LittleLaw looks at… Brexit Negotiations
If you can't get a trade deal, get a trade deal. If you can get a trade deal, don't get a trade deal
June 25, 2020
11 min read
What’s going on here?
The UK is in the process of finding out what Brexit really means. The result of the 2016 EU referendum is being decided by talks between 100 EU negotiators and their 100 British counterparts. What will these negotiators make of Brexit? Where will there be compromises? Who will get the best deal?
As many will know, Brexit has been a legal and political rollercoaster.
Here’s a few of the key numbers that recap what’s happened so far:
50 – The invocation of Article 50 began the official Brexit process
31 – 31st January 2020 was the day the UK officially left the EU
2 – the number of general elections and Prime Ministers since the Brexit referendum
2 – the number of Supreme Court rulings against the British government
365 – the number of seats won by the Conservative party in the 2019 general election that will draw up post-Brexit Britain
The UK voted to leave the European Union in June 2016 and has since seen two general elections (June 2017 and December 2019), political paralysis (Theresa May’s deal rejected 3 times, Boris Johnson’s rejected until calling a general election), strains on the Union, and a host of unprecedented dilemmas.
On the legal front, the government has been overruled twice by the Supreme Court. Both cases were led by the businesswoman Gina Miller who contested the application of Article 50 and Boris Johnson’s attempt to extend the prorogation (suspension) of parliament in order to reduce the amount of time for the House of Commons to scrutinise the Brexit withdrawal agreement.
Politically, Brexit is one of the key factors in reshaping the UK’s political landscape. The December 2019 election delivered the Conservatives 365 seats (a large majority) to the House of Commons and has seen the Brexit Withdrawal Agreement passed by parliament. This majority enabled the UK to leave the EU on 31st January 2020.
After all that, Britain now has until 31st December 2020 to negotiate a UK-EU trade deal, subject to a review by the British government in June. Considering many trade deals can take almost a decade of negotiation, this is an ambitious deadline to find a deal that the British government hopes will enshrine Britain’s status as a truly independent state. It has now been made even tougher by delays due to the outbreak of COVID-19. But what will be the points of contention in the trade talks? Where will each side compromise? And what could the consequences of these trade-offs be?
What is a trade deal?
A trade deal is an agreement between two or more countries that establishes certain conditions for the export and import of goods. In short, countries are agreeing how much they will tax imported goods. This tax is called a tariff. A free-trade agreement means that there are no tariffs (no tax is paid by the exporter when goods are sold abroad). Tariffs are often used to protect a nation’s home produce against cheaper global competition.
However, tariffs can also be used as a political tactic.
A good example is Donald Trump’s threat to tax France’s luxury products such as wine, cheese and champagne. This was in response to the French government’s planned digital tax on tech companies (a sector dominated by American companies). The sectors are on their own unrelated but in this case, were being used for political bargaining.
Model trade deals for Brexit
The UK has recently started negotiating a trade agreement with the EU. The Conservative government is aiming for a Canada-style agreement. But what are the other models for trade agreements?
EU trade deals
|Member of the single market?||Yes||*||No||No||No|
|In the customs union?||No||No||No||Yes||No|
|Financial contribution to the EU?||Yes||Yes||No||No||No|
|Free movement of people?||Yes||Yes||No||No||No|
|Implement EU law?||Yes||***||No||No||No|
* Only where Switzerland has a bilateral trade agreement with the EU. Switzerland currently has 120 bilateral agreements.
** Canada only has trade tariffs on 2% on goods following the Comprehensive Economic and Trade Agreement (CETA).
*** Switzerland may have an obligation to implement in its trade agreements with the EU, but it is not the same as being a complete member of the EU.
1. Norway: Paying to have access to the single market
- Full access to the single market
- Member of European Economic Area (EEA) – in other words, the single market
- Financial contributions required
- Majority of EU laws must be accepted
- Free movement of people
The advantage of Norway’s relationship with the EU is that Norway enjoys access to the single market and does not have to follow certain EU rules on matters such as justice, fisheries, home affairs and agriculture. But they do have to pay a membership fee to join the single market and do not have any voice in how the rules are made.
