Brexit Briefing No.41 -Things are hotting up, and not just for Penka the cow

After a brief hiatus, this week saw a torrent of Brexit news but very little in the way of direct negotiations between the UK and the EU. 

Instead most of the action was in London where the House of Commons is preparing to vote on what are expected to be a series of very tight votes on the House of Lords amendments to the EU Withdrawal Bill. If any of them pass they have potential to cause significant problems for the government’s Brexit strategy.

In addition, the Prime Minister has been focused on getting approval from the Cabinet Brexit subcommittee for a backstop customs proposal that can be presented to Brussels in order to break the current customs impasse. The hope (as discussed in previous brexit briefings) is that this can square the circle between allowing the UK to have an independent trade policy whilst also avoiding a hard border in Northern Ireland. 

Despite all the rhetoric, that is still the key to Brexit. If that circle is squared, the withdrawal deal and the transition agreement can be concluded quickly and an orderly Brexit will take place as planned on March next year. 

However, the proposed backstop plan is hugely controversial as it ensures UK alignment with EU customs and internal market rules, in order to avoid a hard border, until such time as a new customs relationship is agreed. This provoked a serious backlash from Brexit Secretary of State and UK chief negotiator David Davis,  who articulated his concern that without an end date to this arrangement, the EU would have no incentive to negotiate a future trading relationship because they would already have all they needed from this backstop arrangement, and an agreement that it would remain in place in the absence of a future agreement. 

It is still not clear how the more vocal brexiteers in the government will respond to this proposal. Will they see it as unacceptable for the reasons outlined by David Davis, or will they decide that this is the key to unlocking Brexit now, and the future battles can be fought at a later stage. At the time of writing it is unclear how this will play out. 

The other challenge for the government is that Brussels has so far rejected all the potential British proposals to solve the Northern Ireland question so challenging negotiations lie ahead to break the impasse. 

In Brussels, the biggest story of the week has been the plight of Penka the cow, the pregnant Bulgarian bovine who had the misfortune to wander across the border into the neighbouring fields of Serbia. Upon her return doctors gave her a clean bill of health, but under EU regulations she has to be slaughtered for crossing the border. Her distraught owner helped spark a social media firestorm and thousands of signatures to petitions, but at the time of writing clemency has not been granted, though there is a temporary stay of execution. The implications of all this for the many live animals crossing the border between the Republic of Ireland and Northern Ireland have not been lost on those of us following Brexit.

deadline

The potential impact of a genuine no deal situation where the UK effectively ‘crashed out’ of the EU on the 29th March next year was splashed across the Sunday Times front page this week. It alleged there would be food and medicine shortages within days, amidst various other problems, including UK cars no longer being recognised in Europe as safe to drive or planes to fly over European airspace. 

Whilst the reports were both sensationalist and questionable, some of the problems cannot be ignored. Even if we do not introduce any new customs checks in the UK, we are reliant on the French, Dutch & Belgium ports taking similar action, which is unlikely as it would be illegal under EU law. Delays in ports on the Continental side of the channel often cause gridlock around Dover and there is genuine concern that a “no deal” Brexit could lead to the UK ports being clogged up, without goods being able to get in or out easily. However, as the Belgium ports have already started to demonstrate, there is a technological solution to this problem and the Flanders ports have already started to introduce enhanced technological solutions in readiness to deal with such a scenario. 

A no deal scenario remains highly unlikely though, partly because of the disruption it would cause and also because some side deals would almost certainly be struck to avoid the worst case scenario. Such a “limited deal” scenario would probably include aviation agreements and approval of aircraft registrations by UK authorities to keep planes flying and maybe a few other areas such as visa reciprocity, so visa free travel would remain possible between the EU and the UK. However it is worth pointing out that this would be a “limited deal” scenario and not the “no deal” one which is often discussed. 

The European Commission is also making the potential impact of “no deal” worse for everyone, including those in Europe. This week they published proposals requiring all cars approved by the British type approval authority (the VCA) to be re-approved by an EU27 authority, despite the fact the cars were approved under EU law. This will cause more problems for European car manufacturers, many of whom have used the highly regarded VCA to get their own cars approved and now face cost and disruption from having to re-obtain type approval for sale in Europe. They also froze UK companies out of Galileo contracts, delaying the development of the system and significantly increasing the cost. 

The practicalities of customs and VAT post-Brexit also came to the fore as the British government made clear its intentions to keep VAT arrangements as close as possible to the existing situation. The EU VAT area is separate from the customs union and single market. Staying in it will spare British companies (and consumers) from having to pay import VAT when importing goods into the UK and then having to claim it back from the government. This is a significant cost, especially for small companies who can be hit with serious cash flow problems under the system that applies for goods imported from outside the EU. Many companies will cheer if these rules can be avoided for EU imports.

It is also useful for small exporters, as under new rules, from 2021 the EU will set up a simplified system for online sales that will see online retailers levy VAT on goods in the country of purchase and pass the revenues on to that country’s exchequer. 

However, the EU VAT area is policed by the ECJ, which creates problems for the British government. It also will not allow the UK to diverge from EU VAT rules, particularly if the UK wants to reduce VAT on tampons or on e-books for example. (Interestingly the European Commission recently proposed to allow a lower VAT rate on e-books but the Czech Republic vetoed the proposal). 

So companies would cheer the UK staying in the EU VAT area, but it would tie the UK much more closely to EU market rules, something which will not be universally popular in London. In addition, it is also not clear if the EU will agree to such a request in the first place. 

Westminster

Back in London divisions were also coming to the fore in the Labour Party ahead of the crucial votes next week. Labour have tabled a series of their own amendments in an attempt to reconcile the difference between the party’s leadership (who are supportive of Brexit) and its membership and voters, who are overwhelmingly pro EU. 

Many more pro-European Labour MPs were dismayed when the leadership announced it would not support amendments to the EU withdrawal bill backing continued membership of the European Economic Area (often dubbed the Norway option)  Labour have instead tabled an amendment calling for the UK to negotiate full access to the single market, but without the commitments on free movement for example of a member of the single market. This  position of all the benefits of single market membership with none of the obligations was immediately described as attempting to have your cake and eating it and is unlikely to go anywhere in Brussels. 

However the Labour position does makes it much less likely the government will be defeated on the EEA amendment and reduces the number of tricky votes it is expecting to navigate. Government whips are still reported to be nervous about next week’s votes though. If the government is defeated on any key votes next week (it was defeated 15 times in the Lords) it is not the end of the road for its Brexit strategy, but it is also not clear what path forward it would take.

With internal disagreements in both the Labour and Conservative parties the next few weeks will be unpredictable. Events are fast moving at the moment with a Brexit agreement both tantalisingly close (if only the customs issue can be solved) and a long way away (given the hurdles that need to be cleared for the two sides to move closer together). Next week may well turn out to be a defining moment in shaping the direction of Brexit even if it will still be a long time before we know what the long term nature of the future UK-EU relationship will be.