Brexit Briefing 61: Back to the future (relationship)

Back to the Future

Last week saw a seismic shift in the Brexit negotiations with the announcement that the withdrawal agreement had been finalised in Brussels. 

This week was dominated by the implications of that agreement. The debate in London centred on whether the agreement could get through the Westminster parliament. There were challenges in Brussels as the European Commission presented the deal to all EU member states. Attention also turned to the declaration on the future framework, which will be attached to the withdrawal agreement, and may well be the key to unlocking a parliamentary majority in the UK. 

The debate in the UK has been on the implications of the Northern Irish backstop. That is the EU’s insurance policy to avoid a hard border between Northern Ireland and the Republic of Ireland if no trade deal is signed by the end of the transition period in December 2020. If no such deal is done, the UK either can extend the transition phase or enter into a customs territory with the EU. This will also require the UK to remain aligned to EU competition, state aid, and tax rules. As part of the backstop, Northern Ireland would remain in the EU’s regulatory space for goods. The UK cannot exit these arrangements unilaterally and there is a fear that they could become permanent if trade talks are not concluded swiftly. The option of a Canada-style trade deal, where the UK can diverge further from EU rules, remains on the table, but only for Great Britain, not Northern Ireland.  However, that would leave the British government with the unpalatable choice of accepting a customs border in the Irish Sea and effectively giving up economic sovereignty over Northern Ireland.

 

NornIron

However, none of this comes into effect if the EU and UK can agree a future trade relationship that can avoid a hard border in Northern Ireland. That is why this week minds were focused on finalising the political declaration that will outline what the future trade relationship will look like.

This is the key to getting the withdrawal deal through the British Parliament. Can the Prime Minister get enough of a commitment from Brussels to convince parliamentarians that the future trade commitments will be sufficient to avoid the backstop ever being used?

It is a big risk because if there were sufficient commitments in the future trading paper, then there would be no need to even turn the backstop into law. The fact that the backstop is there itself gives the EU a political insurance policy that affords it much greater leverage in those future trade negotiations. The EU can simply confirm its current position that a trade deal with the UK can only work if Northern Ireland is excluded, otherwise the whole UK will need to stay in the customs union. 

The UK is trying to break this impasse. It wants a clear commitment written into the future framework paper that focuses on technological solutions to the border. The EU position has consistently been that Northern Ireland staying in the customs union is the only way to avoid the hard border. It is unlikely that the EU would concede significantly on this point. There may be some soothing words on this in to help the agreement get through Westminster, but they are unlikely to change the reality described above. 

It is now in the UK negotiators interests to tie the EU down quite specifically in the future framework and gain commitments from the EU that an alternative trade arrangement is possible. The Chequers agreement was an attempt to do that, focusing on the UK staying in the single market and a customs relationship for goods but not for services. However, all indications suggests that this approach is quietly being dropped in favour of a relationship more akin to a traditional free trade deal, even if the two sides are miles apart on whether that arrangement includes Northern Ireland or not. 

The paper on the future framework has grown to over 20 pages and is likely to grow further before it is agreed in the coming weeks.The draft currently says EU leaders want to create a “free trade area” that includes “deep regulatory and customs cooperation” which suggests that it expects the UK to stay bound to EU rules and regulations in the future. This underlines the continued opposition to anything that Brussels believes to be “cherry-picking”. While the EU’s argument is consistent, it acts rather differently as many of its existing trade deals do allow third countries to cherry pick their access. For example, Canada has nearly total access to the single market in goods, but limited access in services. Norway has complete access to the single market in services through its EEA membership, but it sits outside the Common Agricultural and Fisheries policies, where tariffs or quotas apply to certain meat, fish and agricultural products.

Norway

It is also worth noting that this week the European Commission themselves admitted that the single market in services is just a mirage. Any proposals on deepening the single market in services are routinely blocked by member states and the European Parliament. 

