Catch-22 Looms Whether the EU27 Agree Brexit Trade Talks or Not

Kirsty Hughes | 24 November 2017

© 2017 European Union

Theresa May has belatedly shifted her diplomatic efforts on Brexit up a gear. But the EU27 are clear that the next week is crucial: without progress on the key exit issues, December’s EU summit will not agree to open talks on trade and transition.

On money, May’s cabinet is said to have given a green light to a much bigger offer. But May doesn’t want to do this without being sure the EU27 will, in return, move onto trade talks – hence meetings with Tusk, Juncker and other leaders. In Brussels, the view is that any financial offer must clearly cover the range of commitments they have identified. And, crucially, the UK must not link its offer on the divorce bill to a future trade deal – if May holds some back, conditional on future progress, the lights will stay at red.

On EU citizens’ rights, there has been progress, but Barnier wants a shift from the UK on family reunification rights and on sending benefits abroad to other EU member states (as happens at present). These issues will not just be pushed further down the track, or they risk becoming lost as the focus shifts to trade and transition.

Northern Ireland, the third key exit issue, has moved centre stage, rivalling money as the big challenge ahead of the summit. It has been clear for a long time that there is no obvious way to keep the Ireland/Northern Ireland border frictionless if the UK is outside the EU’s single market and customs union. As part of the talks, EU and UK negotiators have mapped out all the existing cross-border relations and institutions – denser and more numerous than many in Brussels had realised, underlining the need to keep the border open.

Ireland now wants a written commitment from the UK that, whatever trade deal it negotiates with the EU27, the Irish border will not become a hard one. The EU26 are firmly with Ireland on this – but the UK looks reluctant to provide a clear written commitment, so the hoped-for shift to trade talks could still stall.

Overall, in Brussels the hope is to capture all the UK’s commitments across the three main exit issues in an agreed joint report, aiming to forestall any backsliding if there is a deal to move on.

Does the UK know what it wants?

One of the ironies in all this is that the UK government has yet to clarify what sort of future trade and wider relationship it wants with the EU27. But Barnier has been clear what sort of trade and transition options he sees as on the table. The EU would consider a Norway-style, European Economic Area deal but, since the Tory government has rejected this, the other main option they see is a Canada-style free trade deal.

Such a deal could take several years, but some in Brussels think it is feasible to replicate a Canada-style deal in three years (i.e. starting in early 2018 and ending just as any short transition period might end). But the EU27 have also noted the continuing discussion in the UK government about future regulation, whether to move to a ‘Singapore’ model with much lower and less regulatory standards – and they will not offer a substantial trade deal in that case.

Transition is no panacea

Transition is the other big issue. Businesses in the UK have been increasingly vocal on the need for an agreement on transition if they are not to trigger contingency plans to shift staff, investment, and headquarters into the EU27 states. In Brussels, there is some bemusement at this – if the UK is heading for a Canada-style trade deal, there will be serious non-tariff barriers for goods production (from chemicals to cars to planes) and poor access for services. In that case, many businesses will surely trigger contingency plans anyway as that becomes clear as trade talks start, irrespective of transition.

And Brussels’ ‘no cherry-picking’ line continues. On aviation, for instance, if the UK wants to keep flying in and out of the EU, it will need to agree a standard third country aviation deal, and it will need to sort out transatlantic flights – currently covered by the EU-US ‘Open Skies’ deal – with the US separately.

The nature and length of any transition period are the two biggest questions that will need answering. The Tories currently want at most a two-year transition, while Jeremy Corbyn has suggested a four- or five-year transition. Ireland too is keen to see a longer transition. But, in Brussels, there are doubts that it is possible to go much beyond a 2-3-year transition under any Article 50 treaty deal between the EU and UK. After that, it starts to look like a future trade deal and should be agreed differently, with national parliament ratification and more. Many member states do not, anyway, want Brexit to drag out too much longer. But others hope that perhaps the UK, after a few years of transition, might plump for a Norway model after all.

Some are suggesting a transition as short as the end of 2020 – when the EU’s current seven-year budget ends. A longer transition would, after all, mean more budget payments for staying in the single market for longer. And after 2020, those budget payments may even go up, since the rebate would surely no longer apply.

Brussels, and the EU member states, have also made it clear that they cannot envisage anything other than some form of status quo transition – if a deal is to be struck by next autumn. The exit treaty would then specify that the UK would continue to be part of the EU’s single market and customs union for a time-limited period. This has never been done before, but the Brussels’ view is that such an extension of the acquis could be set up under an Article 50 deal.

This is not an extension of the UK’s EU membership: crucially, the UK would no longer have any voice or vote in EU structures and would still leave the EU on 29 March 2019. How it would fit with the EU Withdrawal Bill currently being debated in the UK is something for the UK, not the EU27, to solve.

One big challenge for the UK in such a short, sharp transition is that it wouldn’t cover the EU’s trade deals with about 60 countries around the world. Whether there is a way that this could be done looks doubtful. But there is some surprise in Brussels that the UK has apparently, so far, not even asked. Sharp reductions in trade loom both with the EU27 and with many other countries if no solution is found.

The UK government should beware what it wishes for. If and when talks do move onto trade and transition, the likely outcome – a short transition, a third-country trade deal – will be a fairly cold, hard shock for many businesses and other organisations.

If talks move on, businesses could start triggering contingency plans to move substantial parts of their operations out of the UK by early 2018. And if talks don’t move on, they would probably do so too. It’s a catch-22 and one the UK government does not appear to have an answer to.

Kirsty HughesKirsty Hughes | Twitter

Scottish Centre on European Relations

Dr Kirsty Hughes is Director of the Scottish Centre on European Relations. She is a researcher, writer and commentator on European politics and policy, and she previously worked for a number of leading European think tanks.