EU leaders met in Brussels last Sunday to sign off on the withdrawal agreement and the political declaration that will act as a framework for future trade talks with the UK. This formality was completed swiftly and the frantic all night long discussions, which are normally a trademark of Brussels summits were avoided, despite last minute complaints from Spain about Gibraltar.
Officials in the Belgian capital will now be keeping a close eye on the Prime Minister’s attempts to navigate the Brexit deal through the British parliament, where the numbers have long been challenging, and a December 11th vote has been scheduled.
The summit did raise another issue however; French President Emmanuel Macron’s threat to veto the future trade deal if French fishermen didn’t retain access to British fishing waters.
This was after the British government won a significant victory in fending off attempts from several countries, of which France was one, to secure legally binding commitments on perpetual access to UK waters as part of the political declaration. Macron warned that without a sufficient deal on fish, trade talks would fail and the backstop, the EU’s insurance policy to avoid a hard border on the island of Ireland, would automatically kick in.
We are still a long way from those discussions even beginning, and Macron’s remarks were in some way grandstanding for a domestic audience at a time when his Presidency appears to be sinking in popularity. But to underscore just how important this issue is to the EU, the declaration on the future relationship refers to fish being agreed “within the context of the overall economic partnership” with the UK after Brexit. No agreement on fish then no trade deal.
It is not an easy issue to solve. Because the UK exclusive economic zone is so huge (200 nautical miles in all directions or halfway between any landmass closer than that), many countries are given quotas from the EU to fish in British waters under the Common Fisheries Policy.
Most of the fish caught by the entire French fishing fleet comes from UK waters. It is a similar situation for Dutch, Belgian and Danish fishermen.
If they were to lose access to these fishing stocks it would be disastrous for their industries, and as a result it is an issue the EU will fight very hard for. However, after Brexit, the waters will be returned to British control and in theory at least, the UK will be able to offer British fishermen far larger quotas.
On the surface, therefore, the UK has the upper hand in this area. However, this is complicated by the fact that most of the fish caught by British fishermen are sold in Europe. UK consumers do not buy the types of fish which are prevalent in British waters and those caught by the British fishing fleet. 93 percent of herring caught in British waters is exported elsewhere while more than 80 percent of cod that ends up on British plates is imported.
So the UK needs tariff-free access to the EU market for the fish it catches. However, non-EU countries currently face punitive tariffs on many fish imports into the EU, Norway pays a levy of 13 per cent on exports of smoked salmon. This is why the EU sees the possibility of a trade off - continued tariff-free access for British fish in exchange for fishing rights in UK waters. The UK government managed to hold that off for now, but this issue will not be able to be ignored during the future trade discussions.
There has also been a lot of focus on the future flow of goods between the UK and the EU after Brexit, but very little attention has been paid to services, which make up nearly 80 percent of the UK economy.
This is similar in many other Western countries, as services gradually replaced the manufacturing jobs that had gone elsewhere. For example, France’s service sector makes up 78 of its economic output. The shape of the future trading relationship of this sector is hugely important for the UK because last year Britain ran a £26 billion surplus in services with the bloc. Those exports include financial services, but also other professional or technical services, in fields such as law, engineering or management consulting.
If a product crosses a border from outside the EU, governments can slap a tariff on it to make it less competitive. However, when it comes to services, governments can and do take much more punitive actions in the way of regulatory barriers which often make it virtually impossible to offer the service at all. Try working as a ski instructor in France without French qualifications.
The free movement of services is one of the four freedoms of the EU single market, yet in reality, there is no such freedom for services. The EU “services directive” is the baseline legislation that allows services to be traded across Europe but it is far from complete. As it is a directive, it allows member states to implement it differently, giving governments the ability to block services coming from other EU member states.
The European Commission itself acknowledges that there is a huge gap between the rhetoric and reality in this area; it currently has 32 infringement proceedings open against member states for failing to apply the directive correctly.
The Commission also recently proposed a new package of laws to deepen the services single market including an e-card system, which would allow professionals to have their qualifications recognised in other EU countries, but this was blocked by the European Parliament.
