As we recently wrote, there have been some suggestions from recent press reports that the UK government’s resolve is fraying and that it is flirting with dangerous compromises in some key areas of the talks with the EU. It is possible that these worrying reports reflect kite-flying by the EU side. But Brexiteers would be unwise to bet on that, given the deceptions seen under the May government.
The serious problems emerging with the Northern Ireland Protocol (NIP) also underline the need for vigilance – that rushed and poorly drafted agreement now looks like a practical and legal nightmare, with some ministers apparently having been unaware of what they were signing up to. We have already signed one very bad deal, and we must avoid signing another.
Given this, we think it makes sense to outline what a ‘bad deal’ would look like. In what follows, we lay out a series of key points Brexiteers should be looking for in different sections of any agreement.
A deal allowing goods trade between the UK and EU with zero tariffs would be a good thing. But EU average tariffs are low, so the gains from tariff removal alone aren’t large. Other elements of a goods agreement also matter, especially those that impact on non-tariff barriers to trade (which may be higher than tariff barriers in many cases). Key bad elements, which could render a zero-tariff deal of limited value, could be –
- No agreement on mutual recognition of conformity assessment (MRA). These agreements reduce regulatory checks and costs of trading with the EU from outside the single market and the EU has agreements of this type with several other countries.
- No mutual recognition of GMP (good manufacturing practice) which recognises e.g. batch testing of pharmaceuticals in each other’s territories. A similar issue exists with whole-type approvals for cars.
- Ungenerous rules of origin e.g. requiring a high UK content share for UK goods exports to the EU to qualify for zero tariffs. A key example here is electric automobiles due to the high share of total costs accounted for by batteries.
- No cumulation of rules of origin e.g. allowing components in a UK good to be counted as local content if they come from a country with which the UK and EU both have a free trade deal. This kind of cumulation is allowed in existing EU deals with Canada and Japan (car parts).
- No customs cooperation chapter, which would allow for smoother border processes e.g. a reduced level of border checks.
Level playing field:
The so-called ‘level playing field’ is a critical area for the EU and is all about trying to prevent the UK competing vigorously both in EU markets and in the rest of the world. So-called ‘non-regression’ clauses are common in free trade deals and require parties to agreements to uphold existing levels of e.g. environmental and labour standards. But the EU wants to go much further than this. Key bad elements in this area could include –
- LPF being based on regulatory alignment (as the EU would like) rather than unfair competition (as the UK would prefer). In the latter case, it would be incumbent on the complaining party to demonstrate actual market distortions/losses relating to lowered/different rules in e.g. environment or labour areas.
- A ‘ratchet clause’ that would attempt to make the UK align continuously in the future with the EU on regulations in the environmental, labour and tax fields. This is currently being bandied about by the EU as ‘shared high standards, evolving over time’. Supposedly this ‘evolution’ would need to be mutually agreed. In practice, this would be a device to try to force dynamic alignment – with the EU threatening to bring in tariff and other barriers if the UK refused to copy and paste its ever-more-restrictive regulations. By contrast, non-regression from existing standards would be acceptable (as seen in other FTAs).
- A dispute resolution process for LPF issues that has reference, directly or indirectly, to the ECJ rather than being based on a neutral arbitration panel.
- Allowing complaints of LPF breaches to be based on divergence from EU rules, rather than the complaining party having to show the other party has gained an unfair advantage by altering or ignoring rules (i.e. a system based on outcomes).
- LPF rules on tax that go beyond the OECD BEPS agreement. This agreement just outlines approaches to combat corporate tax evasion and does not constrain UK tax policy.
Again, it’s normal for free trade agreements to include state aid sections where parties agree to refrain from various distortionary practices. But the EU is trying to get the UK to effectively shadow its state aid regime and create an unbalanced relationship in this area. Bad elements here might include –
- State aid rules based on EU rules rather than WTO rules plus some agreed extras (e.g. not allowing unlimited support for failing firms, as in UK deal with Japan).
- Freedom for the EU to retaliate unilaterally against perceived breaches of state aid rules -before any arbitration and also against firms in unrelated sectors.
- Any link to the ECJ in the interpretation of the above, either directly or indirectly.
- Any requirement for the UK government to seek EU Commission permission for state aid proposals, especially in emergency cases. An independent UK regulator would be acceptable but not one that needs to defer to the European Commission or require its authorisation to allow state aid in the UK.
While agriculture is a small part of the UK economy, high food prices created by EU protectionism do impact significantly on the public. Moreover, freedom for the UK to set its own regulations in this area is important both on health grounds and to allow the UK to unlock trade deals with third countries that open up opportunities for other UK industries. So, bad elements here would include –
- The UK agreeing to follow EU farming rules in key areas for extended periods or even indefinitely. Some of these rules are unscientific with a few having been ruled against by the WTO. Maintaining this rule set would put the break on innovation in the farming sector and make it harder to strike trade deals especially with developing economies.
- Unbalanced rules on allowable agricultural subsidies (such as the May government tried to push through in its proposed vassalage deal with the EU).
- No agreement to minimise border checks – which should be straightforward given the starting point of identical regulations. The EU has such agreements with New Zealand and Chile, which allow inspections of farm imports from these countries to be reduced to very low levels (due to their high standards in this area). Without such an agreement, some UK agriculture and food exports to the EU will face steep additional costs.
