The Trade Negotiation Possibilities

The United Kingdom has left the European Union. However, until the end of the transitional period, almost nothing changes. The transitional period is due to end on 31 December 2020, and the United Kingdom is scheduled to leave the European Union with or without an agreement on a new trading relationship

All EU rules continue to apply as before. For almost all practical purposes nothing changes as far as citizens and businesses are concerned. The United Kingdom is treated as if it was a member of the European Union until the end of the transition period.

The principal difference is that the United Kingdom no longer participates in the EU institutions during the transitional period. It has withdrawn from all decision-making including participation in the EU Council and the EU Parliament which set policy and make laws and from the EU Commission which administers the European Union on a day-to-day basis.

Third countries with which the EU has an agreement have been asked to treat the UK as continuing to be a member during the transitional period. Technically, they may not be obliged to do so. No practical issue appears to have arisen to date in this regard.

The purpose of the transitional period is to allow time in which the EU and UK may enter an agreement in relation to their future relationship. Under the earlier proposed Withdrawal Agreement which would have taken effect on March 29, 2019, there was a 21-month period i.e. to the end of 2020. Even this longer period was widely recognised as far too short a period of time in which to negotiate a comprehensive agreement. The new Withdrawal Agreement adopts the same end date for a transitional period, which cuts the intended period in half.

The transitional period can be extended until the end of 2021 or 2022 by a joint decision of the EU and UK made before 1 July 2020. However, the UK is determined not to extend the transitional period under any circumstances. It has passed a law to prohibit agreeing to an extension. Of course, this law could be amended if required.

Almost all commentators accept that it would be impossible to put in place the comprehensive agreement contemplated by the EU UK political declaration by the end of 2020. EU (and most other) trade agreements normally take several years to negotiate and at least several months  to be ratified by the parliaments and in some case regional parliaments of each state.

Although the EU and UK are aligned on day one, this does not simplify entering a new EU UK future relationship agreement. What is critical is how far the EU and UK may diverge while maintaining the agreed degree of access to each other’s markets. This is an unprecedented undertaking as no state has ever left the European Union or any a deep and comprehensive regional agreement in any way equivalent to it.

It is the opinion of the EU Commission and many commentators that it would be legally and practically impossible to extend the transition period, after 1 July 2020 if the EU and UK have not agreed an extension by that date. The Article 50 power is spent.  The EU must finalise its new seven-year budget period commencing in 2021 during the latter part of 2020 so that any changed arrangements with the UK would be highly disruptive.

The UK is determined not to extend the transitional period beyond the end of 2020 regardless of whether or not there is a trade or other future relationship agreement in place between the EU and UK by that date. Although the political declaration that accompanied the Withdrawal Agreement declared the intention to put in place a  comprehensive agreement between the United Kingdom and EU, it is very unlikely that such an agreement could be negotiated in full and ratified by all the required state parliaments by the end of 2020.

It appears that the most that is realistically possible is a so-called “skinny” agreement dealing principally with trade in goods issues. It might reduce most tariffs to zero. Such an agreement could be agreed by the European Union only without ratification of the member state parliaments. Furthermore, comprehensive agreements may follow over time.

The EU Commission indicates that for logistical and timing reasons a so-called “skinny” agreement in relation to limited areas only within the EU’s  competence, must be finalised well before the end of 2020. It would have to be passed by the EU Parliament before the end of November 2020 at the latest. If such an agreement is put in place the EU and UK may agree interim measures in relation to areas not covered by it, in order to mitigate the effect of exit in those other areas.

If there is no agreement whatsoever, a no deal exit is the remaining possibility and would appear inevitable in those circumstances on 31 December 2020. If there was a no deal exit, then it is likely to be acrimonious with recriminations as to why it  had happened. In the circumstances, mitigation steps would be likely to be more limited and less cooperative. The types of proposed mitigations published by the UK and EU respectively prior to the 2019 scheduled Brexit  dates may be reinstated, most likely with some changes.

It appears almost certain that the possibilities at the end of 2020 are a no deal highly disruptive Brexit or a “skinny” deal very disruptive Brexit. A “skinny” deal Brexit would  have a  very severe impact and it would be of little consolation in most cases and sectors that it might be less disruptive than a no deal Brexit.

The fact that there might something that is correctly labelled a free-trade agreement might superficially seem to suggest something which resolves some or even most Brexit issues. However, this is far from the case. A “skinny” deal scenario would have been what was termed a hard Brexit at the start of the Brexit process. It necessitates full customs declarations, regulatory barriers and a very significant overnight change in the basic trading rules.

Both scenarios are very detrimental to trade in goods between Ireland and the UK. While a trade agreement is likely to eliminate most tariffs .the more significant obstacles to trade remain, namely   requirements for import and export declarations, certification of origin, possible or inevitable regulatory checks and other requirements on every movement of goods across the Irish Sea.

A “skinny” trade agreement would mean a rupture in the EU UK trading rules in relation to numerous areas which were not covered by it. Although some mitigation steps may be put in place, severe and unpredictable disruption would still be likely.

