Brexit Briefing No.29 - Trade-offs

The last few days have seen some significant developments. The UK Prime Minister Theresa May set out a comprehensive plan for a new UK/EU relationship, to which the EU gave an initial response. The opening salvos of a potential new US/EU trade war were fired. Europe saw an electoral shift towards euroscepticism in Italy, and the formation of a German government five months after the election. 

Theresa May's long awaited speech on the UK's future relationship with the EU had many audiences, but the message the Prime Minister wanted to give to both Europe and the British people was that Brexit would involve compromise for all sides. Important for European ears was the concession that the new free trade agreement, leaving the customs union and the single market, would not necessarily involve the same level of access to the European market in all areas, for example financial services. The Prime Minister also hinted at the need for preferential access for EU workers, another welcome note for EU politicians, coming on the heels of the UK's agreement that EU citizens arriving in the transition period would have the same right to stay as those coming before the 29th March 2019.

Theresa May

The speech covered too many areas to list here (for a full breakdown visit my website: https://www.danieldaltonmep.co.uk/news/my-take-pms-brexit-speech). However, its core approach was as close a trading relationship as possible without the UK formally signing up to the EU’s internal market. This would entail both sides signing up to the principle of mutual recognition of standards. This effectively means that any product which meets the UK rules should automatically be allowed to be sold in the EU as well, and vice versa. It would therefore need to extend mutual recognition to the bodies or institutions who make the standards, i.e. the rules may differ between the EU and UK but if the objective of those rules is the same then there can and should be mutual recognition.

This would be in addition to no tariffs or quotas between the EU and the UK.

Mutual recognition is a key principle of the EU internal market and some basic elements of it have begun to be included in some international trade agreements. In addition, increasingly standards are global, such as the UNECE for cars, so in some areas this would make little practical difference. 

This will require significant trust from both sides and is likely to seen by some in the EU as a cherry picking of the benefits of the single market, even though mutual recognition for cars is a part of the EU-South Korea trade deal.

Cars

The Prime Minister also offered very close collaboration on services, including access for EU service providers, mutual recognition of qualifications, labour mobility for professionals and a holistic approach to limiting barriers to trade. The UK would also seek associate membership of the EU's Medicines, Aviation and Chemicals agencies, all areas where it makes sense economically to be in the European system.

The PM reiterated the UK's commitment to no hard border between Northern Ireland and the Republic, to be achieved through IT solutions, automation, as well as trusted traders schemes and an exemption for Micro businesses and SMEs, allowing them to use existing rules. The PM also supported the continuation of the all-Ireland energy market and made a commitment that goods in transit through the UK to the EU would face no tariffs. This was a big offer to Ireland who are most affected by this issue as most Irish exports to the EU go through the UK.

Overall the PM’s speech offered welcome clarity and was highly detailed, spelling out UK proposals for each area. It essentially outlined a softish Brexit, with the minimum restriction to trade, whilst ensuring previous red lines such as UK control of the immigration system and of lawmaking were not breached.

The range of proposals are broad, and many will need long and difficult negotiations in many areas if they are to come to fruition.

The EU’s initial reaction was quite negative - while EU Chief Negotiator Michel Barnier gave a guarded welcome to the speech, his senior adviser Stefaan De Rynck dismissed the idea of mutual recognition and poured cold water on the idea of the UK remaining in certain EU agencies. Senior MEPs also rejected much of the speech. So, when Donald Tusk finally spoke in Luxembourg on Wednesday there was probably some relief in London that his starting point was not as negative as some of the pre-noises. He stated the EU's desire for tariff and quota-free trade in goods with the UK, an agreement that replicates the current rules on aviation and close cooperation on security issues. These are demands that are shared by the UK and means that although the devil is in the detail, it is all but certain that these elements will be part of any final deal.

Tusk

However, on the UK request for services access, the EU guidelines were more guarded, agreeing to mutual recognition of professional qualifications, but not to a comprehensive services element to the agreement. That said, many barriers to services are national, rather than European, so there is already a limit to the extent the UK currently enjoys free trade in services inside the EU.

The EU guidelines were less favourable in other areas. For example the EU demanded continued access to UK fishing waters. This was also no surprise as the vast majority of fish caught by the French and German fishing fleets are caught in UK waters. However, this is a clear example of cherry picking, which is exactly what the EU has repeatedly berated the UK for in its approach.

However, this week has brought significant progress because at the very least there is agreement in principle on tariffs, aviation and security. This is a strong base on which to build the negotiations into the areas where there are more significant differences and is a strong signal that a final bespoke agreement can be agreed, even if there is still much ground to cover in the coming weeks.

The Commission had other big concerns to address this week, announcing a series of tariffs against the US, on products including Levi jeans and bourbon, in response to the US tariffs on steel and aluminium announced by President Trump over the weekend. The President's imposition of tariffs under the guise of national security has been widely condemned as protectionism, and Theresa May told Donald Trump she disagreed with it on a phone call this week, but the EU's decision to bring in counter-tariffs rather than pursuing a legal challenge in the WTO raised eyebrows and risks sparking a US-EU trade war. President Trump has already responded with a further threat to impose tariffs on European cars, something which would hurt British manufacturers hard. However, consumers will ultimately pay the price in any trade war, as all tariffs are effectively a domestic tax on consumers and consumer choice.

Steel bender

Germany finally concluded its coalition negotiations this weekend and another grand coalition is now confirmed, leaving the far-right AfD as the main opposition in the country. The new government faces a big in tray and an EU restless for German leadership on a raft of issues, but it will likely have no real impact on the Brexit talks. Meanwhile, eurosceptic parties surged in Italy's election on Sunday, with results making any viable government difficult to form and prolonged paralysis the likely result.

However, the message from across Europe is clear. In country after country many people are rejecting the way Brussels currently does business. From Greece, to France, Germany and now Italy, anti-establishment parties are gaining ground. This will become an existential threat to the EU if Brussels doesn’t address this quickly. More of the old rhetoric of more Europe as a solution to these problems is unlikely to placate these forces.

So Europe faces many other challenges, even as the Brexit clock keeps ticking down. There remains a real risk that these distractions, the complexity of Brexit and the very real divides between the two sides will mean time for talks runs out.

The potential of such a no-deal scenario, and the chaos on both sides of the Channel which would ensue as a result, are not something which either side wants.

This week’s developments have probably made that scenario less likely, yet given the strict two year timeline of Article 50, and the complexity of the issues still to be discussed, it is becoming increasingly difficult to see how all the outstanding issues can be addressed before the UK leaves in 12 months’ time.