Services are 80% of the UK economy and almost half of exports. It is important that the UK has maximum freedom to develop the services sector. Bad elements here include –
- Access to EU markets that is no better than that guaranteed by existing WTO rules. This is a genuine risk – the EU has itself said that its offer on services might be worse than that which it might offer to Australia. Areas of interest include mutual recognition of professional qualifications (where the current situation may even unfairly benefit EU workers) and allowing entry of foreign workers for limited periods for work purposes.
- Any requirements to follow EU rules on financial regulation. The UK is a major global financial centre and a rule-setter globally. There should be no requirement to shadow EU rules in this area, which are frequently damaging and badly thought out.
The issue of the UK regaining control of its fishing grounds is about more than either righting a historical injustice or allowing the UK industry to grow substantially – which it would, regardless of possible higher trade barriers. It is also about the broader strategic issue of the UK having full control of the resources in its Exclusive Economic Zone (EEZ). Important bad elements here would be –
- Watering down of zonal attachment as a basis for dividing up fishing opportunities between UK and EU boats.
- Failure to guarantee that the bulk of what are now EU catches in UK waters in future go to UK boats. Barnier has reportedly offered less than a fifth by value of such EU catches to the UK. That would be totally unacceptable – an agreement should only be made on the basis that access to stocks in each other’s EEZs is of similar value to both sides.
- Agreeing to continue with some of the very damaging fisheries management rules of the EU’s common fisheries policy, which are already threatening to put many UK fishermen out of business.
- Clauses that allow EU fishing firms to circumvent restrictions on their access to the UK EEZ by buying UK quota.
- Failure to ensure that EU catches in UK waters be substantially landed at UK ports.
- A very long transition period that only delivers a small increment to UK catches every year. This in practice would be likely to force many UK fishing boats (already under great pressure) out of business.
The Northern Ireland Protocol (NIP) is, in the opinion of this author, an unworkable agreement that should be replaced or dumped at the earliest opportunity. Ideally, a UK-EU agreement would supersede it. A bad new agreement would include –
- Failure to exclude the great bulk of GB to NI trade from tariffs or significant checks. Cross-border NI-ROI trade is pitifully small compared to GB to NI trade and concerns about minor leakages of goods across the Irish border should not be allowed to impose major costs on GB to NI trade. Trusted trader schemes and cooperation on market surveillance and customs should be enough to reduce cross-border leakage risks to minimal levels.
- Failure to remove burdensome paperwork from NI to GB deliveries (including exit declarations).
- Defining ‘goods at risk’ of crossing the Irish border on the basis of differentials between UK and EU tariffs that goods face when entering from third countries. This would be a massive disincentive to the UK lowering its external tariffs on items highly protected in the EU and on the UK signing new trade deals.
- Failure to alter clauses in the NIP that cover state aid and which arguably potentially extend the EU’s state aid regime to the whole of the UK (this is disputed but legal challenges are inevitable if these clauses remain in place).
Provisions for how disputes over various aspects of any agreement are settled are crucial. Bad elements here could include –
- Allowing the EU to react to a dispute in one area by suspending unrelated parts of the agreement or even the whole thing (Guillotine clause).
- Allowing any role for the ECJ, direct or indirect, in governing the agreement. Again, the vassalage deal proposed by the May government is an example here, whereby the supposed dispute panel would have been no more than a ‘post box’ for ECJ judgements. Arbitration of disputes must be completely neutral.
- The lack of a standard exit clause. Either party should be able to leave the whole agreement unilaterally with 12 months’ notice – as is normal for such agreements.
Transport links between the UK and EU are extensive, both for passengers and freight. Ensuring these run well in future should be an important element of any agreement (though partly this will be the province of agreements with individual EU countries too). Bad elements here include
- Lack of a proper open-skies arrangement for airlines (such has already been agreed with the US).
- Lack of a decent agreement on road haulage, allowing UK and EU hauliers wide scope to operate in both territories. The omens in this area are not good – very generous offers by the UK in this area (especially generous because the bulk of UK-EU trade is carried by EU lorries) have already been rebuffed.
The above list is not exhaustive, but is long enough to show that a deal could offer very limited economic benefits to the UK (relative to leaving on WTO terms) while also featuring a lot of highly damaging ‘small print’ that at best seriously limits the UK’s future freedom of action and at worst re-creates some of the worst elements of EU membership. Such a deal would not only be economically damaging but would be politically toxic also, and probably highly unstable. It could leave the UK less in charge of its economic destiny, in some areas at least, than before.
A particular danger is that the UK agrees to a combination of a ‘ratchet clause’ on LPF issues and the EU having a right to retaliate against perceived breaches of this based on references to EU rules; in a disproportionate manner; against sectors not related to the initial dispute; and without a ruling by a neutral arbitration panel. Such a combination would allow the EU to blackmail the UK into slavishly following EU rules in all areas – dynamic alignment by the back door. EU officials are already briefing that this is effectively what they want, describing it as a ‘new model’ of dynamic alignment.
No such deal should be agreed to by the House of Commons, especially if it is cobbled together at the last minute and the government tries to rush it through with limited scrutiny – indeed any attempt to do that would be a sure sign that a very bad deal indeed had been struck.
Harry Western is the pen-name of a senior economist working in the private secotr. He is a regular contributor to Briefings for Britain.