Brexit Done, A UK-EU Trade Agreement to Go?

To complicate matters further, on 5 May the UK commenced negotiation of a trade agreement with the USA., and in June has commenced negotiations with Japan, Australia and others, suggesting that the EU is not a top priority.  Could this final step in the Brexit saga fail, leaving the UK and EU with a hard Brexit?

Continental concerns over “club perks”

The EU, deeply concerned about “unfair competition”, wants a comprehensive deal. If the UK deregulates in the future by terminating EU regulations in areas such as labour, state aid and the environment, then that could give UK businesses an advantage over competitors in the EU single market.

The EU wants commitments that the UK will not seek such advantages and will keep in line with EU rules, while the UK says as a sovereign country it cannot do that (and indeed the ability to set its own regulations was a major motive behind Brexit).

The UK prefers to negotiate on topics separately. For example, the UK wants access to the central intelligence database of the EU's law enforcement agency Europol. EU leaders are not keen on such sharing; once you've left the club, forget the perks. In the phrase most often used: You can't have your cake and eat it. To which the UK responds by threatening to exclude EU fishing boats from UK waters; if we are no longer in the club, then forget the perks. You can’t have your fish and eat it.

Both sides aspire to a free trade agreement. UK leaders refer to the Canada-EU trade agreement (CETA) as a simple minimalist free trade option. However, CETA is not a no tariffs/no quotas agreement and British farmers would not like the array of protectionist measures applied by the EU to agriculture.

Moreover, EU negotiators see many terms agreed with a country on the other side of the Atlantic Ocean as inapplicable to a trade partner linked by rail or a short sea-crossing.

Irish issues and the UK Global Tariff

And then there is Ireland. The stumbling block in passing Theresa May’s deal with the EU was the return to a hard border in Ireland. Boris Johnson’s magic wand removed that obstacle in October 2019 by negotiating the Irish Protocol to leave EU regulations in place in Northern Ireland and to introduce a mechanism for checking compatibility as goods crossed the Irish Sea between Great Britain and Northern Ireland.

After Johnson’s Conservative Party won a sweeping victory in the December 2019 general election, the UK Parliament consented to the revised agreement and Brexit followed in January 2020. Implementation of the Protocol was always a potential issue as Johnson argued that there would be no threat to Northern Ireland’s place in the UK. 

A sign of spats to come arose when, following Brexit, the UK closed down the EU office in Belfast. The UK turned down the EU request to have a permanent office in Belfast in order to monitor whether the UK is keeping its commitments under the Irish Protocol. The episode did not help the current negotiations as EU leaders were left with a sense that the Johnson government signs agreements without serious intentions of following them through.

Northern Ireland also poses a potential problem for the UK’s Global Tariff (UKGT) that will replace the EU’s Common External Tariff on 1 January 2021 at the end of the Transition Period. Originally, this was not the case in 2018 when the UK had submitted its goods and services schedule in July and December respectively for certification at the WTO.

These schedules essentially replicated the UK’s WTO obligations as given in the EU schedules. This original continuity suggested that Northern Ireland’s continuation in the EU customs area might be only a minor issue.

However, 19 May 2020, the UK published the UKGT, which the government claimed liberalized the EU schedules and reduced red tape. Because the UKGT differs from the EU’s external tariff and border procedures, it will increase the need for checks on goods and services traded between Great Britain and Northern Ireland. For example, if a good has a lower tariff in the UKGT schedule than the EU common external tariff then there will be an incentive to import through Great Britain and then smuggle the good via Northern Ireland into the EU customs area.

The hundreds of differences between the UKGT and the EU common external tariff will also, inevitably, make negotiation of a future bilateral trade agreement more difficult.

Goodwill or good riddance?

The prospects for reaching a mutually beneficial outcome depends on the negotiators’ desire for the agreement that both sides say they want.  British Brexiteers accuse the EU of trying to undo Brexit by imposing their regulatory regime, while EU officials see the British attempt to negotiate issue-by-issue and kicking hard issues down the road as an attempt to force the EU into last minute concessions.

If red lines become too immutable and goodwill is in short supply, then neither side will make sufficient concessions and the potential for no-deal will increase. Such a “hard Brexit” would be a lose-lose outcome that will likely uncork the bottles of Irish unification and Scottish independence. That would count as a truly disastrous result for a government of the Conservative and Unionist Party.

By Richard Pomfret, Professor of Economics & Jean Monnet Chair Economics of European Integration, the University of Adelaide.

The views expressed here are the authors, and may not necessarily represent the views of the Institute for International Trade.