Brexit and business: how far apart are the UK and the EU's negotiating positions?

Nothing is agreed until everything is agreed, individual items cannot be settled separately – the European Council

Everything is negotiable. Whether or not the negotiation is easy is another thing – Carrie Fisher

Following the European Council’s meeting on 29 April 2017, we have the opening stances of the UK and the EU ahead of their Brexit negotiations. With Brexit activity effectively suspended until the UK election on 8 June, it is a good time to see if we can summarise the positions assumed.

The European Council (the senior body by which the EU acts) agreed its negotiation guidelines at its meeting on 29 April.

The UK’s official position cannot be so concisely summarised, but can be constructed from Prime Minister May’s speech of 17 January 2017, the UK government’s White Paper of February, Mrs May’s letter of 29 March triggering Article 50 of the Lisbon Treaty and from various press reports.

In what order will the negotiations run? The UK and the EU don’t agree on this one. Why does it matter?

The EU’s position

The EU is clear that negotiations must follow a phased and ordered approach.

In the first phase: the ‘immediate effects’ of the UK’s withdrawal must be clarified and made as legally certain as possible. The ‘disentanglement’ of the UK from the EU and from its ‘commitments undertaken as [a] Member State’ (i.e. the UK’s exit bill) must be settled as part of this first phase.

Only once this first phase has made ‘sufficient progress’ (a form of words that comes up continually in EU Brexit communications) on ‘reaching a satisfactory agreement on…an orderly withdrawal’, will the EU move to second phase. As part of that second phase, work can be done to identify an ‘overall understanding’ on the framework for the future UK-EU relationship – but that work will only be ‘preliminary and preparatory’…

…because ‘an agreement on a future relationship’ between the UK and the EU ‘can only be finalised and concluded once the UK has become a third country’ i.e. once the UK has left the EU.

The EU’s position has been clear since its earlier statements immediately after the Brexit vote in the summer of 2016: the terms of the UK’s withdrawal must be sufficiently progressed before any discussions on a future trade relationship. And, crucially, any such relationship can only be concluded once the UK has left the EU.

The UK’s position

By contrast, the UK is much, much keener on a parallel, not phased, approach to negotiations. The UK wants talks on the future UK/EU relationship to be conducted at the same time as the exit talks. Mrs May said in her letter triggering Article 50 that to achieve the UK’s desired ‘deep and special’ partnership’ with the EU, ‘it is necessary to agree the terms of our future partnership alongside those of our withdrawal from the EU’.

Indeed, the UK government still holds out hope (according to this report of 30 April in the Financial Times) that a future agreement could be agreed within the two year period by which Brexit has to happen under Article 50, i.e. at the same time as the withdrawal talks. Article 50 was triggered on 29 March 2017, meaning Brexit should happen by 29 March 2019.

Why does it matter?

The EU’s desired phased and ordered approach is likely to take more time than the UK’s ‘all at the same time’ approach. That may mean a longer period of uncertainty for businesses and governments. This sequencing arguably gives the EU more leverage over the terms of the withdrawal agreement – the EU’s argument will be, at its most basic, ‘no exit agreement– then no trade talks’.

Ultimately, the difference in approach between the EU and the UK reflects the priorities of each side. For the EU, the most important thing is to emerge from Brexit as a unified group with a clean, if unwanted, divorce from the UK. After all, the EU has other pressing issues with which to deal. For the UK, the priority is not the terms of  divorce (though it retains a close interest in those terms) but in settling the future terms of trade between the UK and the EU.

Will there be a transitional agreement governing the period between Brexit and the finalising of a free trade agreement?

This seems likely.

If a final free trade agreement is not concluded by the date of Brexit, one of two things can happen.

Either trading relations between the UK and the EU default to World Trade Organisation rules – with the resulting imposition of tariffs and customs controls – or the parties can agree a transitional agreement setting out how their relations will run between Brexit and the conclusion of a free trade agreement.

The European Council explicitly refers to the high possibility of a transitional agreement in its guidelines – it must be ‘clearly defined, limited in time, and subject to effective enforcement mechanisms’ with ‘existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures’ applying. And we know from pronouncements of various EU actors that they see a transitional agreement as inevitable, given their view that it is impossible to agree a definitive post-Brexit agreement in the two year withdrawal period.

The UK has not been so explicit, and press reports this weekend suggest that the UK Prime Minister still aspires to a final deal within the Brexit withdrawal period.  Nevertheless, the UK’s letter triggering Brexit seems to envisage some form of transitional agreement so that a ‘cliff edge’ of uncertainty is avoided in 2019, observing that ‘people and businesses in both the UK and the EU would benefit from implementation periods to adjust in a smooth and orderly way to new arrangements’ – although that letter also advocates concluding a final deal during the Brexit withdrawal period.

Business lobby groups in the UK and other countries have been vocal on the need to eliminate that ‘cliff edge’ risk.  Given the need for businesses to have certainty as to how their world will work on the first day after Brexit, given how long free trade deals take (the EU-Canada deal took eight years), and given the EU’s views, it seems likely that there will a transitional agreement after Brexit in 2019.

Will the UK remain a member of the Single Market? Or will there be ‘sector-by-sector’ membership?

At the moment, these both seem almost impossible.

In her Article 50 letter, Mrs May said that ‘the UK does not seek membership of the Single Market’. This is because the UK has accepted that the ‘four freedoms’ – the freedom of movement of people, goods, services and capital – which constitute the Single Market are indivisible. They cannot be cherry picked; the UK cannot have the latter three without the first.

