Brexit Briefing No.28 - Rising Temperatures

As an icy blast hit the continent, Brexit started to hot up as all sides began to look beyond transition and to the future trade arrangements. The British government started putting flesh to the bones of their post-Brexit UK/EU trading position, Jeremy Corbyn united with Conservative rebels in supporting the UK staying in the customs union and Michel Barnier met with Irish foreign minister Simon Coveney to put the political commitments agreed at the end of December into legal text.

With just over a year to go until the UK leaves the EU, positions are beginning to be fleshed out and we are fast approaching the time when hard decisions will need to be made on all sides. As a result things are about to get very difficult.

Theresa May convened her Cabinet at Chequers to get an agreement on a post-Brexit trade position. What emerged from the meeting was a political commitment to a broad “three basket” approach to future EU-UK cooperation.

Chequers

The first basket includes areas where the UK wants to preserve full alignment with EU rules, on a voluntary basis. In return it would expect full access to the EU market in these areas, which include the aerospace and automotive sectors.

The second basket consists of areas in which the government will seek an agreement with the EU based on shared goals. This effectively means that even though the rules diverge, the intention of the rules would be the same or similar and therefore could be recognised by both sides, allowing frictionless trade in these areas. This would probably include environmental protection standards, animal welfare and consumer rights, where the UK already has higher standards than many EU member states.

The third basket would contain those sectors of the economy where the government wants to move away from EU regulations, two of the most high profile areas in this basket are likely to be fisheries and agriculture. In these areas trade restrictions would be likely as a result.

The government’s aim is to try to avoid barriers to trade where none are necessary in areas where there will be little to no divergence in the UK and EU approaches.

Three baskets

From an economic point of view the UK government’s approach makes a lot of sense. However it appears that it has already been rejected by senior EU figures and in EU internal papers where it has been dismissed as incompatible with the EU’s aim of preserving the integrity of the single market.

The challenge for the UK is that the EU’s primary concern in the Brexit talks is political, not economic, specifically that a non-member cannot have the same benefits as a member. In addition, an overriding concern from the EU is to ensure no other member follows Britain’s example. As a result, the EU is clearly prepared for European industry to take an economic hit in pursuing that aim.

It is less clear how fully member state governments sign up to that orthodoxy, and only when the going gets tough will that be clear. But there are already signs emerging that some countries have increasing concerns with this approach. Most recently the Bulgarian presidency, representing the member states in Brussels, raised the spectre of concerns about the Commission’s approach in a press conference, suggesting that behind the scenes much more robust discussions have been taking place.

Meanwhile the Leader of the Labour Party Jeremy Corbyn signalled his support for the UK remaining in a form of customs union with the EU. Given the delicate parliamentary arithmetic in the House of Commons, his statement was significant because some Conservative MPs share his opinion and if they teamed up this might cause a government defeat on this issue.

Customs

However even before he sat down Mr Corbyn faced the same criticism from the EU that they normally reserve for the Prime Minister. His plan was quickly rejected as it proposed a bespoke customs arrangement, whereby Britain would have the ability to negotiate new free trade deals together with the EU, would not be restricted by current EU rules on state aid or any other rules it did not wish to abide by. It was perceived as essentially the same cherry-picking approach as the government, even though the cherries themselves were different.

EU sources immediately highlighted the fact that trade deals are now subject to qualified majority voting in the Council, so that there was no chance Britain would get a veto on these deals when no member state had one and would therefore not be able to stop a potential EU-US trade deal applying to the U.K, something which Mr Corbyn has repeatedly said he is opposed to.

However, Mr Corbyn’s intervention highlighted just how challenging these talks are for the government and how little room for manoeuvre everyone has in the negotiations around customs arrangements. The circle needs to be squared between the UK being able to do its own trade deals and the avoidance of a hard border in Northern Ireland.

Ireland Northern Ireland border

In reality there is only one option, which would involve a customs partnership and a customs facilitation agreement to ensure the minimum possible infrastructure at the border. If an agreement is reached, it will be along those lines, but it will involve significant back-tracking from all sides to get to this point now. Without that, the Irish border issue still has the potential to scupper any deal at all.

This was vividly demonstrated on Wednesday when the European Commission upped the ante even more on the Ireland question.

In the December Phase One agreement text the EU and UK committed to solving the Ireland issue through the future UK-EU relationship and technological measures, and if that was not possible the UK agreed to maintain full alignment with those single market and customs rules necessary to support the 1998 Good Friday Agreement. The Commission, in the absence of negotiations on the future relationship, which are not yet possible because it has not agreed a position with the EU27, published in draft version what it saw as the default option under December’s agreement. It proposed de-facto keeping Northern Ireland in the Customs Union and Single Market and drawing a border in the Irish Sea between the rest of the UK and Northern Ireland.

To many Unionists in the province Wednesday’s text was more evidence that the Commission had a selective interpretation of the Good Friday agreement, given that such a suggestion would be in breach of the 1998 accord. The response from the DUP and the government was swift and to the point, any attempt by the EU to annex part of the UK was totally unacceptable.

It is important to note the Commission’s text has not yet been approved by the 27 other member states, and they have in the past made changes to Commission drafts, but it also was not drawn up without any consultation with national governments, particularly the key players in Berlin, Paris, and in this instance, Dublin. The Irish Taoiseach also on Tuesday urged Sinn Fein to take their seats in the House of Commons to try to defeat the government, in an unprecedented intervention in British domestic politics.

The draft text also contained other troublesome elements for the UK, maintaining ECJ oversight in a raft of areas beyond citizens’ rights as agreed in December, including as ultimate arbiter over disputes about the withdrawal treaty. Much of this was not in December’s agreement. This week has shown that the useful ambiguities in that text are now being leveraged by the Commission to maximum effect. In a clearly strategic move the Commission is attempting to pressure the UK, with the clock ticking down, into agreeing to a swathe of concessions in order to proceed on talks on transition and the future relationship. The Commission is gambling, and it is a gamble, that it will not push the situation over the precipice.

Stakes are high, and the reality is that after a week of high profile policy proposals, which have all been immediately rejected by the other side, this week has seen no progress at all.