There has been lots written about the withdrawal agreement, but the important point to remember is that this is the only document on the table now that will be legally binding. The withdrawal agreement focuses on the so-called divorce issues: citizens’ rights, the UK’s outstanding financial liabilities, and a plan B to avoid a hard border in Northern Ireland, which has come to be known as the backstop.
The political declaration is merely an outline of the direction in which both the UK and the EU want to go. But neither side can hold each other to its contents. The future trade deal will be negotiated during any transition phase, or perhaps even under the backstop arrangements. The reason is simple. Legally speaking, the EU cannot cut a trade deal with one of its members. Therefore, the UK will need to leave the bloc before the real talking can begin. There also reflects the political reality that the faces will have changed at the European Commission, the European Parliament and the European Council, where EU leaders meet, by the time negotiators meet to talk trade.
This is the starting position of both sides and will evolve over time. Last Sunday’s big summit in Brussels saw leaders sign off on the text, despite concerns raised by Spain over the status of Gibraltar.
However, none of this will come into play if the backstop is activated. As French President Emmanuel Macron suggested with regards to access to British fishing waters, such a situation could be advantageous for the EU in a bid to wrestle extra concessions from the UK. The backstop is, de facto, membership of the EU single market and customs union, but without any say or veto.
The statement recognises that the UK seeks the “development of an independent trade policy”, but also underlines the importance of the integrity of the EU’s single market.
The goal, according to the draft, is that the EU and the UK should develop an “ambitious, wide-ranging and balanced economic partnership” and that there will be “no tariffs, fees, charges or quantitative restrictions across all sectors.”
However, there is no mention of the “frictionless” trade cited in the government’s Chequers white paper that was published in July.
“Following the United Kingdom’s withdrawal from the Union, the Parties will form separate markets and distinct legal orders,” the document says. “Moving goods across borders can pose risks to the integrity and proper functioning of these markets, which are managed through customs procedures and checks.”
This is consistent with the EU’s position. Brussels has always insisted that the UK could not enjoy the frictionless trade with the members of its single market after Brexit. This represents a shift in the government’s position. Given that ending free movement and ending vast payments to the EU were red lines for the UK, a free trade deal was the only conceivable option in the absence of any willingness to strike a bespoke agreement.
At time of writing, there is no detail about what precisely these checks would involve. The extent of those processes will depend largely on how far the UK plans to diverge from EU rules and standards. Following EU rules will lighten those checks.
The text also refers to a “level-playing field” on state aid, competition, social and employment standards, environmental standards, climate change, and tax.
It is clear that if the direction of travel is indeed a Canada-style deal, the issue of the Irish border needs to be solved. The inclusion of reference to “facilitative arrangements and technologies” could be considered as a victory for the Prime Minister, but there is no guarantee that such technology would emerge in time to conclude a future trade deal.
Another way would be a customs union with the EU, which means the UK can strike its own trade deals with other countries, but that it must align its tariffs with the bloc’s common tariffs, as I explained in this blog post.
Both the UK and the EU say they want to “build and improve” on the “single customs territory” that would be the basis of the Irish backstop and would hamper the country’s flexibility in negotiation trade deals. This could be a nod to the idea the Prime Minister put forward that would see the UK collect the EU’s tariffs on its behalf, while maintaining an independent trade policy. We will have to wait and see what this looks like at the end.
On services, the two sides “should conclude ambitious, comprehensive and balanced arrangements” on trade in services in areas including: professional and business services, telecoms, courier and postal services, distribution, environmental, financial services and transport services.
Specifically on financial services, the City of London has raised concerns about losing the much-vaunted passporting rights that allows companies to sell across the bloc. Passporting means that firms based and regulated in one country of the EU can do that simply based on the fact they are authorised to do so in their home base. Keeping passporting means staying in the single market, which the UK has promised to leave.
That is why this draft refers to “equivalence”, which would be the only other option to facilitate cross-border financial trade and used by third countries such as the US and Switzerland. There is no requirement for both sides to mirror each other’s rules and legislation. Companies from markets that are deemed to have “equivalent” regulatory standards can trade freely across borders with each others’ customers under their home country’s laws and regulations.
However, equivalence can be withdrawn at 30 days’ notice. Some financial institutions may find this an issue if making long-term investments or business plan. Both sides make a commitment to complete equivalence assessments by the middle of June 2020, six months before the planned transition period is supposed to end.
Fishing is one of the most contentious parts of the future trading relationship, given the political sensitives that surround the industry, both here and across the Channel. That is why many coastal states have been pushing the UK to offer clear commitments on access to their waters before the withdrawal agreement is approval. While many member states have relied on fishing in British waters, UK fishermen also export a great deal of their catches to EU countries.
The text here is contradictory. It underlines the UK’s wish to become an “independent coastal state” after Brexit, but also commits to striking a separate agreement that offers the EU access to its waters and a share of the UK catch. The hope is to conclude and ratify that agreement by 1 July 2020.
Airlines have been worried about a no-deal Brexit and this draft spells out what both sides are trying to achieve once the transition period ends. They want to agree a “Comprehensive Air Transport Agreement (CATA)”, which will cover market access and investment, aviation safety and security, and air traffic management.
As an EU member, the UK is part of the European Common Aviation Area that currently covers 36 nations. It allows any airline owned and controlled by nationals of EU member states is free to operate anywhere within the EU without restrictions on capacity, frequency or pricing. However, the text makes no mention of staying a member of this as it would require following all EU aviation laws.
It is as yet unclear which way these negotiations will go, but consumers could be impacted. Legacy airlines, such as Luthansa and Air France, might seize Brexit as an opportunity to reduce access for UK-based carriers to the EU aviation market. They issued a position paper last year arguing that the UK should be treated as any other third country This would prevent European airlines from being majority-owned by UK shareholders, potentially posing a problem for BA owner International Airlines Group and EasyJet.
Much of the headlines in recent weeks have been on France and Germany’s support for creating a European army, which would seriously undermine the NATO military alliance. The political declaration makes clear that there will be continued cooperation on defence and security policy. It leaves open the possibility that the UK could second officers to EU military missions around the world, but there would be no obligation to take part - as is the case today.
There will also be close cooperation on sanctions. “While pursuing independent sanctions policies driven by their respective foreign policies, the Parties recognise sanctions as a multilateral foreign policy tool and the benefits of close consultation and cooperation,” the text says.
The UK has been one of the most vocal proponents of using sanctions against Russia over its annexation of Crimea in Ukraine. It is highly unlikely that the UK’s sanction policy would significantly diverge from the EU’s, even after Brexit.
The Spanish government wants a clear statement that the future of Gibraltar will be negotiated between the UK and Spain. The current draft makes no mention of the Rock and it is reported that Prime Minister Pedro Sanchez wants a separate statement form EU leaders on Sunday pledging that Madrid will have a final say on the extent to which any future trade deal will apply to the British territory.