See Why Brexit is detrimental to trade in goods

The Northern Ireland Protocol is due to take effect at the end of the transitional period regardless of whether there is a new agreement on a trading relationship between the EU and UK. Its purpose is to ensure that there are no customs duties checks or procedures on goods moving between Northern Ireland and Ireland (as well as the rest of the European Union).

The  Protocol is far more likely to work if there is at least an EU UK agreement (even a “skinny” agreement) in relation to trade in goods. It would function in a way that would be much less intrusive and controversial in those circumstances.

If there is no trade agreement it is possible of the Northern Ireland Protocol will itself be the subject of a dispute as to its manner of implementation. The precise rules for Great Britain to Northern Ireland trade (effectively treated largely as imports into the EU) and to a lesser extent Northern Ireland to Great Britain trade (effectively treated as exports from the EU) are to be made in the joint committee in the course of 2020. There is significant scope for disagreement as to what is required.

As of early 2020, the UK government is stating that there would be no East-West checks which seems entirely to contradict the requirements of the Northern Ireland Protocol. Very little has been done to make NI ports ready for significant checks that would be required, in particular in the area of agriculture and food, upon in entering the EU. It may be that the manner of implementation of the Northern Ireland Protocol itself becomes embroiled in the negotiations on a deal.

The Northern Ireland Protocol applies only to trade in goods. It will not affect the fact that most EU laws will cease to apply to the whole of Great Britain including Northern Ireland. Many of the areas mentioned which are unlikely to be incorporated in a “skinny” trade agreement are equally areas which the Northern Ireland Protocol does not cover.

There are level playing field terms in the Northern Ireland Protocol in relation to competition and state aid. State aid is assistance by governments to industry. However, the level playing fields provisions in respect of other areas, in particular environmental, labour, health and safety and certain taxation measures is to be contained in the EU UK Withdrawal Agreement.

The Northern Ireland Protocol is controversial within the Unionist community  as it treats Northern Ireland differently to Great Britain. There is some risk that the Northern Ireland Protocol may be the subject of political resistance insofar as it requires East-West or West East checks.

The whole Withdrawal Agreement including the Northern Ireland Protocol is capable of being suspended if there was a significant economic and political dislocation. This would lead to countermeasures from the EU. They would be enforceable as a matter of international law, on state to state basis only.

The possibility of a challenge to the validity of the Northern Ireland Protocol  under EU law has been raised. Prof Catherine Barnard, a renowned expert in European Union law, has referred to the possibility of a challenge  based on the fact that the Northern Ireland Protocol was made under the withdrawal powers in Article 50 of the TFEU treaty, which may not be sufficient legal basis for what is in effect a long-term trade agreement. Even if such a case failed and the arrangement could be reconfirmed under different powers. The possibility of a contrary outcome while the matter was ongoing might have a disruptive and chilling effect.

The EU has offered the UK a trade agreement with no tariffs (import duties) or quotas (limits on import) provided it agrees to level playing field requirement. A less comprehensive agreement might eliminate almost all tariffs but might leave some tariffs in sensitive areas. The best and perhaps most likely scenario at the end of 2020 is that there will be a “skinny” agreement on trade on goods eliminating all or almost all tariffs with perhaps certain further elements and coverage.

There are several priority issues in the negotiations which are to be agreed upfront and maybe deal breakers including

• access to UK fishing waters
• recognition of UK data protection standards,
• recognition of certain UK financial services providers and
• implementation of the Northern Ireland Protocol.

It is distinctly possible that any one or more of the above grounds or on other grounds not mentioned, that there might not be a trade agreement and that the UK would leave the European Union without an agreement on 31st December 2020.

The EU has sought robust level playing field rules in return for an agreement with no tariffs and no quotas. Level playing field rules are designed to ensure that neither side obtains a competitive advantage by reducing its standards in relation to state aid (i.e. direct and indirect subsidies by governments to businesses) competition law (the rules preventing anti-competitive arrangements and use of monopoly power) environmental employment health and safety and certain elements of tax.

At the very minimum, this would require adherence to the standards as they apply at the date of exit (no regression). Some EU states in particular France had sought to insist on an obligation for continued compliance by the UK with EU standards (dynamic alignment) but this was not pursued.

There is a wide variation in the substantive strength and the enforceability of level playing field rules in international trade agreements. The EU would wish the rules to be  strong in their terms and to have teeth, be enforceable and allow for immediate interim  sanctions pending as well as after determination if breached.

The UK is resisting robust level playing field rules. It may be prepared to accept level playing field rules on weaker terms which are less precise and enforceable than the EU would wish.

Regardless of whether or not there is a “skinny” agreement on trade in goods, it is almost certain that  there will be no comprehensive agreement in relation to many other matters such as rights to trade, rules around services, the free movement of people and the recognition of qualifications before the end of 2020, the scheduled date of withdrawal. This is because a comprehensive agreement would require ratification by the member states as well as the EU institutions.

The sudden removal of the entire EU rulebook outside of likely tariff reductions and trade facilitation is likely to have a significant effect in many sectors. Basic rights which have existed for over half a century to trade with the UK free of barriers will fall away. In some base, as it may be necessary for Irish businesses to establish a UK base as it is necessary for UK businesses to establish an EU-based.

