Now that political agreement has been reached on the divorce terms and a transitional period, negotiating teams on both sides of the Channel are turning their attention to the new relationship. In this briefing we explore some of the key issues they will need to address in the coming months.
What do the UK’s current red lines point to?
To date the UK Government has said that after Brexit it will not accept free movement of people or the jurisdiction of the European Court of Justice and that the days of substantial financial contribution to the EU budget will be over. It has also made it clear that it regards the referendum result as a mandate for “taking back control”, both in terms of internal regulatory issues and the UK’s freedom to negotiate its own trade agreements with non EU countries.
The EU’s chief negotiator, Michel Barnier, has pointed out (most notably in his famous staircase slide) that these red lines point towards a Canada-style free trade agreement, and would preclude any “deeper” kind of relationship, at least in terms of trade.
Is there any room for manoeuvre?
It is notable that the UK’s position has been largely set out in speeches from Theresa May, in contrast to the EU’s which is enshrined in formally adopted negotiating guidelines. That means that some of the UK’s red lines could be open to interpretation.
For example, it is possible that the Government will be prepared to countenance some kind of reduced role for the ECJ, even after the transitional arrangements unwind. It is also pretty clear that the UK Government would agree to be a “rule taker” on a sector by sector basis and would also be prepared to agree to regulatory alignment in some cross-cutting areas such as data protection.
On the EU side, there is also an acceptance that trade is just one “pillar” of a future relationship which would also extend to justice and home affairs, security and defence, and foreign affairs. There is also room for areas of “specific co-operation”, such as research and transport. It is possible that the EU could be persuaded to add financial services to this list, though there is no mention of this in the current negotiating guidelines.
Convergence, equivalence or divergence?
Discussions about the future trade relationship between the UK and EU can be hindered by lack of clarity on the words chosen to describe the differing degrees of regulatory alignment.
Generally speaking though, convergence is used to describe a situation (currently only possible within the single market) where both countries have exactly the same rules, and common enforcement mechanisms. That is why there are virtually no barriers to trade in goods within the single market.
Equivalence or mutual recognition applies where the two countries have different rules but reach an agreement that they fulfil the same objectives. However this still means two separate sets of rules, two separate enforcement mechanisms and the need to check regulatory compliance for goods crossing the border, even if no customs duty is payable.
As the CBI explains in its “smooth operations” report, the challenge the negotiators face is how best to achieve the balance between a Norway-style agreement (with a high degree of convergence but limited domestic control) and a Canada style agreement (with more limited access to the EU markets but a much higher degree of domestic control). However the EU’s current position is that no such half-way house is possible.
What are the main constraints?
Leaving aside what may be politically acceptable to the EU 27, the most obvious obstacle in the way of a unique, half-way house agreement is the need to avoid a “hard” border in Ireland. This issue was postponed, but not resolved, when political agreement was reached on the divorce settlement.
While what a “hard border” means in this context may be open to some interpretation, avoiding it must point to a high degree of regulatory alignment between the UK and the EU. The Labour party’s proposal of staying in a customs union with the EU would be a partial, but not total, solution to this conundrum. The EU’s default position is set out in some detail in the first protocol to the draft withdrawal agreement, which would establish a “common regulatory area” comprising the EU and Northern Ireland – a solution not acceptable the UK Government if it would simply move the hard border to the middle of the Irish Sea.
Another constraint – perhaps operating in the opposite direction – is the WTO’s “most favoured nation” principle. In other words, when negotiating a trade deal with another non EU country, the EU is generally precluded from offering more favourable terms to the UK than it offered to Canada.
The House of Commons Brexit Committee’s report on the future UK-EU relationship includes an accessible account of the EU’s existing relationships with third party counties. It concludes with a list of criteria by which it believes the political declaration on the future relationship, expected in October, should be judged.
The CBI’s smooth operations report outlines the regulatory needs of 23 industry and service sectors, and looks at the common rules that they would like to retain after Brexit. It concludes that opportunities for divergence “are vastly outweighed by the costs of deviating from rules necessary to ensure smooth access to the EU, the UK's largest trading partner.”