By Paul McGrade, Lexington’s new Senior Counsel on Brexit

The UK’s compromises to avoid a hard border in Ireland may significantly limit its negotiating room for manoeuvre as talks move to the UK’s future relationship with the EU. If the UK can’t negotiate an ambitious trade deal, it is committed to maintain ‘full alignment’ of Single Market and Customs Union rules, widely defined to prevent a hard border and support the all-island economy in Ireland.

Avoiding ‘full alignment’ depends on the EU agreeing a bespoke, ambitious trade deal

The UK hopes to avoid being driven to this fall-back by securing a Free Trade Agreement (FTA) so comprehensive that a hard border is unnecessary. If the EU doesn’t agree the kind of bespoke agreement the UK wants, not just Ireland but the EU27 now have a back-stop negotiating position which binds the UK closely to EU rules “now and in the future” regardless.

The UK may argue that the commitment is limited to existing areas of formal Irish cross-border cooperation, such as health or agriculture (even this would make a trade deal with the US, for example, much harder to achieve). But the Irish government and the European Commission take a broad view, especially on the economic dimension. The European Council has said that these commitments need to be “translated faithfully into legal terms” as soon as possible, or the start of future status talks will be delayed beyond March. As the UK binds itself legally to those commitments at the start of 2018, differences may emerge.

The two sides will probably begin future status talks far apart: the UK seeking a ‘Canada plus’ FTA – with wide services access but minus free movement of people; while for the EU the UK’s red lines limit it to free access for goods, with perhaps some add-ons such as aviation. Barnier has suggested the ‘pluses’ will be mainly non-economic, such as security cooperation. If this gap can’t be closed, the UK is committed in any case to maintain much more wide-ranging alignment than would be needed under a Canada-style trade deal for goods.

The negotiating process further constrains the UK

This constraint is amplified by the negotiating process. In Phase II, the UK will negotiate within a triangle of necessary approvals – agreement with the EU, and approval by both the European Parliament and by Westminster, by statute. Each of those acts as a constraint on the UK’s likely starting position. The EU27 have so far stuck to a clear position on no ‘cherry picking’, either by economic sector, or between the EU’s ‘four freedoms’.  The European Commission will propose a negotiating mandate for Phase II, which EU27 Heads may amend and will formalise at the 22 March European Council. That is not just an ‘opening gambit’; once settled, the Commission negotiators will have little flexibility. Key EU leaders will be preoccupied with other EU or domestic issues – as we saw in Phase I. The European Parliament will be even stronger on ‘maintaining the integrity of the Single Market’.  Westminster has a large soft Brexit majority, although it’s unclear how far Remain-inclined Conservative MPs are prepared to push the government on the substantive choices between the Norway and Canada models.

What flexibilities does the UK have?

The UK has some, limited negotiating flexibilities. It will hope to fracture EU27 unity, encouraging close economic partners such as Ireland and the Netherlands to advocate for its bespoke deal. Although the EU27 approve the final agreement by Qualified Majority, small, Anglophile Member States do not have the votes to deliver that by themselves. The EU27 are likely to continue to put a high value on seeking a consensus.

Alternatively, the UK government could get itself off the Irish hook by diverging from the EU rules while shifting the border across the Irish Sea, pressurising Northern Ireland to agree a ‘specific solution’ which keeps it aligned with the EU.  Although it might create opportunities for Northern Ireland investment, cross-community support would be needed in Belfast, and the DUP remain strongly opposed.

Phase I suggests that pressure will build on the UK’s red lines

The other lessons from the Phase I also suggest that the negotiating pressure will mainly come on the UK’s own red lines. Political and legal protection of the Single Market and the EU – seen as a vital national interest in Berlin – will play as big a role as trade economics. The EU’s superior negotiating heft will probably be used to deliver these aims, not to force the UK to stay in the Single Market; the EU as a whole could probably live with a deal largely limited to goods. Timing also works in the EU’s favour. Strict sequencing of future status talks from March – once the UK has made its Phase I commitments binding – reduces UK leverage through money. There is only six months to conclude a political agreement on the future relationship by October, to allow time for approval and ratification. That strongly points towards a largely off-the-shelf solution.

The only significant unknown is how UK political divisions play out once these constraints start to bite into the UK’s red lines. Despite the recent progress, the potential for a crisis that upends the talks, resulting in a hard, disorderly Brexit, cannot be ruled out.