A hard Brexit and an ever closer non-union - Part 1, Summary

This article was first posted on 12 January 2021 by the Fide Fundacion. It mentions early references by the UK Government to a close and special relationship between the UK and the EU. This aspiration, if it ever was such, has been overshadowed by the UK’s efforts to renegotiate the Northern Ireland Protocol, and its focus on a “global Britain” which has emphasised links with the world beyond Europe. The recent invasion of Ukraine by Putin’s Russia may yet return the focus to a closer relationship with the EU and its Member States.

Derrick Wyatt writes in this first part of a two-part article for the Fide Fundacion thin-tank that a Trade and Cooperation Agreement between the EU and the UK was agreed in principle only a week before the scheduled departure of the UK from the customs union on 1st January 2021. In the short term the expectation is of confusion and disruption on both sides of the Channel. The deal provides only a shadow of the economic benefits that continued EU membership would have offered. But a soft Brexit was never going to happen, for hard-headed reasons often lost sight of in the years of debate after the Brexit referendum. The agreement was backed in the UK Parliament on 30th December by the UK’s Labour opposition, reluctantly and because the only alternative was a no-deal. When the dust settles, the deal will bring some element of closure to the remain/leave debate (apart from in Scotland), and provide a platform for the UK and the EU to start repairing their bruised political relationship. The UK Government’s quest for a “Global Britain” should not let it forget that the Europe still matters to the UK. The agreement itself foreshadows further agreements between the UK and the EU, and “global cooperation” on a wide range of issues including peace and security and climate change. Boris Johnson has declared that the UK will be the “best friend and ally that the EU could have”, and one of his senior Ministers has referred to a “special relationship”. An ever closer non-union?

The new trade agreement is a Canada-style deal

No deal the UK could have made with the EU would have replicated the economic advantages of EU membership. The new Trade and Cooperation Agreement is a Canada-style deal with some important additions. Here are some of its key provisions, primarily from a UK point of view.

Trade in goods

In line with the Canada model, there is tariff-free and quota-free trade in goods, but the agreement also puts in place new obstacles in the way of customs formalities and checks, and rules of origin, which will increase costs for UK (and of course EU) exporters. The rules of origin might cause problems for some UK car manufacturers. The new trade agreement requires that to qualify as UK-originating a motor vehicle must contain no more than 45% by value of UK-originating inputs. This might require some adaptation by UK car manufacturers as regards components from, say, Japan or Turkey, if they want to be sure of complying with the origin rules for exports to the EU, but the agreement does provide that EU components will be treated as UK-originating for this purpose.

Services

The rules on trade in services prohibit discrimination but do not provide for mutual recognition of regulatory regimes, so there is no “passporting” of UK financial services providers wishing to operate in EU countries via branches, on the basis of capitalisation and prudential supervision in the UK. The European Commission may on a discretionary basis recognise elements of UK regulatory supervision of certain financial services as equivalent to EU supervision. This would facilitate cross border service provision in some cases, but the equivalence regimes are not comprehensive – in particular capital requirements for most wholesale and retail banking services are not covered. The equivalence regimes as a whole fall short of passporting but would be a lot better than relying on the basic services provisions of the new trade agreement. There is another drawback to the equivalence regime - the Commission’s decisions on recognition – and on withdrawing recognition - are unilateral and very political, so the UK should stay the best of friends with the EU if it wants favourable outcomes.

No mutual recognition of qualifications

The agreement does not provide for the automatic recognition of qualifications of doctors, architects, accountants, etc., so individuals seeking to provide professional services in the EU will now have to comply with the requirements of any Member State where they wish to provide services or to work. Lawyers are treated somewhat more favourably under the agreement, as regards providing legal advice under their home professional title, but they are only entitled to advise on law in the UK and on public international law, and they will no longer enjoy the right to appear before the courts of Member States. This means that UK lawyers will no longer be able to provide advice on EU law to clients in EU Member States and to represent clients before the EU courts. In order to continue practice of this kind, many UK lawyers have acquired an Irish legal qualification and a professional base in Ireland.

Additions to the Canada model

The additions (or “pluses”) to the Canada model include aviation, road haulage, energy and climate change, level playing field provisions, continued access of EU fishers to UK waters, continued internal security cooperation between the UK, Europol and Eurojust, and opportunities for UK continued participation in several EU programmes on scientific research, environmental monitoring, nuclear issues and satellite surveillance and tracking. There are also binding dispute settlement provisions.

Fishing

The agreement provided for a significant increase in quota for the UK fishing industry in UK waters, equal to 25% of the current value of the EU catch in UK waters. This will increase the catch taken in UK waters by UK vessels to about two thirds of the total catch in those waters, phased in over 5 years. It is likely that the deal on fishing will benefit the Scottish fishing industry most of all. Scotland accounts for about 6% of the UK population but over 60% of the UK’s total fishing catch, reflecting Scotland’s share of the UK Exclusive Economic Zone.

Level playing field commitments

The agreement contains level playing commitments, backed by an enforcement mechanism. The commitments cover labour, social, and environmental standards, climate protection, and subsidy control. If in these areas material impacts on trade or investment arise as a result of significant divergences between the UK and the EU, either Party may take strictly proportional rebalancing measures (such as tariffs) to address the situation. Such action must be based on reliable evidence and not merely on conjecturer or remote possibility. The taking of such measures is subject to binding arbitration.

