The shape of the UK and EU trade talks in 2020

Feb 17, 2020

Since the UK formally left the EU two weeks ago, the two sides have been gearing up for negotiations on the future relationship. The EU is still finalising its mandate, with the European Parliament and member states pushing for a tougher stance than the European Commission’s draft. The Prime Minister set out the UK’s position in his Greenwich speech earlier this month.

Over the coming ten months, the key moving parts are likely to be market access for goods, ‘level-playing field’ obligations, fishing rights, and the structure and governance of any agreement. Separately, both sides will also need to ensure the effective implementation of the Withdrawal Agreement – particularly the Protocol on Northern Ireland. The EU negotiations will also have implications for the UK’s plan to launch simultaneous talks with its top priority non-EU markets, notably the USA, Japan, Australia and New Zealand.

On goods, the UK and the EU share the same the end goal – a zero-tariff, zero quota free trade agreement. The EU has consistently framed the future relationship as a choice between a close relationship based on the rules of the EU’s Single Market (like Norway), and a distant relationship based on a free trade agreement (like Canada). Unlike his predecessor, Johnson has accepted this framing and come down decisively in favour of the latter. In many ways this will make the negotiations easier, as the Government is now explicitly seeking to emulate previous EU trade agreements. It is worth noting, however, that even the most comprehensive EU FTAs are not completely zero-tariff and quota free – so a successful UK-EU deal would be “unique” to some degree. For example, the EU-Canada deal does not remove tariffs on certain agricultural products.

Even without tariffs, the corollary of the UK’s desire for an independent regulatory regime is increased friction and non-tariff barriers on UK-EU trade after the transition period, a trade-off which the Government has acknowledged and for which Whitehall and businesses will need to prepare this year. The Commission has broadly accepted that the UK is prioritising regulatory freedom – its draft mandate states that “the economic partnership should ensure that the Parties retain the autonomy and the ability to regulate economic activity.” However, this is the source of some contention in Brussels, with the European Parliament pushing for UK-EU alignment in sectors such as food standards and chemicals regulation.

There are other economic questions to address, particularly regarding financial services. This week, the Treasury and UK-based firms have urged the EU to consider a new framework for regulatory cooperation that would give greater certainty over the European Commission’s “equivalence” regime, which UK firms will rely on for market access. Under the EU’s current rules, equivalence can be unilaterally withdrawn at short notice and in some cases after only 30 days.

Under the new system being mooted, the UK and the EU would each have the ability to change their regulations, and therefore diverge, but there would be a formal process for deciding whether rules were still equivalent, based on regulatory outcomes. This would not stop the EU from withdrawing equivalence, but it could ensure that any divergence was coordinated and that industry would benefit from longer lead times and greater transparency over any changes to market access. Michel Barnier has dismissed the idea of “general open-ended ongoing equivalence” but, in theory, such a proposal would respect the EU’s desire for regulatory autonomy, and would build on the precedent set by the “joint financial regulatory forum” set up under the recent EU-Japan free trade agreement.

A likely area of particular controversy is level-playing field obligations demanded by the EU – measures to prevent unfair and trade-distorting competition on issues such as environmental regulations, employment law and state aid. The EU Commission’s opening bid is similar to the provisions previously negotiated with Theresa May’s Government, as part of the now defunct all-UK backstop. These commitments are more restrictive than those typically included in an FTA – particularly on state aid, where the EU demands ongoing UK alignment. The EU argues that the UK’s size and proximity necessitates more stringent obligations, an argument the UK rejects. Indeed, one of the strongest arguments in the Prime Minister’s Greenwich speech was that Brussels’ fear of a race to the bottom is baseless. As he pointed out, the UK was the first country in the G7 to commit to net zero carbon, has gold-plated many EU social standards, and has a much better record of compliance with EU state aid law than either France or Germany.

A second source of difference is fishing. The Government position is that the UK will become an independent coastal state like Norway or Iceland, with annual negotiations on access to waters and fishing opportunities. The Commission wants “stable” quota shares decided on a longer-term basis, and has emphasised “upholding Union fishing activities” as a key objective. There is room for compromise between these two positions, but finding it will require navigating choppy political waters.

On both level-playing field and fishing, there is also a risk that the EU’s mandate is toughened up in internal negotiations. For example, on environmental and social standards, the Commission’s position is that existing common standards should be upheld – but the European Parliament and several member states, especially France, are pushing for ongoing UK alignment with future EU rules. This would place greater constraints on the UK than the EU insisted upon under May’s backstop – which, based on a UK-EU customs union, was a deeper relationship than the Government is now seeking. Similarly, on fishing, several member states are pushing for the EU’s mandate to explicitly demand the status quo. This, too, would be very difficult for the UK to accept.

Finally, there is an emerging split between the UK and the EU is over the structure and overall governance of any agreement. The EU wants all the aspects of future relationship embedded in an overall governance framework, with a cross-cutting mechanism for dispute resolution. The UK, by contrast, wants a “suite” of separate agreements, each with specific dispute resolution settlements. This is not merely a technocratic matter, it is about political leverage. For example, some on the EU side have publicly suggested that the agreement might link together the seemingly separate issues of fishing rights and financial services. The EU has previous for creating such “links” to maximise leverage – it recently banned Swiss stocks from being traded on EU exchanges because Switzerland refused to ratify a new broader treaty with the EU.

Overall, broad UK-EU agreement on the scope of the deal being sought means a possible landing zone is in sight, but the path there will require bridging significant divides – each with the potential to be deal-breaker – in a short space of time. Recent history suggests much will be left until late in the day.

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