Time is getting very tight!
A month after Michel Barnier’s end-of-October deadline for concluding negotiations, and just a month before the transition period expires, many businesses across the UK and EU are still desperately awaiting clarity on their New Year trading arrangements.
Concluding a wide-ranging Free Trade Agreement between the UK and EU in a matter of months was always going to be challenging, even for an agreement that obviates the need for line-by-line negotiation of tariff schedules. Disentangling economies and political structures that have developed over 40 years – and landing on a compromise with which both sides are content – is no easy task. Add in COVID-19 and the loss of trust between the two sides caused by interventions such as the UK Internal Market Bill, and it’s perhaps unsurprising that deadlines have been breached. And yet, the key issues that remain as obstacles to reaching a deal are the same now – the level playing field, enforcement mechanism, and fisheries – as they were three months ago.
Philosophical differences are proving hard to bridge…
The reason these politically-charged issues are proving so hard to resolve is, broadly, down to philosophical differences. For example, when it comes to specifying in the agreement what will be the UK’s future regime for regulating state subsidies, the two sides approach the question from very different angles. For the UK Government, this is a question of sovereignty and the freedom as an independent state to determine its own subsidy control framework without regard to the EU’s state aid regime to which it has hitherto been subject (as well as an advocate and adherent!). Moreover, the Johnson administration regards the highly-prescriptive EU regime as a significant outlier in global terms, arguing instead for the more minimalist state subsidy terms the EU has concluded in previous FTAs. For the EU, defining in the agreement a sufficiently detailed and aligned state aid framework for the UK is fundamental to ensuring that future access to single market by British businesses is on the basis of a level playing field and that state subsidies cannot be used to give UK firms an unfair advantage.
Similarly, when it comes to the economically insignificant (in terms of overall contribution to GDP) but politically salient issue of fisheries, regulating access to UK territorial waters is, for Boris Johnson and his team, a crucial issue of sovereignty. Given that the UK’s quota allocations under the EU’s Common Fisheries Policy were a long-running source of discontent, the EU’s demand for continued access to UK waters, with the same quota shares is, for them, a non-starter and would fundamentally undermine Johnson’s promises to ‘take back control’. But for the EU, and particularly France, the question of fisheries access is seen as much more of a quid pro quo – giving continued access to Continental fishing boats is the price to be paid by the UK for a zero tariff, zero quota trade deal and access to the EU’s market of 500 million citizens. Ceding sovereign decision-making rights lies at the heart of what free trade agreements entail, they argue – and that applies as much to the UK as any other country.
…but landing zones are in sight
How, then, to bridge the divides? It’s clear that to reach a deal, both sides are going to have to make further concessions. On state subsidies, the UK is going to have to agree to write into the agreement considerably more detail about the structure of its future regime than it had originally planned. A powerful regulator, independent of Government, to enforce a new UK framework will be a pre-requisite for EU endorsement. In return, the EU has already given up its demand for the UK to continue to replicate its state aid regime, but it will want to ensure that strict and rapid sanctions are available for any breaches of the agreement.
On fish, the compromise must surely lie in a transition period. Preventing a cliff-edge in fishing quotas for European fishermen and women is both a necessity for the EU and a practical concession for the UK to make – the UK fleet, which already employs significant numbers of EU nationals, will take time to build up. How long that transition period should be, and whether any review points are built in, should be the final details to be ground out.
The risk of miscalculation remains
Will such compromises be made and a deal reached? The economic and political logic for a deal remains strong on both sides. However, given that time is so short, the risk of miscalculation is high. If the EU were to conclude, for example, that the recent departure from No.10 of Dominic Cummings and other Vote Leave acolytes will lead to a softening in the UK’s position, requiring no further concessions from Michel Barnier’s team, then a no-deal exit becomes more likely. Similarly, if the UK concludes the EU is unwilling to risk a ‘no deal’ outcome, or fails to take seriously the remaining protections the EU seeks for its single market, that too could result in the UK leaving the transition period on WTO terms.
The history of EU deal-making suggests that results tend only to come at the eleventh hour; but in this case, the negotiations are getting perilously close to midnight. Final concessions must be tabled now to allow – albeit hugely compressed – ratification procedures to be conducted by both sides. At this stage, an orderly transition in the early weeks of January is unlikely, particularly for freight crossing short Straits. But the certainty of an agreement for firms and investors would still be a welcome Christmas present and a springboard into the New Year.
Key dates
10-11 December European Council meeting in Brussels
31 December Transition period expires