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By Paul McGrade, Lexington’s Senior Counsel on Brexit

The EU’s publication of draft Brexit negotiating guidelines today contained few surprises, but will make grim reading for the UK government nonetheless; if not yet the beginning of the end for Theresa May’s vision of selective deep single market access while maintaining control of laws, borders, and money, it’s certainly the end of the beginning.

As we have suggested before, the EU has set out a very cautious negotiating position, prioritising the integrity of the Single Market and full EU control of its rule-making and enforcement processes over preserving frictionless trade with the UK as a third country outside the Customs Union and Single Market. This a short statement of principles, not a draft treaty. The starting point is that the UK’s red lines rule out anything other than a basic Free Trade agreement (FTA), along the lines of the EU-Canada deal. The EU text specifically rules out sectoral participation in the Single Market (‘cherry picking’). The key elements of a deal would be:

  • tariff-free trade in goods, with the aim of covering all sectors;
  • customs cooperation, but based on two separate customs areas – so rules of origin would apply, disrupting supply chains and raising costs;
  • a framework for voluntary regulatory cooperation on technical barriers to trade (TBT) and sanitary and phytosanitary standards;
  • developing a framework for market access in services under host state rules i.e. no mutual recognition – this is pretty standard FTA stuff, not an open door to widespread market access for services;
  • access to public procurement markets, investments and protection of intellectual property rights, including geographical indications; and
  • participation in EU programmes (e.g. in research, innovation or education) on usual third country terms (including budget contributions).

This is the bare bones of a basic FTA largely focused on goods, falling well short of the UK’s stated aims. The text specifically rejects some of Theresa May’s proposals – no UK participation in EU regulatory agencies, no data sharing without accepting EU data rules. That is a blow to industries like pharma, who had been hoping that regulatory alignment under the Medicines Agency would go a long way towards reducing customs friction.

Low ambition is not set in stone

There are some signs of more ambition; agriculture and fish could be included (“all sectors”), the EU wants to see “ambitious provisions” on movement of people, and a framework for the recognition of professional qualifications. The EU specifically mentions the need to “ensure connectivity” between the UK and the EU on aviation under air transport and safety agreements – though again this appears to fall short of what the UK is seeking.

But there is also an important constraint on UK regulatory flexibility; even for a basic FTA, the EU wants mechanisms to prevent “unfair competition” on tax, social, environmental and State aid rules, among others. For the EU, that means not just aligned rules, but adequate UK enforcement, a dispute resolution body, and unilateral EU remedies (a nod towards restricting market access). The UK might argue that it’s being offered a largely standard FTA, but with extra constraints on its regulatory freedom.

The draft text confronts directly the ‘economic self-harm’ argument which British Brexiteers had suggested would in the end trump Single Market legalism. The text recognises that the UK’s decision to leave the Customs Union and Single Market will “unfortunately will have negative economic consequences” – for the EU as well as the UK In effect, the EU has seen Theresa May’s Mansion House speech realism that market access will be more limited, and raised it.

There are two important caveats. Firstly, this a draft, which needs to be agreed by the EU27 Member States. It’s possible that they will seek to soften this stark message to Mrs May. But it’s unlikely. The Commission and Donald Tusk, who chairs the European Council meetings of national leaders, have consulted widely in national capitals. So far, their judgement of what Member States will support has been vindicated. And the UK has – as even friendly EU partners like the Irish and Dutch feel – offered too little, and asked for too much in terms of setting its own rules and expecting these to be accepted by the EU as equivalent in future. In a direct challenge to May’s speech, Tusk characterised this as refusing “to grant the UK the rights of Norway with the obligations of Canada”.

Secondly, and helping to maintain EU27 unity, the EU has held the door open to a more ambitious deal, if the UK red lines soften. There is certainly flexibility – and individual Member States’ support for a more ambitious deal – under the surface. But to unlock it the UK will need to offer much more, especially on guaranteeing to accept EU rules and the supervision and enforcement role of the ECJ in return for market access.

There is also a firm reminder that progress on future trade is contingent on the UK fully respecting its commitments on the ‘withdrawal issues’ – especially the Irish border. The EU has already set out in detailed legal text how it interprets those commitments. The UK has rejected that in fiery language. But without progress on Ireland, there will be no future agreement, and therefore no transition deal.

The focus shifts back to London

How likely is the EU position to shift? By taking such a tough, cautious line, the EU has put the ball firmly back in the UK’s court. That is a deliberate negotiating tactic, and EU unity may start to fray if the UK refuses to shift its red lines. But the smart money, as throughout this process, would be the on the UK position shifting. The British Cabinet has already accepted the outcome of largely aligning with EU rules for industrial goods. Some Brexiteer Ministers (Boris Johnson in particular) are holding out for the ability to decide, case by case, which EU rules the UK follows, and resisting rule-taking. But others, such as the Chancellor, would probably be happy to make a binding commitment to accept EU rules, at least in goods, in return for full market access. The EU holds out the prospect of offering a better deal, “if these [UK] positions were to evolve.”

That will be the focus of politics over the next three months, up to the June European Council. But Mrs May, carefully balancing between the wings of her party at the price of an un-negotiable UK position, will have little political capital with which to stretch her Cabinet compromise. Local Council elections in May are expected to be very bad for the Conservatives, further weakening her position. Hard Brexiteers will be happy, since an arms-length, Canada-style agreement is what they have always sought. But the Cabinet have already gone further, at least on substance; the real question is where and how the government will seek to move to improve the offer. Mrs May needs to start making trade-offs when she is weakest politically.

To speak to Lexington about our Brexit offering please contact declan.mchugh@lexcomm.co.uk

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