a free trade agreement need to be approached by the UK to ensure continuity. One solution would be to turn the EU’s bilateral treaties into trilateral ones including the UK, but a negotiation of some kind with third states will be needed and these may use the opportunity to make new demands. This would be easier with EU cooperation. In this context, it is important to note that the EU and the UK have put forward joint positions to the World Trade Organisation with regards to their tariff and quota obligations to third parties that result from Brexit. Also it’s interesting to hear the latest rumours that the UK government would be looking to ask to remain party to these trade deals concluded by the EU during the transition and no longer would try to replicate them before March 2019.

With regards to the “trade negotiations”:

  • European companies are expected to lobby hard to demand that Britain shouldn’t be allowed to compete in the single market with divergent regulations. In some countries, some companies may even like Brexit in the sense that this offers an opportunity to protect them from UK competition, even if European consumers would ultimately be the victims.
  • A big question is the extent to which the EU will accept “mutual recognition” of the UK’s standards and regulations in order to permit continued market access for UK exporters. It was remarked that this can only work politically if either side has the right to immediately suspend market access if there is a perceived breach of terms. This would necessitate a pretty bureaucratic monitoring system to check to what extent UK regulations and procedures are deemed satisfactory – and vice versa.
  • In many areas of regulation the UK may face a stark choice in practice. If Britain decides to voluntarily take over a lot of EU rules, for the example the REACH Regulation on chemicals, alongside a new divergent, domestic framework, this would increase bureaucracy for UK companies, who then not only would have to comply with the EU’s but also with the UK’s regulation.
  • It was remarked that the EU shouldn’t make excessive demands. The EU should accept that the UK’s position means it does not want to agree a trade deal whereby it loses substantial regulatory autonomy for the future. In all likelihood, Britain will be able to decide its own regulations at some point. The quid pro quo will be greater trade barriers for UK exporters to EU markets.
  • With regards to the danger that an individual national parliament in the EU27 may scupper any EU-UK deal, it was remarked that, the European Commission is considering splitting up the trade deal with the UK into parts. This might mean one treaty where no national ratification would be necessary and one where it would be. This is possible because the EU retains sole competence to negotiate certain trade issues and mixed competence, with national governments, in others. Crucially, an arbitration mechanism as desired by the European Commission and members states would likely need to be ratified in national parliaments.
  • One of the participants suggested that the UK should publish a draft EU-UK Treaty, which would provide a maximalist template, in order to put pressure on the EU side to make clear which products and services it would like to restrict. The objective would be to make clear how damaging any restrictions would be for businesses on both sides.