Brexit Briefing No.46 - The Fallout from Chequers

An extraordinary week in European politics, with Donald Trump in town for a visit to the UK and a NATO summit in Brussels and upheaval in the British government after the Cabinet approved a new proposal for the future UK relationship with the EU. 

The NATO summit dominated European news this week, in addition to disrupting the traffic in Brussels. Most significant was the suggestion from Donald Trump that the US was prepared to leave the NATO alliance if European nations didn't raise their defence spending. NATO was formed in the Cold War as a collective defence organisation to stop the threat of Soviet invasion and domination of Europe, yet it has outlived the Cold War. For a while its future purpose did not seem clear, but the re-emergence of Russia as a strategic threat to Eastern Europe after the invasions of Georgia and the Ukraine have made the alliance just as vital as it was during the days of the Cold War. It is therefore hard to understate how destabilising a US withdrawal for NATO would be for Europe. Without overwhelming US military power guaranteeing the security of the Baltic states in particular, there would be a real danger that Russia would see little impediment to moving against them. Given the independent UK security guarantees that we have given to the Baltic States and other Central European countries such as Poland, such a scenario could see the UK being dragged into a future war with Russia without having US support. 

It appears that Donald Trump was given assurances by his NATO allies that they would raise defence spending which allowed him to reaffirm his commitment to NATO. His tactics have likely offended many, but the basic premise that European nations should be spending more on their own defence is a fair one, given that only a few (UK, France, Greece) spend anywhere near the 2% of GDP target that the US originally wanted to see. However, the threat that the US may one day leave NATO is driving the European Union to try to develop a defence capacity of its own.   

In the UK things have been just as tense. The Cabinet met at Chequers and agreed a new negotiating strategy for future relations with the EU. The "Chequers Agreement" however had a seismic effect in the following days with both the Brexit secretary of state and Chief Negotiator David Davis, and Foreign Secretary Boris Johnson resigning from their positions in opposition to the proposal. Both felt they could not abide the Cabinet collective responsibility that had been reinstated after Chequers.

The agreement itself was aimed to counter the claim from Europe that the UK had not given any clear proposals for the future relationship that it wanted. Despite a series of speeches by Theresa May and various UK government papers the EU could still credibly claim that they did not know the details of what the UK wanted and therefore could not resume the negotiations. 

However the Cabinet agreement should allow those negotiations to start again and there are a series of EU27 meetings expected in the next few weeks, as well as another UK-EU round of talks on the 16th July. To date, there is no indication as to how the EU will react but they are likely to give it a cautious welcome. 

Whether they will agree to the contents and adjust their negotiating guidelines as a result remains to be seen. 

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The full White Paper, released Thursday afternoon, provides further detail, but what does the Chequers Agreement indicate? 

This is a mix of both a soft and a hard Brexit. With the UK staying close to the EU in some areas and diverging in others. 

The biggest headline from the summit is the decision to commit the UK to a common rule book with the EU on goods and agricultural products. This, combined with the UK's commitment to collect EU tariffs for the bloc at external borders, is aimed to avoid a hard border in Ireland or any kind of barriers to trade in the Irish Sea. This commitment would see the UK signing up to EU rules in this area, with parliament having the power to diverge, but accepting that any divergence would cause negative consequences for trade flows. Alignment in many goods and food areas had already been agreed by the Cabinet in principle at the Chequers away day in the spring. 

This common rule book agreement would limit the ability of the UK to strike free trade deals with for instance the US or India on agricultural products, but whether that really limits the UK's options to negotiate with the Americans is open to question as there is no real likelihood that the UK parliament or population would agree to trade deals which reduced UK food, animal welfare or environmental standards. However the common rule book will place limits on possible UK free trade agreements in goods, although not on services, which is the main part of the UK economy, and it makes it simpler for the UK to replicate future EU deals with other countries. 

The paper reaffirms the UK  desire to leave the single market in services. This is the least well-developed element of the EU single market. Services account for 80% of the UK economy and would therefore keep most of the economy out of EU rules. 

The main reason the UK has opted for this is because services access is intrinsically linked to continued EU free movement of people under current terms, which is a red line for the UK government.

In addition, being in the single market for services would give the EU the ability to control the rules surrounding the British financial services industry, which is a key strategic industry for the British economy. 

So the UK will not try to get any special access for services and this will allow the UK may to diverge from EU rules on services, in part to suit the UK economy and in part to gain competitive advantage in a global economy increasingly dominated by services. It will also allow the UK to be at the forefront of developing global rules in this area, something the EU has generally been reluctant to do. 

The customs part of the plan is very complex, but in principle it will see the UK collect EU tariffs on goods arriving in the UK that are destined for the EU. If the good is for the UK market a different tariff will be collected. This becomes a significant logistical challenge if UK and EU tariffs diverge, but in an era where there is a general desire for lower tariffs that may not be the case. However the deal will not be reciprocal, so the EU will not have to collect tariffs on goods which are bound for the UK.

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The agreement also allows the UK to end ECJ jurisdiction in the UK, however with a common market in goods, the UK will not be able to totally disregard the ECJ's views.

On free movement, whilst this formally comes to an end, the UK is proposing a highly flexible labour mobility agreement that sounds quite similar to the EU situation before the 1992 Maastricht Treaty. This would mean that people with a job offer can move freely between the UK and the EU. This will be a hugely controversial issue, but it does reflect the reality of UK economic interests and is a key demand from almost every sector of business.

Those are the key areas of the agreement, which in principle keeps the UK out of the single market and the customs union, ends ECJ jurisdiction and free movement, all the key red lines of the government. However, it is clear that all those lines are pinked somewhat and the big question is if this position can get majority support in parliament.  It is not clear if it will and already a number of amendments have been tabled in parliament which could undermine the agreement if they are passed. In addition, it is not clear if the EU will accept this position without demanding further concessions which will be very difficult for the UK government to accept and to get through Parliament. 

Achieving a clear cabinet decision was undoubtedly an important step in the process and the return to collective responsibility will make it much harder for minsters to disagree with the government line. This will also make it more challenging for rebel Conservative MPs as well, but Monday's events show the challenges ahead. The parliamentary arithmetic is difficult for the government, even as Labour are yet to adopt a clear position on the Chequers Agreement, and whilst the DUP will be happy to see no divergence between Northern Ireland and the rest of the UK their support cannot be taken for granted either. 

The EU's response may take some weeks to become clear but if they reject the UK approach then it is far from sure what happens next. In those circumstances a no deal scenario will become much more likely. Equally, the arrangements for this deal are very complex and cannot possibly be completed before October. As a result the negotiations now are likely to focus on guidelines which will be annexed to the withdrawal agreement. The more detailed elements, which will be much more difficult to negotiate, will only be addressed after the UK has left the EU and during the transition stage.  

This week has fundamentally changed the dynamics in the British parliament and within the Conservative party. The rebels, who up to now were mainly from the remain side are now suddenly coming from the leave side who are unhappy with the contents of the Chequers agreement. The key question going forward is can the prime minister keep both those who want a close relationship with the EU and those who want a distant relationship together in support of this position even if the EU demands more concessions. The next few weeks will be fascinating!