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A deal, some deal, or no deal? What’s at play in UK-EU trade negotiations

Introduction

The UK Government hopes that the General Election to be held on December 12, 2019 will solve the parliamentary impasse over Prime Minister Boris Johnson’s draft EU withdrawal deal, either by finally securing parliamentary ratification for it or by forcing a No Deal outcome.  Opposition parties meanwhile are working together to block Brexit entirely, or at the very least to make acceptance of any renegotiated withdrawal deal subject to a further referendum.  Public opinion polling shows the country deeply riven between Leave and Remain supporters, but far more bitterly so following three years of increasingly detailed analysis..

During those three years of bad-tempered negotiation, as much between political factions within the UK as it has been between the UK and the EU, it has become progressively clearer that whatever the outcome, the issues and challenges for UK future trade policy and trade are daunting.  Some of these are analysed in other articles on this site.  They will have to be tackled in awareness of serious problems which the prospect of Brexit also causes for governments and traders in the UK’s trading partners.  Unscrambling closely integrated economic and trade relations which go back over decades is a very different and more complex proposition than the normal negotiating job of starting from divergent positions and looking for common ground.

This article considers some of the key issues that UK will have to address after 12 December regarding its relationship with the EU. These naturally includes the status of the Withdrawal Agreement and the terms on which the UK leaves the EU, and connected to that the question of arrangements regarding Ireland. But beyond this lies the question of negotiating a new arrangement, a process that is likely to take time and that cannot be viewed in isolation from the UK’s positioning in international trade and its relationship to trade rules.

Brexit bases

There are two main bases on which exiting the EU might happen: (i) a ratified Withdrawal Agreement (either the one currently on the table or some new variant possibly subject to a further referendum); and (ii) No Deal, under which from Brexit day onwards the UK and EU would trade together according to the basic rules of the World Trade Organisation (WTO).  Either way the future bilateral relationship would be the subject of intensive negotiations once Brexit had happened.

Coping with Brexit

Brexit is therefore not a self-contained event i.e. a “clean break”, in which the  UK severs all formal ties with the EU at one go.  Rather it is a process.  This is because whatever the basis on which Brexit might happen, there would still be protracted and complex negotiations on vital issues such as security, cooperation on law enforcement, support for the international monetary system, the rights of people, and of course trade.

The UK, as a full member of an intricately-structured organisation established by a web of international treaties, has chosen unilaterally to leave that club and strike out on its own.  It has every right to do that if its people and Parliament decide that they don’t like the rules of the club.  In that case however we must be clear that no other country, whether in or out of the EU, owes Britain a living.  The 27 other EU member states (the EU27) have an interest in negotiating special post-Brexit arrangements with the UK only to the extent that they have vital interests to protect in their own established relations with the UK.  These will be much more important to some member states (mainly the larger ones, plus of course Ireland) than to others.

Similarly, non-EU trading partners who are asked by the UK for new bilateral trade agreements (the subject of a forthcoming post) will want such agreements to offer them special advantages that they may not currently enjoy with the UK while it is an EU member.  Only if they find the balance of advantage likely to be positive will they enter into the arduous, expensive and time-consuming business of negotiating on trade.

The brutal fact is that at the most basic level, every person or undertaking in the UK who wants to export goods to the EU or do other business there will have to conform to all the relevant requirements and procedures which apply in that market.  In the event of No Deal, that will also include bearing all appropriate tariffs applying in the Union to imports from the UK.  This was firmly underlined on November 14, 2019 in a statement by the Commissioner for Trade in the new European Commission, the Irishman Phil Hogan.

Withdrawal Agreement

The draft Withdrawal Agreement currently on the table in Brussels and London is designed to settle the mechanics of Brexit in the narrow sense of fixing the terms on which the UK relinquishes its membership of the EU. It accordingly deals with settling outstanding financial contributions, treatment of EU citizens in the UK and of UK citizens in the EU, continued cooperation in ongoing R&D projects, transport links, security cooperation and so on.

Ireland

The Withdrawal Agreement proposes a solution to the Irish border problem which involves Northern Ireland’s remaining subject to EU regulation, particularly in agriculture, while at the same time, as an integral part of the UK, it leaves the Union.

This proposal is not only conceptually awkward and untested. It also involves complex customs arrangements for handling tariffs on goods traded between Great Britain and the EU through the island of Ireland.  It is as hotly opposed by the Democratic Unionist Party in NI and by Brexit hard-liners as have been all previous border proposals, on the ground that it treats Northern Ireland in important respects differently from the rest of the UK and hence undermines the unity of the UK.  A former version of it, negotiated by Theresa May as Prime Minister, has been rejected in Parliament three times and might still not pass in this new form.