A Soft Brexit was never going to happen

Whatever the objections to the agreement raised by critics, it is close to the best the UK was ever going to get, given the result of the referendum. Politicians across the political spectrum in the UK hoped for a soft Brexit that might retain UK participation in the EU customs union and/or single market membership, but the difficulties were gravely underestimated and the political arithmetic did not stack up.

A joint UK/EU customs union was never going to happen, because the EU would never have allowed the UK a say in the negotiation and conclusion of joint EU/UK trade deals with third countries. Nor would a Norway model have provided a stable basis for a future UK relationship with the EU. To the UK population it would have seemed like continued EU Membership under another name, and half the UK population would have rejected that. Under the Norway model, important decisions affecting the UK economy would be taken in Brussels, without any input from the UK. The financial regulation of the City of London would be firmly in the hands of the governments of its major European competitors. No UK Government would ever accept all this. The Norway model works for Norway, but it would not work for a G7 country with heightened sensitivities about its self-governance.

The new Trade and Cooperation Agreement is a chance for the UK to move on

The UK now has a Trade and Cooperation Agreement with the EU with some features which the UK Government did not want but had to accept because the EU’s economic power gave it the upper hand in negotiations. In some quarters there is a feeling of having been let down, but the new trade agreement may allow the UK to move on from Brexit, or at any rate it may allow England and Wales to move on.

For Northern Ireland, its Protocol to the Withdrawal Agreement remains as important as the new trade agreement, and Northern Ireland will retain a kind of partial membership of the EU. This probably suits the majority of the Northern Ireland population, which prefers a border in the Irish Sea to a border on the island of Ireland, though it does not suit many Ulster unionists, whose MPs voted in the UK Parliament against both the Northern Ireland Protocol and the new Trade and Cooperation Agreement.

In Scotland, the new trade agreement will be seen by many, and be presented by the dominant Scottish National Party, as an epitaph to the folly of Brexit.  But the new agreement will bring some bonus of fishing quota to the Scottish fishing industry over the next five years. Boris Johnson has warned the SNP that this bonus will have to be handed back if Scotland becomes independent and (re)joins the EU.

But for most of the public and most politicians in the UK the new trade agreement will bring some closure to the divisions caused by Brexit, and allow more focus on normal politics, and recovery from the coronavirus crisis. The fact that the deal has been reluctantly backed by the Labour opposition makes it unlikely that a future Labour Government would attempt to renegotiate its terms.

What next for the UK and the EU?

The Johnson Government has been busying itself for the last year with its “Global Britain” agenda, seeking to strengthen political links and make new trade agreements around the world.

Brexit was always going to require some reset by the UK of economic and political relationships with the EU and the rest of the world. It is difficult to forecast the forms this reset will take, and in the strengthening of new trading relationships around the world, there may be some change of emphasis in political relationships too, e.g., if the UK joins the Comprehensive and Progressive Agreement for a Trans-Pacific Partnership (parties include Australia, Canada, Japan, New Zealand and Singapore). The UK has recently announced plans to increase political links with India, and to discuss a future free trade agreement with that country. Yet the Johnson Government should not be tempted to make its quest for “Global Britain” a pretext for acting as if the UK’s links with Europe no longer matter.

Geography dictates that the Johnson Government and its successors should work hard to rebuild a close political relationship with the EU. That won’t be as easy as before, without the platform of day-to-day engagement with EU leaders, ministers and officials that EU membership provided.

The basis of a strong political relationship with the EU will be the same as the basis of a strong political relationship with the new Biden administration in the US:  close cooperation on internal and external security, on combating climate change, and on support for the rules-based international order and multilateral organisations.

The Trade and Cooperation Agreement itself foreshadows further agreements between the UK and the EU, “global cooperation” on a wide range of issues, and coordination of positions within the UN, World Bank, G7 etc. Such pledges will not in themselves bring about a close political relationship between the UK and the EU, but they do read like an offer on both sides to make such a relationship possible.

The Johnson Government may understand this better than most observers give it credit for. As Boris Johnson announced the trade deal which had been reached, he emphasised that although the UK has left the EU it will “remain culturally, emotionally, historically, strategically and geologically attached to Europe, not least through the four million EU nationals who have requested to settle in the UK over the last four years and who make an enormous contribution to our country and to our lives.” He later added that the UK would be best friend and ally that the EU could have. One of his most senior ministers Michael Gove has said that the deal would give the UK the chance to develop a new pattern of friendly co-operation and a “special relationship” with the EU, “between sovereign equals” (presumably more in a conceptual than physical sense). Perhaps the Johnson Government accepts that its ambitions for a “Global Britain” can be reconciled with a close relationship with the EU, now that that relationship is based on inter-governmental cooperation rather than participation in the EU institutions, and based on international law, rather than on EU law. Whatever the thinking of its current Government, the UK really does have to make this new relationship work. There is no going back.

Derrick Wyatt QC, Emeritus Professor of Law, Oxford University, Member of the International Academic Council of Fide Fundacion