Brexit: Time is tight and risks are high
Although both sides are aiming for an ambitious agreement, important differences across a range of politically-sensitive areas between the UK and the European Union are already evident. Time is tight and the risks of miscalculation between now and the 31st December deadline appear high.
Earlier this week, Boris Johnson set out the UK’s approach to the forthcoming negotiations with the European Union. He stated that the UK is aiming for an off-the-shelf Canada-style Free Trade Agreement (FTA), with World Trade Organisation (WTO) terms as the default if negotiations fail.
Also this week, the EU’s lead negotiator, Michel Barnier published the EU’s draft negotiating mandate, due to be approved by Member States on 25th February, to allow formal negotiations to begin at the end of the month.
The mandate states that the EU is aiming for an “ambitious and comprehensive new partnership” with the UK. However, due to the limited time available, the EU will seek to agree as much as possible by the end of the year. They will prioritise areas that would have the greatest impact in a no-deal scenario, with negotiations on remaining issues to be conducted after the end of the transition period.
Potential flash points
Although both sides are aiming for an ambitious agreement, important differences across a range of politically-sensitive areas are already evident, which will be very challenging to overcome in the time available. These include:
| Issue | UK Approach | EU Approach |
| Single / multiple agreements | A suite of agreements, comprising an FTA covering substantially all trade; and separate agreements covering fisheries, internal security, aviation, civil nuclear etc. | A “single package”, to be supplemented, if necessary, with agreements on outstanding issues after the end of the transition period. |
| Scope | Limited: issues such as migration, competition and subsidy policy, environmental standards, social policy, procurement, data protection, foreign affairs to be determined domestically and not subject to an international treaty | Comprehensive, including underpinning values & principles; economic arrangements (trade, fisheries and level playing field “guarantees”); and security (judicial, internal security, and foreign policy) issues. |
| Market access for goods | No tariffs, fees, charges or quotas. Protocol on rules of origin. | No tariffs, fees, charges or quotas “providing a level playing field is ensured through robust commitments”. Rules of origin based on standard EU rules. Fisheries access will “guide the conditions” of market access on free trade. |
| “Level playing field” measures (social, tax, environmental and competition policy) | No regulatory alignment. Standard high-level clauses on international obligations and non-regression to be included – as per EU FTAs with Canada, Korea, Japan. | UK-EU proximity and economic interconnectedness requires robust commitments to ensure level playing field, with the ability to include additional areas or higher standards over time. |
| Fisheries | UK will have annual negotiations with EU on access to waters and fishing opportunities, as per current EU arrangements with Norway and Iceland. UK will “consider a mechanism” for cooperation on fisheries. | Build on existing reciprocal access conditions and quotas for all relevant species. Objective to “avoid economic dislocation for Union fishermen that have traditionally fished in UK waters” |
| Financial Services | Enhanced regulatory and supervisory cooperation; arrangements for structured withdrawal of equivalence findings. | Close and structured regulatory and supervisory cooperation; market access based on unilateral equivalence decisions. EU seeking to link degree of financial services market access to fisheries. |
| Role of European Court of Justice | No ECJ jurisdiction over any UK laws or supranational control in any area. | ECJ to decide on interpretations of EU law. Independent arbitration panel should follow ECJ rulings. |
| Ratification | Both Houses of Parliament. | Tbd, depending on whether the Agreement covers issues solely within the EU’s competence or also issues within Member State competences. |
Time is tight
While it was to be expected that there would be significant gaps between the two sides at this stage, the UK’s decision not to extend the transition period beyond the end of this year means time is extremely tight.
The UK Government is seeking to agree and ratify in ten months the type of FTA that took a well-prepared Canadian team seven years to deliver. Essentially, there will be just two blocks of negotiations – from the end of February until a joint stock-take summit in June; and from July until the European Council meeting in mid-October.
Privately, UK Ministers concede that success in his timeframe will require huge political will on both sides but, as it’s draft mandate shows, the EU is already preparing to push negotiations on certain issues into 2021 and beyond.
The European Commission has also said that it will only take a view at the end of negotiations on whether any treaty agreed can be ratified solely at EU level or if it will require the explicit consent of Member State legislatures (as was the case for CETA) – meaning the time required for ratification remains an open question and could squeeze available negotiating time yet further.
Conclusion
By aiming for a Canada-style FTA with the EU, the UK Government is explicitly prioritising sovereignty over access to the Single Market and accepting (even if not yet explicitly) that there will no longer be a frictionless border between the UK and EU.
With, now, relatively more limited demands, the UK is seeking to make the EU – nervous at the risk of having a low-tax, low-regulation immediate neighbour – the demandeur across a wide range of issues from fisheries to social and environmental policy to security and foreign policy cooperation, attempting to strengthen an otherwise weaker hand.
Whether the UK’s approach will work depends in part on whether it really is prepared to exit the transition period on WTO terms; and whether the EU is willing to make concessions to avoid such an outcome.
Government insiders claim the PM is willing to opt for WTO terms, having worked through the social and economic implications in detail last Autumn. However, EU leaders will be sceptical, noting both the concessions made by Boris Johnson to secure a Withdrawal Agreement last October, and the nervousness among new Conservative MPs representing areas in the Midlands and North of England at trade with the EU being conducted on WTO terms only.
With so little time available to overcome significant political and policy differences, the risk of miscalculation is clearly high and the prospect of agreeing a comprehensive UK-EU trade agreement by December 31st looks very challenging indeed.
Important information
- Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.
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