In most areas, the change may not be significant at least at first as the UK has been open to international trade in goods and services. The impact will depend very much on the sector and the rules governing it and future UK policy in those areas.

The common travel area will assist Irish citizens to some extent in relation to free movement and basic rights to work and do business in the United Kingdom. However, it is not legally enforceable in the same way as the EU rules and has a very limited scope.

In the event of an exit with an agreement is likely that the priority areas in the negotiations would have been resolved including issues regarding fission recognition of data protection adequacy recognition of certain nice and service providers and rules to implement the Northern Ireland Protocol.

There is a distinct possibility that if there is a “skinny” agreement but no agreement on wider issues, that interim mutually agreed measures  and reciprocal reliefs would be applied in respect of the areas outside the scope of the “skinny” agreement. These are likely to go beyond the scope of the unilateral no deal concessions published by the EU and UK in 2019 on the eve of the relevant no deal risk dates in March and October 2019.

For the most part, the issues concerned would the relevant both to the Republic of Ireland to Northern Ireland trade and vice versa as well as the Republic of Ireland to Great Britain trade and vice versa. They would be the same areas that are outside the scope of the Northern Ireland Protocol.

There is a very significant possibility of a no deal exit. As of early 2020, the EU and UK are taking stances and positions that are significantly at variance with each other. The UK government appears determined to use the ticking clock of a year-end exit to force a better agreement as time runs short. The EU has taken the view that unless an agreement can be concluded by late autumn or early winter that it is not going  be possible to enter an agreement at all.

The EU is determined to ensure that the UK is not in a better position outside the EU  in terms of its businesses access to the EU single market. It is an essential principle that a non-member cannot have a better deal in terms of EU market access than a member.

For its part, the UK government is determined to demonstrate to its population that it will have a greater trade advantage in aggregate in terms of its worldwide trade.  UK government ministers believe that the flexibility that comes with being outside the constraints of EU rules will allow it to regulate in respect of new areas of trade in a more  speedy and responsive way, that meets the particular strengths and requirements of the United Kingdom.

Since Theresa May’s original Lancaster House speech in 2017 outlining a distinctly hard Brexit and referring to the possibility of a lightly  regulated United Kingdom competing aggressively with the EU, the EU has been alert to the possibility of so-called Singapore on the Thames. This implies a very open lightly regulated economic environment,  whose flexibility enables it to outperform economically, its much larger neighbours.

During the Withdrawal Agreement phase, the EU concluded from the UK’s red lines that the only possibility was a free-trade agreement relationship equivalent to that of the EU with Canada Japan and other third countries. Some elements of the UK government seized on this as an offer of a Canada style free-trade agreement.

The EU Canada agreement provides for zero tariffs and zero quotas in most areas including most (but not all) agricultural areas. It has level playing field rules, but they are in much less stringent terms than the EU would wish to apply in respect of the United Kingdom. The EU has emphasised that the UK is not comparable to Canada, as it is on its doorstep so that much more thorough level playing field rules will be required to avoid unfair competition. The UK for its part regards it as unfairly discriminatory that it would be offered less favourable terms than Canada.

If there is a no deal exit by the UK from European Union at the end of 2020 the scope for relief measures will be much more limited than in the case where there was an agreement which is not wide enough to cover certain issues. In the case of a no deal exit each of the EU and UK would most likely grant concessions mitigations in areas which considered it in their interest. They would not necessarily be reciprocal.

There is a possibility of a dispute with the granting or withholding of mitigation measures itself being a tactical weapon in seeking to advance one side’s interest for the others. Concessions which might usefully be granted an easy granted might be withheld to seek typical equivalent concessions to advance the position of one side generally over the other in the dispute.

Before the previous high-risk Brexit dates in March and October 2019, the UK and to a much lesser extent the EU, published several hundred notes on various areas which contained temporary measures to ease the worst effects of a sudden no-deal exit. It should be emphasised that these are limited mitigation steps only and do not resolve most of the disruption caused by Brexit. These notes have been withdrawn. However, in the context of a no-deal exit or an exit with a limited trade agreement, many of them may be reinstated in similar terms.

Because the UK will be no longer bound by EU law, it has offered more thoroughgoing concessions than those offered by the European Union. Ireland is bound by EU laws so that it has very limited scope to mitigate the application of EU laws and rules. However, if circumstances of the trade dispute prevailed,  the UK might be unwilling to unilaterally offer and grant concessions which the EU did not make a return.

There are many areas where the rules are dependent on state competence. In theory, Ireland could enter and allow  unilateral concessions on a reciprocal basis with the United Kingdom. In practice, this might be politically difficult given the perceived solidarity  and support for Ireland in the Northern Ireland Protocol negotiations.

On the other hand, Ireland and the UK have a deep relationship which is recognised by the common travel area which is expressly permitted by EU law on the Withdrawal Agreement. Some building on the common travel area might be possible on a bilateral basis given the proximity culturally linguistically legally and the overlapping interests in Northern Ireland.