European Council gives green light to begin talks over post-Brexit trade relationship

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After over three years of drama on the heels of its historic Brexit referendum, the U.K. officially withdrew from the E.U. at the end of January.

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For now, not much has changed. The U.K. remains in a transitional period vis-a-vis its relationship with the E.U., with previous rules governing their relationship still in place.

The clock is ticking, however, as the parties have until the end of this year to agree to a new trade arrangement, one that could have significant consequences for both sides.

Barring an unforeseen extension, if the E.U. and U.K. have cannot hammer out a post-Brexit trade arrangement, the two entities would then have to revert to the much harsher World Trade Organization (WTO) rules.

The respective parties have already been making noise in the press regarding their respective objectives in the ensuing talks. For the E.U., that generally means not giving the U.K. too much, given that it is no longer a member of the bloc. On the other hand, the U.K. is also keen not to lose too much from its relationship with the trade union, lest it seriously damage its biggest export market.

According to a research briefing on the U.K. Parliament’s website, the E.U. is the U.K.’s largest export market.

“The EU, taken as a whole is the UK’s largest trading partner. In 2018, UK exports to the EU were £291 billion (45% of all UK exports),” the briefing notes. “UK imports from the EU were £357 billion (53% of all UK imports).”

In 2018, the U.K. posted an overall trade deficit with the E.U. of £66 billion, with a surplus of £28 billion in services and a £94 billion deficit in goods.

In short, both sides will be eager to reach a deal, even amid feelings of political bitterness stemming from the U.K.’s departure after 47 years of membership.

Earlier this week, the European Council gave the go-ahead for talks to begin with the U.K. regarding their future trade relationship and formally appointed the European Commission as its negotiator in the process.

“The Council has adopted a clear and strong mandate for our negotiator, Michel Barnier,” said Andreja Metelko-Zgombić, Croatian state secretary for European affairs. “This confirms our readiness to offer an ambitious, wide-ranging and balanced partnership to the UK for the benefit of both sides. The EU is now ready to start negotiations.”

Next, the parties will decide on a date for the first negotiating sessions in the process. According to the European Council, the first formal meeting is expected to take place in early March.

“The EU intends to establish a free trade agreement with the UK which ensures that zero tariffs and quotas apply to trade in goods,” the announcement continued. “This agreement should provide for cooperation on customs and regulatory aspects. It should also include effective management and supervision, dispute settlement and enforcement arrangements.”

The timeline for a fisheries agreement is approaching even sooner.

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“On fisheries, the mandate outlines that the future partnership should uphold the existing reciprocal access to waters as well as stable quota shares,” the European Council release stated. “The agreement on fisheries should be established by 1 July 2020, to give time for determining fishing opportunities after the end of the transition period.”

Posturing and red lines

MetalMiner’s Stuart Burns weighs in on the E.U.-U.K. talks ahead

There is a great deal of pre-negotiation posturing going on — laying out of stalls, drawing of red lines, and otherwise trying to set both domestic and opposition expectations prior to the talks actually commencing. So, every announcement has to be taken with a pinch of salt. We are, after all, taking about politicians here and we know how they can shift their positions over time if it suits them!

It is clear, however, that there is a fundamental disconnect between the U.K. and E.U. positions.

Both sides would like a free trade agreement because both sides value the huge volume of goods that trade between the two economies every year.

Germany, in particular, considers the U.K. its “treasure island” for the automotive market it provides German carmakers. The E.U. is hoping to secure continued open access but on its terms of maintaining the same terms and conditions as other E.U. countries accept — that is, that the U.K. accepts E.U. regulations about laws, labor relations, state aid, taxation, environmental standards, free movement of labor, etc., that the E.U. has in place with the other 27 member countries.

The U.K., on the other hand, voted to leave the E.U. precisely because it wants to shed itself of these rules, which it sees as restrictions.

The French are worried the U.K. will become a low-tax, low-regulation competitor in Europe’s backyard — a “Singapore on the Thames,” if you like. As such, France is desperate to tie the U.K. up to existing E.U. terms, hence the “maintaining a level playing field” phrase heavily bolded on the European Council’s negotiating guidelines.

The U.K. would be happy with a Canada-style free trade deal, which does not involve the same restrictions to accepting E.U. regulations and jurisdictions. The E.U. has so far refused for the reasons above.

Personally, I think Boris Johnson’s government would accept WTO rules (essentially no deal) before it accepted — it would say capitulated to — E.U. demands for acceptance of E.U. regulations, standards and oversight.

Both sides would be the poorer for that outcome, but politics seems to be trumping pragmatism here, and it is certainly a possible result.

For now, though, this is all about laying out of stalls and setting expectations, from which we can see both sides are a long way apart.

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