The Government insists that on this basis all customs examinations and physical checks on movement of goods at the border can be avoided.  It is difficult however to see how, in a situation where different regulatory systems and standards may apply in the UK, including Northern Ireland, and the Republic, conformity checks and associated customs procedures could be avoided as regards both Northern Ireland’s trade with Great Britain, and its trade with the Republic.  Most checks could probably be conducted away from the geographical border and in many cases online; but they still constitute a border within the territory of the UK, and Irish unionist politicians object to that.

Transition

The Withdrawal Agreement also specified that there should be a transition, or implementation, period during which nothing much would change in current bilateral UK/EU dealings or in application of the rules. The idea is to secure a breathing space while administrative and physical arrangements for post-Brexit trade were got up and running, and negotiations regarding the long-term bilateral relationship took place.  Based on the original intended Brexit date of 29 March 2019 this period was initially agreed to last till end-December 2020, i.e. for 21 months.

Now the Brexit date has slipped to 31 January 2020, but the target of end-2020 for the end of the transition period is maintained.  This standstill arrangement and negotiating window would therefore now operate for less than a year. Once Brexit has taken place, Article 50 of the Treaty on European Union will have been fulfilled and will offer no further basis on which the transition period could be extended.

A separate provision in the draft Withdrawal Agreement does permit, by mutual consent, a single decision to be taken before 1 July 2020 to extend the transition period for up to a further 1 or 2 years, but with no provision for further extension after that. This provision would however require the parties to be in a position only halfway through the transition period, as it currently stands, to determine that there was no chance of finalising negotiations by end-2020.  There would be obvious reluctance, no doubt on both sides, to throw in the towel and go for a further extension with six months’ transition still available; and if the parties were unwilling to do that by July 1 2020 yet could not conclude an agreement by 31 December, a No Deal Brexit would then be inevitable.

Long-term UK/EU relationship

Political declaration

What has been provisionally agreed between negotiators for the two sides – but not ratified by Parliament in the UK – is the Political declaration setting out the framework for the future relationship between the European Union and the United Kingdom, whose latest version was published on October 17 2019.  This document is agreed as part of the current draft Withdrawal Agreement, but nothing in its 26 closely-typed pages binds either side.  The Declaration lists areas of shared interest for negotiation and settlement between the parties, not only in respect of trade in goods but also regarding services and investment (especially financial services and digital trade), capital movements, intellectual property protection, public procurement, mobility of persons, all forms of transport, energy, nuclear policy, carbon pricing, cooperation on fisheries, competition, law enforcement, foreign policy and security cooperation, participation in joint projects, migration and counter-terrorism.

In each of these cases the Declaration sets out ambitious aims which will require detailed and time-consuming negotiations involving dedicated teams of technical experts on each side.  This is a huge undertaking.  So far these aims can be expressed only in terms of goodwill and best endeavours, although the document clearly seeks on this new basis to salvage as much as possible of the arrangements which the UK and the EU27 currently enjoy jointly as EU member states.

Free trade agreement

Specifically on goods trade, the parties

“envisage comprehensive arrangements that will create a free trade area [FTA], combining deep regulatory and customs cooperation, underpinned by provisions ensuring a level playing field for open and fair competition”.

The FTA should

“ensure no tariffs, fees, charges or quantitative restrictions [are applied] across all sectors with appropriate and modern accompanying rules of origin, and with ambitious customs arrangements that are in line with the Parties’ objectives and principles”.

Further,

“the Parties will put in place provisions to promote regulatory approaches that are transparent, efficient, promote avoidance of unnecessary barriers to trade in goods”,

and which go beyond the well-established disciplines of the WTO.  There should be close cooperation between UK and EU agencies on regulatory matters. This last point is vitally important, for the UK more than for the EU, because the EU27 market will carry much more international clout than the UK on its own.  EU standards will inevitably prevail in this process, and as noted above every single UK trader seeking to sell into or operate in the EU will have to conform to them.

A number of outcomes are possible under this framework. At one extreme, if talks fail, then the UK and the EU will revert to trading on MFN terms (a “hard” Brexit) . An intermediate outcome might be a free trade agreement that is similar to the one that Canada and the EU negotiated (CETA).

It is also worth comparing the present version of the political declaration and withdrawal agreement with the previous versions of each negotiated by Theresa May’s government. The latter implied a commitment to a common regulatory area and customs arrangement -essentially a deep form of integration on goods. As explained elsewhere, this put a limit on the losses that the UK could end up facing. The current version removes that default position – in effect exposing the UK to the possibility of greater losses on its trade with the EU. The calculation seems to be that this additional risk is worth paying if it allows the UK more freedom to negotiate trade agreements with third parties. Whether this calculation is realistic is a separate question.

The figure below illustrates the points. The bigger the red bars, the greater the annual losses on EU-facing trade relative to current arrangements.

