After finally leaving the European Union, Britain has now entered a transition period set to end on 31 December 2020. During this period, Britain remains inside the European Single Market and Customs Union while EU law continues to apply in the UK. That is to say, everything carries on business as usual until the end of the year.
Throughout 2020 the future relationship between the United Kingdom and the European Union will hopefully be determined in several rounds of negotiations. Both parties have now released their negotiation mandates which outline their respective approaches to these negotiations and what they wish to achieve. The EU released their directives on Tuesday 25 February, while Britain published a document titled ‘The Future Relationship with the EU’ on 27 February. Whilst these documents are not what the future partnership will look like, they offer an insight into each side’s ideal relationship before any compromises.
So how do the UK and EU’s opening positions compare?
At the surface, the two parties appear to agree over what the ideal trading relationship should be. Both want to sign a Free Trade Agreement (FTA) by the end of the year with the overall aim of eliminating any tariffs, fees, charges or quantitative restrictions between the two. As both sides benefit from the frictionless trade of goods which exists currently, it is unsurprising that neither see the establishment of barriers to trade as something to strive towards.
Beyond the desire for frictionless trade, however, it is clear that the EU and the UK will be some distance away from an agreement when negotiations begin in March.
Regulatory alignment and level playing field
Exact details of the UK/EU Free Trade Agreement will be negotiated over the next few months, but as a rule, access to European markets is closely tied to alignment to European Union regulations. One big source of contestation between the UK and EU is the latter’s desire for level-playing-field provisions between the two.
A level playing field refers to a set of common rules and standards that prevent governments or businesses in one nation undercutting their rivals. The EU wants to see British and European standards on the environment, working rights, taxation and state subsidies aligned, not just at the point of departure but into the future. This could work in one of two ways:
Non-regression alignment – this would mean that UK regulation in these areas would be pegged to the same levels as they are now, and not be able to drop below this level after transition. If the EU subsequently raised these standards, the UK would be under no obligation to do the same.
Dynamic alignment – this would mean that at the point of departure and beyond, the UK and EU’s regulations in these areas will remain the same. If the European Union, for example, decided to improve regulations on environmental standards, the UK would be obliged to do so as well. This option is preferred by French President Emmanuel Macron to ensure that Britain does not get a competitive advantage in the future. The line in the European mandate, that they are seeking “a level playing field that will stand the test of time” may suggest that this is the EU’s preferred outcome too.
As this is a key priority for the European Union, it is unlikely that they would agree to a deal that permits relatively frictionless trade without some level of regulatory alignment.
Furthermore, at the heart of the European project is the ‘indivisibility of the four freedoms’ that the European mandate makes plain. This means that the free movement of goods, services, capital, and people cannot be separated: if you want to have free movement of goods, then you are expected to accept the free movement of people across Europe.
While the British mandate aims for frictionless trade, it also explains that the British will not agree to any obligation for EU and UK law to be aligned, or for the European Court of Justice to have any jurisdiction in the UK. Also, with the recent announcement of a ‘points-based immigration system’ that will stop the freedom of movement of people after transition, there appears to be some significant distance between the two parties about how frictionless trade will be achieved.
For Britain, a trade deal with the EU will hopefully remove barriers to trade whilst also leaving room to not follow European regulation; Canada and Japan are two recent examples of Free Trade Agreements signed by the EU that the British mandate cites as models to emulate. The Europeans, however, are consistent in their long-held assertion that you cannot leave the Union, diverge from Union regulations, stop the free movement of people and then have the same benefits as members.
The logical cost of Britain’s current position then is that frictionless trade through a Free Trade Agreement is not possible. Either through the implementation of tariffs, fees, and quotas, or additional customs checks which will slow cross-border trade, it seems unlikely as it stands that a free trade deal will provide circumstances where trade will be as quick or efficient as it is now. Of course, there are still months of negotiations to come, so there are no guarantees for what the final relationship will be.
One further area of disagreement and one which seems to have blighted the UK/EU debate for eternity is the two parties’ respective positions on fisheries policy. Fishing accounts for approximately 0.1% of UK economic output compared to 6.9% for financial services, but despite its relative insignificance, fishing has become something of a symbolic topic that neither side is keen to concede on. The EU wish to see both the European and British vessels able to fish each other’s waters through a reciprocal agreement, whereas Britain wishes to see an agreement over access to each other’s waters that can be altered every year, with any European vessel in British waters being subject to British regulations and greater changes made to the fisheries quota system. While it may seem a subject of little importance when compared to an agreement on the trade in services, for example, it is, in fact, a large obstacle in the course of negotiations as the EU wishes to see an agreement on future fisheries policy signed and ratified by 1 July 2020 – less than four months away.
The Transition Period
The single biggest takeaway from the British mandate though, and one of the biggest divergences with the EU, is the continued commitment to getting a deal within the already permitted timeline, with no further extension. Negotiations are set to begin in March, and a scheduled meeting in June will allow an opportunity for both sides to assess what progress has been made. The European Union plans to use this meeting to assess progress and decide on whether a further 1- or 2- year extension of the transition is necessary if a deal does not seem likely. The current understanding between the two parties suggests that this June meeting is the last time in which an extension can be granted.
On the other hand, the British mandate declares that the Government will not extend the transition period. If a deal between the parties does not seem likely in June, then the UK will then decide whether to walk away from negotiations and focus on preparations for exiting transition regardless.
If a deal is not reached, the Government claims that the trading relationship with the EU will “rest on the Withdrawal Agreement and will look similar to Australia’s”. It is important to point out here that Australia does not have a Free Trade Agreement with the European Union. The EU and Australia do not have an ‘agreement’ over trade and therefore trade on World Trade Organisation (WTO) terms.
Walking away from these negotiations in June would mean that when transition ends on 31 December 2020, that increased customs checks and documentation requirements will come into effect on traded goods, along with tariffs, customs duties, and quotas. Some examples of tariffs that the EU places on goods imported from ‘third countries’ (non-members without a free trade agreement) include a levy of around 10% on cars or 12.8% on beef.
This is a situation that will have significant negative impacts for the North East businesses, including its automotive manufacturing sector that relies on tariff-free access to European markets and complex just-in-time supply chains that spread far beyond Britain’s borders. With components arriving only a few hours before they are due for assembly, any additional delay at customs would place these long-established supply chains that harbour the employment of over 25,000 people at risk. This arrangement would also only give businesses a matter of months to adapt to huge changes in day-to-day operations and regulations; attempts to avoid this must be made.
The decision to walk away from negotiations in June should not be taken lightly and hopefully over the coming months, the above differences in position can be reconciled. A free trade deal with Europe is of paramount importance to industries across the nation and the North East region.
The Chamber will continue to champion the most pressing issues for the North East business community, and this blog will update as information about negotiations is made available.
If you are looking to gain some more expertise on exporting after the transition period, the Chamber is also carrying out several training courses on import procedures, custom procedures and documentation. These courses will count towards the British Chamber of Commerce Foundation Award in International Trade and extensive discounts are available for Chamber and Chamber Global members.