It has long been a source of frustration for successive British governments that the single market in this area has never been properly completed. Yet despite this reality the EU market for services is still more open than any other one in the world. In terms of access to EU service markets, it is as good as it gets.
The UK has made it clear, both through the Chequers proposal and in other government announcements, that it wants to diverge from EU rules on services. Freedom to have different rules will mean less market access in Europe, with the hope being that this will be offset by new trading opportunities further afield. This is attractive to Britain, as it will aim to become a leader in shaping global regulation in this sector, whereas the EU repeatedly fails to boost access to services due to protectionist sentiments in key member states, such as France and Germany.
The political declaration that was finalised on Sunday is vague about the ambitions of both parties on services. It says there should be provisions on market access, and non-discrimination clauses once a service provider has entered the market, known as national treatment. However, these are common in most free trade deals and therefore imply a substantially lower level of cross-border market access than the UK currently enjoys. But you do not necessarily need a free trade deal to sell the services in another country. The United States is the largest single market for services exports, according to official government data, and there is no specific trade deal in place, although there are ancillary agreements on things like the movement of data.
Securing good access to the EU market has been of concern to the City of London. The UK’s red line is that it can’t have its major strategic industry governed solely by laws that are made abroad. That is too much of a risk to the UK economy. Therefore it has accepted that it will lose the much-vaunted passporting rights that allows companies to sell across the bloc. Passporting means that once a bank or financial services firm is established and authorised in one EU country, it can provide certain services throughout the EU, and can open branches in other EU countries, with relatively few additional authorisation requirements.
As a result the declaration on the future relationship refers to the “equivalence”, regime for financial services. In principle this is open to all other countries and currently is used by both the US and Switzerland to gain access to the EU market. It is not negotiated, but requested. Companies from markets that are deemed to have “equivalent” regulatory standards (they don’t need to mirror the laws but they need to have equivalent effect) can trade freely across borders with customers under their home country’s laws and regulations, While access might be reduced under this option, being able to diverge on services could be hugely important for the UK as it could opt for a lighter touch regime that attracts investment.
However, the EU can withdraw equivalence approval at 30 days’ notice if it considers that the UK’s services regulation is unfairly undercutting its own legislation. This will be an issue for financial institutions that are making long-term investments or business plans. In the political declaration both sides make a commitment to complete equivalence assessments by the middle of June 2020, with a view to the UK having equivalence at the end of the transition period six months later.
The issues outlined above indicate why some have advocated the UK joining the European Free Trade Association (EFTA) which would mean retaining membership of the single market. However there are many challenges with this approach. The UK would be a rule taker, having to obey the laws imposed from Brussels with no input into making them. It would also need to accept free movement of people. It doesn’t includes fisheries, which would be beneficial for the UK, but likely a red line from the EU side.
It remains to be seen whether the EFTA option might be seriously considered by the government, but alone it would not be enough. The EU would certainly try to link it with a customs union and a backstop to address the Irish border issue, which effectively then takes us back to square one, as that doesn’t look that much different from the current deal on the table.
The negotiations on the future relationship will take place after the UK has left the European Union on March 29th next year. There are two reasons for this; one is legal and the other political. Firstly, Article 50 only deals with the withdrawal of a member state and is silent on what a future relationship would look like with the departing country. (Despite this the EU did manage to insert future trade issues like Geographical Indicators in the withdrawal agreement) Secondly, the EU is not able to sign a trade deal with one of its own members. As a result, there was never the possibility to discuss trade at this point, and Brexit will need to happen before Britain can know exactly what the trade deal will be.
Finally, there is also the reality that many of the leaders at the European Commission and the European Council, which hosts the EU summits, will have changed by the time the planned transition period ends in December 2020. Either a deal is agreed by then, or the backstop kicks in unless the transition can be extended, which is an option which was floated by the British government and will quite possibly happen given the short timeframe available to negotiate the trade deal.
With four months to go until Brexit, anything can happen at this stage, but all eyes across the EU are waiting to see if this agreement will pass in the House of Commons next month. Everything is on hold until then.