 

The quantitative analysis does not capture all the nuances of the outcomes: we look at some of the qualitative aspects below.

FTA – border procedures

If a bilateral FTA as proposed in the Political Declaration could be successfully concluded, this would still not avoid the need for customs declarations and other border checks.  Where different systems collide, potential health and other conformity checks, customs declarations for tariff purposes etc. constitute a border even if that border does not involve physical checks at Dover or Antwerp.  Detailed rules of origin would have to be devised, agreed and enforced in order to determine case by case what goods qualified for duty-free treatment under the FTA and which did not.

Both the UK and the EU insist that they want to streamline procedures so as to avoid bureaucratic disruptions to trade, in particular border checks of consignments of goods travelling in both directions.  For example, thousands of trucks cross the English Channel in both directions every week carrying components for “just-in-time” delivery to manufacturing units, where a delay to just one consignment can cause serious disruption to production.  Despite extensive UK Government advice and publicity, it is reported that many firms still seem to be unclear what documentation they should complete, and where to submit it.

Much of the necessary reporting and information flow could these days be carried out online; but cases of doubt could arise where consignments which at present move freely within the EU could become subject to checking for special purposes at UK/EU borders.  The Government’s current draft “deal” as it applies to Northern Ireland tries to cope with these difficulties in the case of trade between the UK and EU through Northern Ireland, by effectively treating Northern Ireland as part of the EU customs union while asserting its position as an integral part of the United Kingdom.

Impact of No Deal

In the event of No Deal, whenever that occurred, businesses exporting goods which are subject to charges in the EU’s common customs tariff (CCT) would find that as from Brexit day their EU importing customers had to pay those tariffs, while both the UK exporter and the EU importer would be required to prepare and submit customs declarations and other documentation which is not required for intra-EU trade.  Important categories of UK goods would become more expensive and harder to sell into the EU as a result.  This impact would be particularly damaging to UK agricultural sectors, particularly sheep meat where most UK production is sold in the EU.

Meanwhile UK service suppliers operating in the Single Market would as now have to abide to the letter by all regulatory systems obtaining in the EU.  And the ultimate arbiter of those systems is the Court of Justice of the EU, whose rulings would have impacts on UK traders that may be direct or indirect, but in either case inescapable in both short and long term.

In this the UK’s future situation in the EU market might appear to differ little from the demands which (in the absence of agreed preferential trade deals) already face British exporters into other foreign markets. Exporters are used to facing established tariffs, customs procedures and documentation requirements in such markets and know how to cope with them.  The situation with the EU is however different, because the tariffs and charges which UK exporters would have to surmount in that market under No Deal would be new and their impacts on commerce both far-reaching and unpredictable.  The problems could be redoubled if in some sectors the UK unilaterally decided to depart from the EU regulatory standards which as a member state it currently applies, in order to pursue a perceived trading advantage in the wider export world.  This might help to ease access to some markets in third countries, but at the price of imperilling access to markets nearer to home in the EU.

Temporary implementation – tariffs

In the context of contingency preparation for No Deal, the UK Government has confused the issue of future tariff policy.  Like all EU member states the UK is a member in its own right of the WTO. After Brexit it will cease to follow the EU’s common commercial policy but will retain its individual WTO membership, and so it has to post with the WTO new national schedules of tariffs and other charges on imported goods.  As far back as December 2016 the UK announced that in order to minimise disruption of its trade both with the EU27 and with third countries, it would as far as possible adhere to the import tariff rates which it currently applies under the EU’s Common Customs Tariff.  Draft schedules have been submitted to the WTO on that basis.

Later however, on 13 March 2019, the Government announced that if (but only if) the UK left the EU with No Deal, then from the point of Brexit it would for 12 months suspend tariffs on 87% by value of UK imports, in order to avoid a sudden hike in prices charged to UK consumers and to manufacturers importing foreign components.  Tariffs on items seen as specially sensitive, like vehicles and some meat and dairy products, would not be suspended.

WTO implications

The WTO’s so-called “most-favoured-nation” (MFN) rule requires that a trade concession accorded to one trading partner must be extended to all WTO members. A WTO member can deviate from this requirement in specific circumstances, one of the most notable one being that it enters into a reciprocal preferential trade agreement with another.

The MFN requirement means that the UK’s possible 12-month tariff suspension would have to apply not just to imports from the EU27 but to all relevant UK imports of dutiable goods from all sources, except for those from countries which already enjoyed preferential access to the UK market.  The 12-month tariff window would be used to carry out a widespread review of what long-term tariff policy the UK should adopt.

