Where Next for Brexit Talks on Trade?

Kirsty Hughes | 24 January 2018

© 2017 European Union

Very tough EU-UK talks lie ahead if a Brexit deal is to be pinned down for the autumn in legal form, so it can be ratified on all sides. The UK has yet to set out precisely what it wants – but if the starting point is that the UK doesn’t want a Norway or Canada-style deal and that is all that the EU27 offer, then finding a path to a deal will not be easy.

Without a deal on the framework of the future relationship, the first stage deal on Northern Ireland, EU citizens’ rights and money will run into difficulty too (even if some minimal deal could be agreed on citizens and money in the face of ‘no deal’ elsewhere).

And time is certainly running short. The EU27 won’t agree their high-level trade guidelines until their 22-23 March summit. After that it will take a few weeks for the Council to then agree detailed negotiating directives. That suggests trade talks not starting before the second half of April – by when, it is hoped, the transition arrangements will have been mainly agreed. By then too, the first phase agreement will need to have been put into draft legal form – but disagreements there, given the December fudge on Northern Ireland, will then burst back into life and will impact on the trade talks themselves.

What sort of framework for a trade deal is possible?

The UK government only had its first discussion of the future relationship at a full cabinet meeting last December. The EU27 want to see a much clearer pitch from the UK side on what it wants than Theresa May has set out so far in a couple of speeches. Hence the delay in the EU’s trade guidelines until March.

But, of course, the EU knows very well the red lines that May has set out: no freedom of movement of people, no single market or customs union, and no oversight by the European Court of Justice. The EU’s chief negotiator, Michel Barnier, recently set out the implications of this in a diagram – showing how these various red lines rule out EU membership, EEA membership, a Swiss-style deal and a Ukraine-style association agreement, leaving a Canada-style trade deal as the obvious answer.

But a Canada-style deal is not what the UK wants – although the UK’s negotiator, David Davis, told the House of Commons Brexit committee on 24 January this year that the Canada deal provided a ‘floor’ to any future UK-EU relationship. On the UK side, officials are very concerned that the EU will stick to an essential offer of either a Norway- or Canada-style deal – and are quite aware that a deal similar to the latter would cause major economic dislocation. They are very keen to see space opened up to debate in-between models.

On the UK side currently, the debate within the government appears to boil down, in many ways, to whether to go for a ‘high alignment’ or ‘low alignment’ model for the future EU-UK economic relationship. Theresa May in her September speech in Florence set out the idea that there may be three main types of regulatory relationship (some are calling these three regulatory ‘buckets’): one group where regulations are the same, one where the goals are identical but the regulations differ somewhat, and one where there is regulatory divergence. If for goods and some services, there was ‘high alignment’ then, according to May, cross-border production, supply chains and access for services could all emerge relatively unscathed. Chancellor Philip Hammond would probably back such an approach, but others such as the foreign secretary Boris Johnson might not – especially if ‘high alignment’ has to be ‘full alignment’.

Amongst UK officials, at least, there is full awareness that the EU will set out guidelines in March that will reject this approach of three regulatory buckets. The EU is not about to upset the internal rules, regulations and structures of its single market to accommodate the UK in a cherry-picking deal. The EU27 in March may not precisely set out a Norway and a Canada-style offer, but they are likely to do something very similar. In response to whatever further detail Theresa May has put forward by then, the EU could set out what its basic approach would be if the UK’s red lines are respected, and what it would be if those red lines were not crucial.

It is clear that the EU is not going to accept ‘high alignment’ as a concept allowing the EU and UK in future to have somewhat but not very divergent regulations (in some or most sectors) and some form of committee to discuss what happens if regulations diverge substantially. If the UK does not want to follow EU regulations and laws, then it will be a Canada-style deal (though obviously exports to the EU would have to conform with EU regulations). And the only ‘special’ aspects of the UK-EU relationship will be around security, foreign policy, police cooperation and around exactly how the UK participates in some of the EU’s research and education programmes.

Some on the UK side hope that the EU’s expected rejection of a genuinely bespoke economic relationship might weaken in a few years time – perhaps in a major rethink of its whole relationship with countries in its neighbourhood. Perhaps, but for now it isn’t on the cards.

Is there an intermediate deal?

If the UK did end up with something rather like a Canada-style deal then this would not resolve the commitment to keeping the Ireland/Northern Ireland border open as set out in the phase one deal. The UK side still imagine that a better-than-Canada deal and some specific, perhaps differentiated measures for trade across the border might solve the problem. Some go as far as wondering whether staying in the customs union for goods and agriculture would be almost good enough.

But the only route to keeping the Irish border frictionless is for either Northern Ireland or the whole UK to stay in the single market as well as the customs union. This is what Ireland means by ‘full alignment’. There might be variants of this – staying in the single market and customs union for goods only, leaving services to take the full hit of only having Canada-style access (barely better than WTO access – perhaps leading to a 61% reduction in services trade with the EU).

But for the various types of intermediate models, there are two questions: whether they are acceptable to the EU, and whether they are acceptable to the Conservative government and backbench MPs.

A customs union for goods and agriculture – now supported by the UK’s CBI – would be acceptable, probably, to the EU (with a side deal on fisheries). But how such a customs union could be sold to ‘Leave’ voters and Brexiteers in the Tory party is another question. For Brexit to mean still following EU trade policy but with no vote and little voice would be a major loss of sovereignty – and would put an end to the idea of a global UK establishing great new bilateral trade deals around the world. And customs unions – as Turkey knows – have various drawbacks. Turkey has to apply the tariffs the EU has agreed in third country trade deals, but then it still has to negotiate (with almost no bargaining power) its own access to the markets of those third countries. This would seem a very strange place for the UK to end up.

And a customs union does not solve the problem of cross-border production and supply chains, or of the Irish border – only the single market as well does that. So there would be serious economic knock-on effects for both goods and services sectors in terms of barriers to trade and loss of access.

Would the EU accept the UK being in the customs union and single market for goods and agriculture but not services – and without freedom of movement of people? It could solve the Northern Ireland issue, but it would be a peculiar (and still damaging) construct for the UK and would cross the EU’s own red lines on the four freedoms of the single market.

A Rock and a hard place

The UK government has ended up in a place where it is not only against free movement of people but it is also against following EU regulations. It cannot sell to its MPs or its voters the idea of being a ‘fax democracy’ like Norway and having to apply new EU rules with no vote and no voice, even in the absence of free movement (not currently on offer anyway from the EU). The UK government’s hope that the EU will help it off this hook of its own making by allowing a high but not full alignment model across goods and services will soon, in March, face the reality of the EU’s trade guidelines.

If the UK government decides to accept a Canada-style deal as inevitable, then there is no solution for the Irish border. If it accepts a customs union and single market outcome to deal with the latter, that is a Norway-style deal that it cannot sell within its government and party. The government may try to fudge this in the outline trade framework and hope to find a better way through as transition unfolds. But the Irish government will not allow a framework and Brexit deal to go through that doesn’t pin down a single market/customs union definition of full alignment.

The UK faces a rocky path ahead. And if, or as, a deal gets too hard to pin down, then the two choices of ‘no deal’ or ‘no Brexit’ will come ever more sharply to the fore.

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.