2. Switzerland: Lots of little trade deals
- Member of the European Free Trade Association (EFTA), instead of EEA
- Several bilateral agreements allow access to the single market, but not all
- Financial contribution required
- No obligation to implement EU law, except when agreed in trade agreements
- Free movement of people
The advantage of Switzerland’s relationship with the EU is that they have been able to negotiate the 120 bilateral agreements with the EU in sectors that Switzerland feels are important rather than accept the single market’s terms unilaterally. However, there has been political tension between Switzerland and the EU over the free movement of people, and financial contribution is still required to not be a full member of the single market.
3. Turkey: Customs Union
- Not part of EEA or EFTA, but instead is part of a customs union with the EU – so no tariffs
- Turkey’s customs union with the EU does not include agricultural goods or services
- Must follow EU tariffs towards non-EU countries
- No free movement of people
Turkey enjoys free trade on a number of goods but it cannot negotiate different terms to the EU’s external tariffs to non-EU countries. In 2016 many EU member states saw an influx of migrants which forced them to take one many more migrants than they would have liked. Turkey, however, which does not have free movement of people, was able to charge the EU €6 billion in a deal to take on migrants as it had no obligation to the EU to take on more migrants than it desired.
4. Canada- CETA
- The Comprehensive Economic and Trade Agreement (CETA)
- No tariffs on most goods, excluding certain items such as eggs and chicken
- CETA only partially covers the services sector
- This is the model that Boris Johnson’s Conservative government is trying to persuade the EU to accept
CETA, which took seven years to negotiate, gives Canada access to the single market in a way that does not have the obligations of transferring EU law and paying an entry fee (notably advantageous compared to Switzerland and Norway’s agreement). However, services are not fully covered by the deal.
5. Singapore and Hong Kong
- Unilateral free trade policy
- Relies on the World Trade Organisation’s (WTO) rules
This model of trade appeals to those who are ideologically in favour of free trade. But it goes without saying that such a broad trade policy could damage certain British industries, especially goods like food and steel.
6. WTO Rules
- The UK would follow the rules for international trade as laid down by the WTO
- No requirement to implement EU law, although any traded goods would have to fulfil EU requirements
- No financial commitment to the EU
- No free movement of people
Trade on WTO rules does fulfil the notion of a “clean break” from Europe but WTO rules only allow countries to discriminate in favour of a trade partner in specific circumstances. Therefore, tariffs applied by the UK to the EU will be the same as the tariffs on goods from all across the world. This could damage both economies as they are interdependent on particular goods, and there would be some disruption due to restricted trade.
The key areas where the UK and EU greatly differ
- LEVEL PLAYING FIELD
- FISHERIES AND FINANCIAL SERVICES
- THE ROLE OF THE EUROPEAN COURT OF JUSTICE
Britain and the EU’s objectives
- Britain wants to diverge from EU rules and regulation, without losing too many EU privileges
- The EU wants to ensure that the UK cannot diverge
1. Level playing field
The EU aims to ensure that there is a “level playing field” between the EU and the UK. This means that in its future trade relationship with the EU, the UK would have to follow EU rules and standards to enjoy EU trade.
The UK’s Chief Negotiator, David Frost, has openly rejected this proposal. He argues that a “level playing field” would deny the UK “the fundamentals of what it means to be an independent country”. Instead, the UK is pursuing an agreement that does not require “alignment” with future EU Regulation. This is the current trade arrangement between the EU and Canada, South Korea and Japan.
The EU is concerned that if the UK does not sign up to its “level playing field” deal, the UK may gain a competitive advantage over time. They also argue that the UK is fundamentally different to Canada due to its geographical proximity to Europe. In October both sides agreed to allow “fair and open competition”, but neither can agree on how to achieve that.
2. Fisheries and financial services
Fisheries and financial services are examples of sectors where both nations are strongly interconnected. EU fishermen catch over 700,000 tons of fish a year in British coastal waters whilst Britain sells around 70% of its fish to the EU. Nearly 50% of the EU’s debt and equity issuance is carried out by global banks in London (Europe’s financial hub) whilst 49% of London’s economic output and nearly 7% of the UK’s economic output comes from financial services.
In fisheries, the trade negotiations will establish the level of access to the UK’s coastal waters and the tariffs on fish exports and imports. The UK’s current terms are that annual negotiations will take place to secure EU access to Britain’s coastal waters. The EU wants a long-term deal guaranteeing fishing rights. The sector only employs 180,000 people in the EU and makes up just 0.1% of the UK’s economy, but it is a sector with political influence.
