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Brexiteers beware – a bad deal is still a real risk

EU Brexit Pursuit

The UK’s negotiating efforts with the EU this year have been dramatically better than under the May administration. But a bad deal is still a real risk as a result of political and time pressures.

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Some recent reports suggest the UK may be flirting with dangerous compromises in key areas. The temptation to give ground just to get a deal over the line must be avoided. The government needs to remember that its key aim – re-establishing the UK as a genuinely independent state – can be met by simply leaving the transition period without a deal. Moreover, the government should bear in mind how limited the benefits of a thin trade deal with the EU are, especially one hedged around with various EU-friendly restrictions on UK action.

Most observers would agree that the UK’s negotiating efforts with the EU this year have been dramatically better than those seen under the administration of ex-PM Theresa May. At the start of the year, chief UK negotiator David Frost laid out clearly that the government’s key aim was to ‘recover our political and economic independence in full’.

Up to now, this goal has been pursued by UK negotiators with considerable tenacity. But as the year draws to a close, and with it the ‘transition period’ before the UK fully exits the EU’s system of laws and regulations, there are some signs that the UK government’s resolve is fraying and that it is flirting with dangerous compromises in some key areas.

The government has consistently argued that it would prefer to strike a free trade deal with the EU, but not one that sacrificed the UK’s freedom of action in areas like competition policy and regulation. In addition, restoring full control over the UK’s fishing resources has been a red line. But there are signs of wobbling in all these areas.

Governance: The UK argued at the start for a suite of agreements with the EU rather than a single one. A key reason for this was to prevent the EU trying to force agreements on its terms in specific sectors by threatening to collapse the whole of any agreement. Unfortunately, the UK has already moved towards the EU’s position here, allowing areas like transport and fishing to be linked to trade.

On state aid: Some of the proposed concessions to the EU in this area, e.g. agreeing to establish a strong national regulator for state aid, are not a big problem. But the UK has also reportedly agreed to consider enshrining in a deal arrangements that go beyond those normal for an FTA. There is talk of including some ‘high level principles’ – a slippery formula (how will they be drawn up? How governed?). More worrying still is the potential for each side to unilaterally retaliate against perceived breaches of state aid rules – before any arbitration and also against firms in unrelated sectors. This must be resisted.

On the ‘level playing field’: The UK has previously set out that it would accept so-called non-regression clauses in an FTA which would mean not rolling back existing levels of environmental and social/labour protections. This is reasonable. But recent talk has been of this ‘floor’ for such standards being ‘moveable’. This looks dangerously close to the EU’s long-standing aim to get a ‘ratchet’ clause into any agreement forcing the UK to keep in step with its regulations to avoid rising trade barriers. Supposedly, such rises in the floor would have to be mutually agreed but in practice it is easy to see how the EU would use this route to place endless pressure on the UK to align or lose ‘market access’.

On the Northern Ireland protocol: While the government seems to have persuaded the EU to accept that requiring NI firms to complete exit declarations for sales to the rest of the UK isn’t necessary, this is a small concession. Much more worrying is that there is no agreement on exempting most GB sales to NI from potential tariffs and regulatory checks – preparations for much-expanded checks on food products entering NI are going ahead. The EU is trying to get the UK to agree to define which goods moving from GB to NI are ‘at risk’ of crossing the NI border to Ireland (and so become subject to the EU external tariff) based on differences between the EU and UK external tariffs on the goods in question. This would be a massive disincentive to the UK lowering external tariffs on items highly protected in the EU and on the UK signing new trade deals.

On fishing: The government has reportedly floated the possibility of phasing in higher UK fishing quotas (and lower EU quotas) over time. This is reasonable and we suggested something of the sort ourselves some time ago. But there are worrying signs of wobbling over the key issue of moving to a system of zonal attachment to calculate the split of catches between the UK and EU fleets. It is also essential that the UK government does not carry over any of the hugely damaging fisheries management policies of the EU CFP into any phase-in period – these management policies threaten to force much of the UK fleet out of business and leave the UK unable to take advantage of greater allowable catches.

On top of the above points, we are also concerned about the government’s position on SPS regulations (covering animal and plant health) and financial services regulation. These are areas where there is much to be gained by diverging from EU regulations yet we hear little about this. We are concerned the government may keep the status quo largely in place to try to push forward agreement in other areas.

