Brexit Business Brief | Different visions

Written on 2 Mar 2020

The negotiations begin today, with the EU and UK having different visions of the future relationship.

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Given that Brexit has actually happened, this newsletter will now cover the UK’s future trading relationship with the EU.

Something has changed

Since the Brexit negotiations started in 2017, it’s been a united EU pursuing clear ends and a confused UK uncertain of its aims. Eventually Mrs May’s government settled on a close and complex relationship, staying, for example, within some form of customs union to try and maintain frictionless borders.

Once Mrs May was gone, Mr Johnson’s desire was simply to exit, and so his administration cut the knot by – remarkably – agreeing to an internal customs border between Great Britain and Northern Ireland. That meant the Withdrawal Agreement and its Protocols settled the Irish border issue to the EU’s satisfaction and so could be ratified, and the UK duly left the EU.

Right up until the general election campaign, how the UK saw the future relationship was not clear. Since then, the UK government’s new-found fixity of purpose has become evident. That’s the big change.

The UK: ‘We will not trade away our sovereignty’

Last week the UK government published its negotiating mandate for the talks that begin in Brussels today.

The following sentences give a flavour of the UK mandate, in their bullish assertion that where there is a choice in the negotiations between maintaining the UK’s legal sovereignty and aligning with the EU rulebook to achieve better market access, the former will always win:

Whatever happens, the Government will not negotiate any arrangement in which the UK does not have control of its own laws and political life. That means that we will not agree to any obligations for our laws to be aligned with the EU’s, or for the EU’s institutions, including the Court of Justice, to have any jurisdiction in the UK.

Michael Gove, Chancellor of the Duchy of Lancaster, emphasised the UK government’s determination not to be a ‘rule taker’ in a statement accompanying the publication of the UK mandate:

To be clear: we will not be seeking to dynamically align with EU rules on EU terms governed by EU laws and EU institutions.

What does this mean?

This insistence on political and legal sovereignty means that the UK accepts that access for financial services will be determined by unilateral equivalence decisions made by the EU and UK, separately – as the UK will not sign up to the EU rulebook to gain access.

It means that the UK will not accept that it has to align with EU rules on state aid, labour, environmental and tax rules (the EU’s ‘level playing field’) in order to gain ‘tariff free, quota free’ access for goods – as the UK must be able to set its own rules. It means that the UK accepts there will be friction at the border: customs declarations, licences, regulatory and compliance checks and procedures.

What the UK wants is a trade deal of the same type as the Canada-EU agreement. The intellectual underpinning of the UK’s negotiating mandate is, in essence, ‘hey EU, you agreed what we’re asking for with Canada / Japan / Mexico / other friendly countries, so it’d be hypocritical not to agree the same with us…all we want is a straightforward free trade deal, supplemented by agreements covering fisheries, law enforcement and judicial cooperation in criminal matters, transport, and energy’.

The mandate is adamant that what the UK doesn’t want is an ‘association agreement’, with an overarching governance structure and dedicated institutions. As, for one thing, that way lies an EU insistence on a role for the European Court of Justice, anathema for this UK administration.

The EU: ‘Robust commitments ensuring a level playing field for open and fair competition’

The EU also published its negotiating mandate last week. The vision is rather different.

For the EU, the most substantial points of principle at this point are that the UK signs up to those ‘level playing field’ conditions, so that the UK cannot seek competitive advantage by undercutting (regressing from) EU standards; that in particular the UK keeps in lockstep with the EU state aid regime; that fisheries access is dealt with first; and that there are overarching governance and institutional arrangements which include a role for the Court of Justice.

The intellectual basis of the EU’s approach is that the relationship with the UK cannot be done on the same ‘transactional’ basis as the trade agreement with Canada, because the UK is simply so much closer geographically. That proximity, the EU argues, means that level playing field provisions matter much more than in the Canada deal.

The reasoning behind that argument is not explained in the mandate, and the UK government has already pushed back, with Mr Gove observing that:

…the EU has also argued that the UK is a unique case owing to its geographical location. But proximity is not a determining factor in any other FTA between other neighbouring states with large economies. It is not a reason for us to accept EU rules and regulations. You need only to look at the USMCA agreement between the US, Canada and Mexico for an example of a trade agreement that does not require regulatory alignment to one side’s rules, or demand a role for one side’s court.

Michel Barnier, in a speech on 26 February, went into more detail on how level playing field and state aid provisions are dealt with in some of the EU’s trade agreements.

So the level playing field and state aid dispute is probably the number one area of disagreement, along with fish of course and governance. No doubt more will emerge as the talks start. There is a long way to go.

It is worth briefly saying that in many areas – energy, data, financial services, aviation, possibly mutual recognition of some professional qualifications – the EU and the UK do not seem too far apart (the UK acknowledges that it will seek an adequacy decision on data).

The next few months

The negotiations start today. The Terms of Reference agreed by the EU and UK are here. Topics to be negotiated have been divided into eleven groups (‘Trade in Goods’, ‘Trade in Services and Investment’, and so on). The agenda for the first round of negotiations is here.

It is expected that the teams will meet every two to three weeks, alternately in Brussels and London, up until a high-level review of progress meeting in June. That meeting is required by the Withdrawal Agreement.

And the UK has unsurprisingly – given its overall approach – laid down in its mandate that:

The Government would hope that, by that point [i.e. the June meeting], the broad outline of an agreement would be clear and be capable of being rapidly finalised by September. If that does not seem to be the case at the June meeting, the Government will need to decide whether the UK’s attention should move away from negotiations and focus solely on continuing domestic preparations to exit the transition period in an orderly fashion.

What that means is that the UK government is saying that it is ready to contemplate a ‘no trade deal’ exit at the end of 2020. Or as it has taken to call it, an ‘Australian-style deal’. Australia trades with the EU on pretty much WTO terms.

 

It’s worth having a look at these

For a detailed comparative analysis of the EU and UK mandate, see this excellent Institute for Government explainer.

As usual, the European Commission has produced a Q&A style explanation of its position.

The UK lead negotiator, David Frost, gave a speech earlier in February which is probably the clearest explanation of the UK government’s thinking and resolve.

Our Osborne Clarke Brexit Insights are here.