The UK-EU trade negotiations - what do we know so far?

On Monday 3 February, the first working day since the UK left the EU, both the UK government and the European Commission released their positions on the conduct and scope of the forthcoming trade negotiations.

The Prime Minister submitted a written statement to the House of Commons, after he delivered a speech in Greenwich in which he outlined the UK government’s wish for the UK to re-emerge “as a campaigner for global free trade”, with a desire for “a comprehensive free trade agreement, similar to Canada’s”.

The European Commission issued a recommendation to the European Council to open negotiations on a new partnership with the UK. The EU’s chief negotiator, Michel Barnier, stated the EU is “ready to offer a highly ambitious trade deal” with “wide sectoral coverage”. On market access Mr Barnier said “the more we will have common standards, the higher quality access the EU will be able to offer to its market”.

I discussed these latest positions with Raoul Ruparel, who was previously closely involved in the first phase of negotiations and has recently joined us in Deloitte’s Brexit Insights team:

Q: Where are we given the opening positions of both sides?

“So far, the UK and EU are at least talking on the same page about the outcome they are aiming for. Both look to be targeting a Free Trade Agreement (FTA) in line with existing precedents, such as the agreement the EU has with Canada or with Japan.

“This seems to me to be a positive shift from the last phase. But it is clear the absolute maximum being sought is a Canada style agreement. The agreement will not go much beyond this precedent and it certainly will not allow for frictionless trade or an agreement similar to that which the EU has with Norway or even Switzerland.”

Q: What are the differences? Are they gaps which can be bridged?

“There are three significant ones. In some areas it is possible to envisage a landing zone. In others it will require either or even both the UK and EU to shift from their current hard line stance.

“First, the biggest area of disagreement is currently on ‘level playing field’. The EU position is the UK should commit to ongoing alignment with EU rules on state aid. Furthermore, that it should commit to non-regression from EU rules in areas such as taxation, labour and social protection and environment. All of this should be subject to adequate dispute resolution and enforcement mechanisms via the agreement. It also wants the treaty to require the UK to have a system of carbon pricing which is at least as effective as the EU’s Emissions Trading System. Of course this is much more onerous than what is usually found in a FTA, which the EU argues is necessary due to the proximity and value of the UK’s trade with the EU.

“On the other side, the UK has essentially said it is happy to sign up to the sort of provisions usually found in a FTA. These tend to be far less onerous and focus on non-regression from international standards, while they are often not covered by a dispute resolution mechanism. The UK fundamentally disagrees with the EU’s view that proximity necessitates more stringent provisions. This is likely due to the fact that a FTA does as standard require products to be checked and documented meaning the EU has the ability to prevent anything from undercutting the Single Market. Given the gulf between the two sides, it seems likely there will need to be movement from both.

“Second, another difference is the view on the structure of the agreements. The EU wants a single agreement with an overarching governance framework, while the UK wants a suite of agreements with discreet governance in each area. This is quite a fundamental difference, but it is possible to envisage a middle way which sees an arrangement of separate agreements inside a loose framework. In the meantime, negotiations could still progress in parallel strands with the exact structure left until later.

“And third, there are also differences on fisheries. The UK wants annual negotiations over access to waters and quotas, while the EU wants a longer-term settlement reached now. There seems a relatively obvious landing zone in the middle in the form of a multi-year agreement, but of course this is an area where negotiations rarely go as simply as expected.”

Q: What can we expect from the early exchanges in the negotiations?

“I think we will see some scratchy exchanges early on, particularly over level playing field and its structure. We are also likely to see linkages being made, for example between progress on fish and progress on financial services equivalence, and progress on detailing the implementation of the Northern Ireland Protocol from the Withdrawal Agreement and progress on the FTA. Business should be prepared for these sorts of ups and downs early on.

“Of course, one of the side effects of the standard FTA approach the UK and EU have now landed on is that the difference between this approach and no agreement is much narrower. As such, both sides may be less willing to concede or be seen to pay a price for the agreement.”

What does all this mean for business?

We now have a good sense of the direction the two sides are heading in and what the broad outlines of a deal are likely to be. Businesses have less than 11 months to prepare and need to start now. As the Prime Minister set out in his written statement to Parliament, whether there is an agreement on the future relationship or not “the UK will be leaving the Single Market and the Customs Union at the end of this year and stakeholders should prepare for that reality”. The statement also makes it clear there will not be an extension to the transition period.

We’ve consistently heard the government now wants to move Brexit from the front pages to the business pages – this is no longer about political uncertainty, but the detailed negotiations and the practical implementation, and is being placed firmly in businesses’ hands to prepare.

Business can already identify known change areas and given the negotiating positions can start preparing with much more certainty. The changes we already know include:

• Any organisation moving goods across the UK/EU border will need to provide new import and export declarations, as well as deal with rules of origin – something many have never had to do before. Simplifications such as Authorised Economic Operator (AEO) and Simplified Freight should be applied for now.
• Free movement of people will end on 31 December 2020. New records will need to be kept by business for the existing workforce, and new visa and mobility frameworks adopted in future.
• Any organisation which currently requires regulatory approvals to place goods on the market will likely need to deal with a UK system and an EU system going forward, compared to one system previously. Conformity assessments may be covered under Mutual Recognition, but product safety markings will change.
• Any organisation operating in Northern Ireland will be in a unique position under the Ireland/Northern Ireland Protocol (which is not the subject of the FTA), managing some form of customs border for goods moving from Great Britain to Northern Ireland and a different VAT regime for goods and services.
• For many organisations, particularly those in the services sector, market access could potentially be significantly restricted and feel like a ‘no deal’ if, as expected, a shallow, goods focused trade deal is all that can be agreed in the timeframe.

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