EU negotiators also admit that the minimum standards established under the backstop will be the baseline for any future pact with Brussels. The draft says both sides will aim for “ambitious customs arrangements that build on the single customs territory provided for in the withdrawal agreement.” In other words, a permanent customs union even if the backstop is not needed. 

This betrays the EU’s real intention. The only viable future relationship for the EU is a customs union between the UK and the EU. Remaining in a customs union  is a double-edged sword, as I explained last week

In Brussels, there was also trouble afoot. EU leaders are scheduled to meet in the Belgian capital on Sunday to endorse the text of the withdrawal agreement. They will not formally finalise the withdrawal agreement until after the European Parliament has had its say, which is scheduled to be some time in the New Year.

However, the unity of EU governments appears to be cracking at the last moment. Spain broke ranks to say it would not support the deal if Gibraltar wasn’t removed from the future trade relationship. This is something that had long been feared in Gibraltar. Spain claims that Gibraltar is not British territory, even though British MEPs represent it in the European Parliament. Spain wants any future relationship with Gibraltar to be negotiated bilaterally between the UK and Spain. Their real goal, however, is two-fold. They want the ability to close the border and disrupt activity in Gibraltar at will, and cut off Gibraltar from the British market something which they tried during the transition negotiations and which could theoretically happen if Gibraltar is not included in the future trade relationship. The British government made it an agreement with Gibraltar earlier this year to ensure that this wouldn’t happen.

GIB

In addition, France led a group of coastal states demanding changes to the deal to include immediate and guaranteed access to British fishing waters, even after the UK has exited the transition period.

Germany was unimpressed by these shenanigans and made it clear that they don’t want any changes to the agreed deal. However, this highlights just how difficult a trade deal will be to strike. A longer transition period or a long-term backstop are the most likely outcomes. 

A future trade deal will be at the whim of the interests of each EU country. Their interests diverge massively and fluctuate over time. The Gibraltar issue appeared to be solved, but the centre-left government, which has traditionally been softer on the issue, may call an election soon and therefore has changed its position. France is worried about fishing and agriculture, Germany about access for its manufactured goods, the Eastern European countries free movement for its citizens. Each one has the potential to block the final trade agreement as each has a veto. Far-reaching EU trade deals are described in Brussels as ‘mixed agreements’. This means it needs every member state to ratify them, and in some cases also regional parliaments.  As the Canadian government found out to their detriment, the local parliament in Wallonia, the French-speaking part of Belgium, nearly sank the EU’s free trade pact with Canada. 

For the EU, if the backstop is in place it loses little if the trade deal fails to emerge. For the UK, it risks potentially locking the country into a permanent customs union via the backstop.

FishNCHIPS

The UK is keen to keep these trade issues separate from withdrawal issues. Fisheries, for example, are seen as a trump card that can be played in the future relationship negotiations. Boats from other EU countries land around 760,000 tonnes of fish worth £540 million per year from British waters. It is likely that the UK will seek to trade market access in return for access to its resource-rich waters, as Norway does. Most fish caught by British fishermen are sold in Europe and nearly 25% of the cod - used in traditional fish and chips in the UK - are imported from EU countries. An agreement will eventually be done in this area, but the British government will want to avoid any legally binding commitments at this stage of proceedings.

As seasoned Brussels negotiators will tell you, nothing is agreed until everything is agreed. Revisions to the agreement are possible, even at this stage. European leaders are scheduled to meet in Brussels on Sunday to approve both the withdrawal agreement and the future politician declaration. At the time of writing, there is some question as to whether that summit will take place, as the political declaration will need to strike a delicate balance. British parliamentarians will want to see enough detail to be convinced that the backstop can be avoided, but EU negotiators will not want to spell out too much and risk splits between EU member states, who would start to fight for their own interests.

If the withdrawal agreement gets through parliament, the Irish border question will continue to loom large over the future trade talks. The real drama is yet to come when MPs in Westminster vote on the text that has been carefully crafted by UK and EU negotiators over the past months. What happens next is really anyone’s guess.