Brexit is not done
Forget all the celebrations. Forget the countdown and the 50p coin. Forget the flags, and the commemorative tea towels. January 31, 2020 did not spell the end of Brexit. Brexit is nowhere near over.
Yes, formally the UK has left the European Union, but it is now entering a state of “trade purgatory”. The EU-UK trade relationship will stay the same for the next 11 months, but the choice for heaven or hell still needs to be made. All signs indicate that a hard Brexit awaits.
The common view is that a No Deal-Brexit is no longer something to worry about. Wrong
For more than two years, the spectre of a ‘No Deal’ hung over the negotiations. Now that the Withdrawal Agreement has been approved, the common view is that this is no longer something to worry about. Wrong. We may have an agreement on Britain’s financial liabilities, and a solution on paper for the Northern Irish border, but nothing has been agreed on trade.
The UK-EU relationship is entering a new phase. EU trade commissioner Phil Hogan was right when he warned against complacency, saying that the most risky part of the negotiations is still to come.1 He was referring to the upcoming trade negotiations, which need to be finalised in the next 11 months.
No one is talking about the UK staying in the customs union or the single market. This will be a hard Brexit based on a free-trade agreement
Those trade negotiations, which will start in early March, will take place in a negative context. Rather than make trade easier, the two economies will negotiate how they can make their trade relations more difficult and costly. No one is talking about the UK staying in the customs union or the single market. This will be a hard Brexit based on a free-trade agreement.
The trade-offs are clear. The EU’s draft negotiating mandate states that the UK should commit not to reduce its environmental, climate and labour-market standards. The EU will also ask of the UK that it continues to follow EU rules for state aid. These so-called level playing field guarantees are a precondition for a trade deal.
But London will insist on having the freedom to diverge from EU rules. As prime minister Boris Johnson said on 3 February: “There is no need for a free trade agreement to involve accepting EU rules on competition policy, subsidies, social protection, the environment, or anything similar any more than the EU should be obliged to accept UK rules.”
Make no mistake, the UK will in time choose to diverge from EU rules. Why else leave the European Union’s system of regulations? And in response, the EU will make clear that this will inevitably lead to administrative costs, extra checks or exclusion of British products and services from the EU market.
It might not be as photogenic as last year’s political struggles in the House of Commons, but the debate over “divergence” and “dynamic alignment” will be every bit as dramatic and consequential. Expect the next few months to be dominated by discussions about what it means to align oneself to EU rules, how to measure when alignment becomes divergence, and how the EU aims to ensure compliance of any British level playing field commitments.
Though some in the UK would like to think differently, post-Brexit Britain will be a rule-taker on trade
A complicating factor is that the British will simultaneously enter into trade negotiations with other countries, such as the United States. Though some in the UK would like to think differently, post-Brexit Britain will be a rule-taker on trade. But whose rules? European and American trade standards differ – for example in the field of food safety (did anyone mention chlorine-washed chicken?).
A British deal with the US on agricultural goods, for instance, could make it impossible to strike one with the EU, and vice versa. An EU-US tug of war over the standards which the UK economy will follow lies ahead. Do not think that the US will sit on the sidelines as the EU and UK start their talks.
Of course, we only have 11 months to sort this out. In fact, the time available is even shorter when we allow for ratification of a deal before December 2020. An extension is possible, but according to the Withdrawal Treaty, the UK has to ask for one before 1 July. Boris Johnson has vowed not to extend the transition and, backed by his large parliamentary majority, Brussels is inclined to take him at his word.
Before 1 July separate deals also need to be struck on EU access to British fishing waters and on financial services. On fish, the EU is asking for long-term guarantees for EU boats to fish in British waters. London says it controls its own waters and is only willing to make annual agreements. Finding a landing zone will be tricky.
On trade in financial services, the EU will likely only offer standard equivalence arrangements, while the UK will want something more bespoke. These talks will consume most of the five negotiating rounds between now and the summer.
Yet, crucial issues including governance of the agreement, the implementation of the protocol on Northern Ireland, rules of origin, labour migration, customs procedures, and data exchange will also need to be sorted. Equally, an agreement will need to be reached on future police and law enforcement cooperation, or ways in which the UK can be plugged into European foreign policymaking.
A No Deal 2.0 beckons if no agreement is reached by the end of the year
As such, it seems that only a limited trade agreement with a lot of loose ends can be achieved before the end of the year. It is, however, likely that some formula will be found to continue negotiating beyond December 2020, without Boris Johnson formally asking for an extension. For companies, this offers little certainty. Neither is such an outcome guaranteed.
A No Deal 2.0 beckons if no agreement is reached by the end of the year. Then, European and British companies will find themselves trading under WTO rules, facing costly tariffs. Keep this in mind when you hear British politicians declare these coming weeks that they “got Brexit done”.
- 1. Tony Connelly, ‘Hogan warns “crash-out” Brexit still a possibility’, RTE News, 29 january 2020.