The UK has the right to do this – the WTO prohibits tariff increases above the rates notified (“bound”) in national schedules, but welcomes decisions to apply rates below those notified.  However, the announcement of the possible temporary tariff suspension has created further uncertainty for UK business, which still has no idea of what long-term tariff policy it will have to adjust to.  And as to the long-term, all governments find that any concession once granted, and even if it was only temporary, is much more difficult to take away later.  Future attempts to resume charging notified tariff rates, if that situation arose, would run into opposition and objection, both in negotiations on the long-term trading relationship with the EU and in negotiations for bilateral agreements with third countries.

There also WTO implications relating to others aspects of Brexit. One relates to aspects of trade policy that cannot be easily carved up between the EU and the UK. The most notable example of this is the issue of tariff rate quotas (TRQs )– instruments used in aspects of agricultural trade such as lamb, beef or dairy. As a member, access to the UK market in TRQ-covered products was covered by a EU-wide TRQ. Apportioning that access post-Brexit in a manner that does not diminish access granted to trade partners is tricky and proposals made to date have not been viewed with satisfaction.

A second issue concerns the WTO-compatibility of the Irish backstop agreements. The fundamental MFN principle extends beyond duties charged to customs arrangements and processes. The backstop proposals contemplate more favourable arrangements between the Northern Ireland (part of the UK’s customs territory) and Ireland (part of the EU’s). This would be acceptable if there were a free trade agreement between the two, but part of the rationale of the backstop is to cover a contingency where there is no such agreement.

Both the TRQ issue and backstop proposals have prompted questions, and objections, on the part of other WTO members.

Negotiation is not easy

None of this is conceptually new.  All significant trading nations have detailed experience of international negotiations and disciplines on such matters, and the joint Political Declaration’s statement of intent to liberalise and harmonise trade policies is welcome.  But topic by topic, when it comes down to negotiation between dedicated teams of EU and UK experts, each side is highly likely to come up with special interests that require detailed individual negotiation and contentious trade-offs.  Very often the sticking points in the later stages of a negotiation are on matters to which little or no importance was accorded at the start.  In any event it will be far from the Brexiteers’ early ambition of simply rolling over the UK’s current relationships within the EU but minus the subordination to EU decision-making and law – in Prime Minister Johnson’s memorable words, “having your cake and eating it”.

A provisional or partial agreement?

It might be that as the tight deadline of December 31 2020 loomed, EU and UK negotiators could seek to avoid No Deal by agreeing on some form of partial or provisional settlement that left other issues open for resolution later.  This would not be a viable course.  First, there would be inevitable debate and disagreement over which side was getting more out of such an arrangement, maybe seen as an unfair advantage.

Secondly, and importantly, whatever arrangements can be negotiated between the UK and the EU will be subject to consideration by the WTO.  Article XXIV of the General Agreement on Tariffs and Trade (GATT), the WTO’s foundation document, requires that a FTA or a customs union must eliminate “substantially all” of the “duties and other restrictive regulations of commerce” between the parties to the agreement on goods traded by them.  “Substantially all” has never been definitively interpreted, but as a rule of thumb it can be taken to mean not less than 90% of the trade concerned.  A partial agreement that omitted important sectors (for example agriculture or vehicles), even if it was only temporary, could not pass this WTO test.  And even if the UK side were willing to enter into such a deal on a provisional basis pending further negotiation, the EU in such an important and visible case would be concerned to remain within the letter of international trade law, and would not be so willing.

The challenge of negotiating such a comprehensive agreement in less than a year is daunting, and probably only a further and massive extension of the negotiating period, under either Article 50 or the draft Withdrawal Agreement, could enable it to be met.  Meanwhile at every point in every discussion of Brexit terms, No Deal and the prospect of disruption to which it would give rise looms in the background.

Conclusion

In sum, Brexit is a process, rather than a one-off event than can “get done” at a particular point in time. This fundamentally reflects the interwoven nature of the UK and EU economies and the arrangements for their governance. To use a metaphor coined by Pascal Lamy, unscrambling the UK egg from the EU omelette will be exceedingly challenging for both sides.

Even if the current withdrawal agreement is signed, the likelihood is that the UK and the EU will face difficult decision points – and the political wrangling that goes with these – in the near term (on matters such as the extension or otherwise of the transition period), and in the medium to longer term regarding the configuration of future trade and economic arrangements. The nature of such arrangements are necessarily dynamic. And just as the UK was involved in periodic negotiations with other EU members on the nature of the Union and the single market, it will need to negotiate on a dynamic basis with these same countries, but from outside the club.

 


About the Author

Michael Johnson

Michael
Johnson

Michael Johnson was a senior official of the UK’s former Department of Trade and Industry, where he worked on international commodity policy, UK bilateral commercial relations with developed country markets, and the UK’s input to EU external trade policy. He is in demand as an independent consultant, and has advised governments of more than twenty developing or former Communist countries on trade policy formulation and on trade-related development projects.


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