It’s also notable the UK government has allowed timetable slippage to occur – threatening to halt talks without major progress but not following through on this. The latest so-called deadline is October 15th but few in the EU believe this is a real deadline, unsurprisingly given the previous experiences in this area.

Our concern is that a combination of time pressure and political pressure – the latter made much more acute by the ongoing coronavirus crisis which is also arguably a crisis of government credibility – may tempt the UK government into making a rushed and bad deal.

Such a deal might feature a lot of highly damaging ‘small print’ that effectively locks the UK into following EU rules – backdoor dynamic alignment. A bad deal might also provide multiple avenues for the EU to pressure the UK into closer alignment over time – for example by fomenting endless disputes in areas like state aid and the level playing field and using unilateral retaliation clauses to close off UK market access one sector at a time. We have been here before, notably in the shape of the Northern Ireland Protocol which contains a number of damaging clauses that UK ministers do not at first appear to have fully understood the significance of.

Overall, it’s quite easy to imagine the government signing up to something that appears at face value to be broadly in line with its avowed aims but on closer inspection is nothing of the sort. The government and MPs need to remember two things –

First, the goal of re-establishing the UK as a fully independent state can be achieved merely by exiting the transition period at the end of the year. No negotiations or further agreements are needed for this.

Second, the benefits of the kind of free trade deal that is being worked on are, for the UK, quite small compared to trading on WTO rules:

* The EU’s average tariff on UK exports under WTO rules will be around 3%, very low. By way of comparison, before the UK joined the EU in 1973, the average tariff was around 11% and much higher for many sectors.

* Even with an FTA, some UK goods will not qualify for zero tariffs when entering the EU. Because the EU is resisting ‘cumulation’, which allows inputs from third countries with which the UK and EU have FTAs can be counted as local content, some UK-made goods will not have enough local content to qualify (via ‘rules of origin’ thresholds) for zero tariffs.

* Rules of origin compliance costs, which firms must undertake to qualify for zero tariffs, will also reduce the benefit of zero tariffs. In a few cases, they may be high enough to cancel out any benefit from having zero tariffs versus just paying the WTO tariff.

* An FTA with the EU will do nothing to ease possible border congestion. This is an incredibly important point. New border systems including checks, paperwork, and IT systems, will all be coming in regardless of whether an FTA is agreed. All the FTA would do is remove tariffs – which are anyway paid electronically and so have little or no part to play in defining border costs.

* An FTA with the EU will also do little or nothing to reduce other non-tariff barriers to trade – these will be much the same as under WTO rules. Indeed, the EU seems very keen to ensure this is so, its refusal to agree mutual recognition of conformity assessment for goods (which avoids double testing), in defiance of WTO guidelines, being a good example.

* The proposed FTA will not offer much on services – the UK’s strongest sector – beyond standard WTO commitments.

* It is the EU that benefits most from free trade in goods, running as it does a huge trade surplus with the UK. The UK can quite easily redirect its spending – on food, cars and other major items that constitute this surplus – elsewhere.

So, what would a bad deal look like? Its key component would be a thin FTA with no third country cumulation, no MRA on conformity assessment, no significant customs cooperation arrangements, and nothing of substance for services.

In addition, it would include a failure to exempt most GB-NI goods from tariffs and checks, the UK agreeing to maintain SPS and financial services rules very close to EU norms, onerous level playing field conditions and backdoor alignment of state aid rules. These add-ons would be quite enough to cancel out the minor benefit of zero tariffs versus the low average EU WTO tariff.

We should also look out for a bad deal on fishing that preserves key parts of the Common Fisheries Policy and a governance mechanism for the whole deal that allows the EU to retaliate unilaterally and disproportionately to perceived breaches of the deal and even to collapse it entirely based on disagreements in one small part of the overall package. Finally, look to see just how difficult it might be for the UK to exit such a deal – does it include standard exit clauses allowing the deal to be dumped after say 12 months? What other costs might such an exit trigger?

How should we know if a bad deal is on the way? Watch the political briefings and spin lines from pliant MPs. Lots of references to ‘sensible compromises’, ‘middle ways’, ‘balanced agreements’, ‘getting Brexit done’ and mentions of the background of the coronavirus epidemic should set alarm bells ringing.

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Briefings For Britain