Brexit Briefing No.13

In marked contrast to the situation in the UK, it has been a relatively calm political week in Brussels with the main item of interest being the ex-Catalan leader’s continued residence in the city seeking sanctuary from Spanish government prosecutors. The Catalan crisis continues to make things uncomfortable for Brussels and the circus following Carles Puigdemont around town has not dampened down the issue.

In the meantime, politicians in Brussels have watched as Westminster was engulfed firstly by the sexual harassment scandal, and then the reshuffles following the departures of Michael Fallon and Priti Patel from the government.

Brussels is not immune from allegations of sexual harassment or bullying and intimidation of staff either, with both Politico and The Times running pages of similarly graphic stories on the European Parliament in the last ten days.

After a go-slow week on Brexit the pace has quickened slightly as it comes to an end with two days of talks between Michel Barnier and David Davis. More on those talks in next week’s Brexit Briefing, but in the meantime some analysis of two different trade issues rearing their head in the process.

Berlaymont Building

A Telegraph story late last week “Theresa May’s Brexit Strategy hits a legal minefield” received a lot of media traction. Essentially it claimed that no UK-EU free trade agreement could be deeper than ones the EU had already concluded with Canada and South Korea as the EU would be forced to upgrade those deals.

Why has no one noticed this gigantic snag before you might ask? There has not exactly been a shortage of Brexit analysis - over the last 18 months it has been the biggest growth industry in Britain and Europe since the invention of the aeroplane.

The story relates to so-called most-favoured-nation (MFN) clauses included in a number of EU trade agreements, principally Canada and South Korea, but also with the ACP (African, Caribbean and Pacific) group of states. These clauses state that if the EU negotiates a trade deal with another country which offers more access, these concessions also have to be extended to these countries as well. On the surface this would seem to suggest that the EU can’t offer the UK a “super Canada” type of deal as a result.

However, it is not as simple as that. These clauses tend to be sector-specific and so don’t cover the whole trade deal. In addition, there are a number of exceptions to these clauses which would not apply to the UK, such as the generous access the EU has given to some of the world’s poorest states to aid their economic development.

Furthermore, it is particularly difficult to see how direct legally binding parallels would be drawn between an EU-UK agreement and other trade deals. This is because the main discussions on the UK-EU deal will focus on areas which go well beyond what has been agreed in FTAs with other countries, mainly because in those cases neither side were prepared to give the concessions necessary to get an agreement in these areas.

These are non-tariff barriers, regulatory structures, mutual recognition and trade in services. The UK and the EU, starting from a position of conformity in many of these areas, will go much further than Canada or South Korea would be prepared to go.

So applying third party MFN clauses to the UK-EU trade deal is likely to be limited and will not undermine the whole deal. It is something trade negotiators on both sides are aware of even if they are not yet able to talk to each other formally.

However, the continued delay in starting trade talks poses numerous problems, and not just for the UK, with the EU’s negotiating position also being bad for businesses in the remaining EU27 member states. This is particularly true in one vital area of European industry - automobiles.

car manufacturing

The European Commission’s negotiating papers are intensely harsh on European car makers. Yes, you read that correctly. As the proposals stand, if the Commission continues with its current approach, it takes a direct strike against manufacturers in core member states such as Germany with a position which will hit EU27 car makers much harder than their British counterparts.

This is due to the Commission’s approach to goods in general, which was outlined in one of its position papers earlier in the year. This proposal allows goods which were placed on the market prior to the Brexit date to continue to be allowed to be sold in Europe after Brexit. However, this does not cover the approval regime for that product in the first place. In the case of cars this is the type approval (the certification needed that proves a car is safe and meets all the relevant rules). The Commission proposes that these type approvals, if issued by the UK, would no longer be recognised in the EU post-Brexit.

The VCA is the UK’s type approval authority and once it issues a type approval, it is valid for the whole of Europe. The VCA is highly active and recognised as a leader in testing expertise, and many European manufacturers get their cars type approved in the UK. This leaves these manufacturers with a huge problem, because under the Commission’s approach, many cars built in Europe, by a European manufacturer, but with a UK type approval, will not be able to be sold in Europe. Ironically they will still be able to be sold in the UK as the approval comes from the UK.

These manufacturers are not in a position to act pre-emptively before March 2019 and get a type approval from another EU country because a car cannot under EU law hold two EU type approvals at the same time and there is under these regulations a requirement for a six week gap between the two certificates. This means that if there is no trade deal at all, or if there is a deal along the lines that the European Commission wants, European car manufacturers could in theory have to close down some of their European factories for six weeks, just to be able to continue to sell their cars in Europe.

This will hit British manufacturers as well, as they will have to get an EU type approval post-Brexit in order to export into Europe, but they will be able to continue to sell into their home market, something which European manufacturers won’t be able to.

This situation is repeated in the pharmaceutical sector, a major employer in the EU, and several other sectors which rely on mutual recognition of approvals across Europe.

This outlines the weakness in the European Commission’s negotiating position. It is not one based on securing the best deal for the EU, but instead focuses on some rigid principles which have all sorts of unintended consequences.

This rigidity has been clear to see in the first phase of negotiations, with the Commission refusing to move to trade talks, which can solve the problems outlined above, until the UK meets its demands on the budget, citizens’ rights and on Northern Ireland.

Ireland

Serious cracks have begun to appear in that rigid approach, with the Irish Taoiseach Leo Varadkar, in an address to the Irish Dáil this week, pushing hard for a December start date to trade talks. Importantly, he acknowledged explicitly in public what London and Dublin have been telling Brussels in private for months, that no real solution to the Irish border issue is possible without negotiations on the future trade relationship. Irritation in Dublin and other capitals has grown as it has become clear a deal on citizens’ rights is nearly agreed and it is merely the Commission’s demands on a financial settlement holding up progress. The Taoiseach and other Irish commentators have effectively come close to telling Brussels they are not prepared to have either the peace process or the island of Ireland damaged by the Commission’s financial demands.

So just as London faces difficulties as the negotiations stretch on, so does Brussels, which makes the negotiations that much harder, but also provides greater incentives for both sides to compromise and reach a mutually acceptable political agreement. Neither party in the talks wants to gamble the house in such a politically risky and tricky process.