In financial services, the trade negotiations will seek to ascertain the possibility of an equivalence agreement. The objectives of each party in financial services are the inverse to their current terms on fisheries. The UK’s primary objective is to establish a long-term agreement, whilst the EU would likely only grant equivalence on a short-term and scrutinised basis.
Equivalence is the mechanism by which the EU allows non-EU countries to access its financial markets. The EU decides if a non-EU nation’s financial services’ regulation produces the same regulatory outcomes as the EU’s regulation. Several countries have equivalence in certain areas of regulation, with only the US, Japan and Singapore coming close to complete equivalence.
Both are looking to leverage these sectors in negotiations. The EU has already threatened the loss of access to the EU’s financial markets unless the UK opens its coastal waters to EU fishermen. Both will play chicken until it gets down to the wire.
3. The Role of the European Court of Justice
After the first round of negotiations, the roles of the European Court of Justice (ECJ) – the most powerful court in Europe – and the European Convention on Human Rights (ECHR) – an international convention to protect human rights and political freedoms – have become an unexpected point of disagreement.
The UK has positioned itself in favour of restricting the influence of the ECJ and no longer formally applying the ECHR. For the UK, this position is fundamental to the Brexiteer mantra of “take back control”.
However, Michel Barnier, the EU’s chief negotiator, has labelled the UK’s position as “serious” and “grave”. The move underlines the UK’s desire to diverge greatly from EU rules and standards. The EU fears that the potential for gradual divergence could give the EU an economic rival that devalues the union between the 27-member states.
The timetable and the structure
The final deadline for these negotiations is 31 December 2020. The UK’s Prime Minister Boris Johnson has threatened to walk away from trade talks if “the broad outline of an agreement” is not in place by June. But the EU feel they are in a winning position. Many believe that the real movement on key issues will only take place in the autumn. It was hoped that six rounds of talks would have taken place by June, but the outbreak of coronavirus has delayed negotiations, with the fourth round of talks finishing on 9 June with little sign of a breakthrough.
The EU is keen to avoid a Swiss-style structure to the deal where there are separate agreements for each sector of trade (one financial services deal, one fisheries deal etc). Therefore it is likely that, if a deal can be agreed, there will be a single, all-encompassing UK-EU trade agreement. However, the EU will have to ratify the deal in all 27 of its member states and the European Parliament before it could be officially passed.
LittleLaw’s Verdict: The EU and the UK talk the talk, but won’t walk the walk
There has been a lot of powerful rhetoric and political symbolism attached to these trade talks. That is because the trade talks pose an existential political question to both parties. Britain must underline its independence and sovereignty as a nation. The EU must highlight what it means to be a member state.
The UK has a strong electoral mandate, and therefore pressure, to deliver this. But they face 100 experienced EU trade negotiators, a tight timetable and the counter-leverage of the political inflexibility of 27-member states and the more fractured European Parliament on the deal. At the end of it all, both sides will claim that they are the victors.
Everyone loves a bit of drama. But we must remember that both sides are not that different. The more that British legislation diverges from the EU (in the case of a deal to access the single market), the more tariffs will be imposed at the EU’s discretion. The relationship will be in a state of constant review. With greater enemies in the world, it seems likely the divorcees will learn to symbiotically co-operate.
Report written by Will Holmes
Share this now!
- Gary Gibbon interviews Georgina Wright of the Institute for Government and Same Lowe of the Centre for European Reform, Britain talks post-Brexit trade with the EU (Channel 4 News, 28 February 2020).
- Gideon Rachman, Brexit Solved With the Sword of Damocles (Financial Times, 2 March 2020).
- George Parker, EU-UK trade talks: four key battle lines for post-Brexit settlement (Financial Times, 27 February 2020).
- BBC, Five models for post-Brexit UK trade (27 June 2016).
- Sam Fleming, Philip Stafford, Matthew Vincent and George Parker, Can the UK and EU reach a compromise on financial services? (Financial Times, 12 February 2020).
- Sebastian Payne, Why is UK arguing about a Brexit matter that is already agreed? (Financial Time, 19 February 2020).
- Sebastian Payne, George Parker and Jim Brunsden, Brexit transition deadline in doubt as talks called off (Financial Times, 17 March 2020).
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