That the UK will leave the Single Market is implicit throughout the European Council’s negotiating guidelines.  And just to emphasise the point, those guidelines say that ‘any free trade agreement [between the UK and the EU27] should be balanced, ambitious and wide-ranging. It cannot, however, amount to participation in the Single Market or parts thereof.’ 

By that final phrase and elsewhere in its guidelines, the Council also explicitly rules out any sectoral participation in the Single Market – which Prime Minister hinted was something that the UK might try and pursue in her 17 January speech, when she said that a future agreement ‘may take in elements of current single market arrangements in certain areas’ (she cited the export of cars and lorries, and financial services).

The Council, by contrast, is certain that ‘a non-member of the Union, that does not live up to the same obligations as a member, cannot have the same rights and enjoy the same benefits as a member’…that there can be no Single Market participation ‘on a sector-by-sector approach’.

So what sort of future trading relationship do the UK and the EU want?

The EU has made its position public and put down some unequivocal markers; the UK has not revealed too much of its hand

Mrs May said on 17 January that the UK wants ‘the freest possible trade in goods and services’, that it would like ‘a new, comprehensive, bold and ambitious free trade agreement’. On 29 March she aspired in her Article 50 letter to ‘a deep and special relationship’.  That aspirational position is, however, pretty much all we have at the moment, and it runs through section 8, ‘Ensuring free trade with European markets’, of the UK government’s White Paper of February 2017.

The European Council, more focused on negotiating the terms of withdrawal, wishes to have the UK ‘as a close partner in the future’.  But it has also laid out some more detailed principles that it sees as important for any future trade relationship:

• Any free trade agreement should be ‘balanced, ambitious and wide-ranging’…
• It ‘must ensure a level playing field, notably in terms of competition and state aid, and in this regard encompass safeguards against unfair competitive advantages through, inter alia, tax, social, environmental and regulatory measures and practices’.
• And any future framework should ‘safeguard financial stability in the Union and respect its regulatory and supervisory regime and standards and their application’.

That is a warning shot that the EU is not keen on the UK following a low tax and deregulatory course after Brexit – sometimes referred to, perhaps not necessarily accurately, as a move to a Singaporean-style offshore economy.

So what is first up for negotiation?

The status of EU and UK citizens; certainty for business; the UK’s bill; a way forward for non-EU trading relationships?

If the EU get its way as to the order in which negotiations will run, the Brexit negotiations will look something like this:

1. The status of EU27 citizens in the UK, and of UK citizens in the countries of the EU27: This is the European Council’s first priority. In the words of the Council’s guidelines:

‘Agreeing reciprocal guarantees to safeguard the status and rights…of EU and UK citizens, and their families…will be the first priority for the negotiations. Such guarantees must be effective, enforceable, non-discriminatory and comprehensive, including the right to acquire permanent residence after a continuous period of five years of legal residence. Citizens should be able to exercise their rights through smooth and simple administrative procedures.’

One of the few things we know for sure about the UK position is that the UK too wants to prioritise this question of citizen’s rights.  The Prime Minister said on 17 January that the UK wants to ‘guarantee…[these] rights…as early as we can’.

2. Legal certainty for business: Then comes the impact of business on EU businesses trading with and operating in the UK, and on UK businesses trading in the EU. Brexit ‘may affect those who have entered into contracts and business arrangements…based on the assumption of continued British EU membership’. So ‘negotiations should seek to prevent a legal vacuum once the Treaties cease to apply’ to the UK.
3. The UK’s bill to pay: Third up on the Council’s list of priorities is that a single financial settlement should be made between the EU and the UK to ‘respect the obligations’ resulting from the UK’s EU membership.
4. A potential way forward on the UK’s future non-EU trading relationship? After discussing the ‘unique circumstances’ on the island of Ireland, and then the UK sovereign bases in Cyprus, the Council’s guidelines state that it expects the UK to honour its international commitments ‘contracted in the context of its EU membership’.  They continue:

‘In such instances, a constructive dialogue with the United Kingdom on a possible common approach towards third country partners, international organisations and conventions concerned should be engaged.’

Is that to be interpreted as the Council suggesting that the UK’s future trading relationship with non-EU countries could replicate the existing arrangements between the EU and those countries?  If so, that could be constructive, as it may imply some form of ‘grandfathering’ of those arrangements over to the UK’s new position outside the EU.

The Council’s guidelines then discuss the continuing and future potential role of the Court of Justice of the European Union, particularly in settling and enforcing disputes about the actual withdrawal arrangement. That’s not likely to be particularly well-received by the UK government.

Given these clear guidelines, it is much easier to be certain about how the EU will approach the Brexit negotiations than it is about how the UK will come to the table.  That is because position-forming and decision-taking amongst the EU has to be public; after all, the EU has to form consensus between 27 Member States.  Michel Barnier (the EU lead Brexit negotiator), the European Council and the European Commission have consequently been relatively (compared to the UK government) open since summer 2016 about the EU27’s views and stance on Brexit – and the detail set out in the guidelines is the result.

By contrast, the UK government has deliberately revealed very little of its negotiating hand, other than its approach to the ordering of the negotiating process.

What can we conclude from all of this?

Citizens’ rights are likely to be first up for negotiation.

The UK’s ‘disentanglement’ from the EU Treaties will be a priority, as will the UK’s ‘exit bill’.

There is likely to be a transitional agreement governing the period between Brexit and a final free trade agreement being entered into between the UK and the EU.

The UK will leave the Single Market and sector-by-sector deals replicating elements of that market seem unlikely.

The EU27’s negotiating position is public and clear and has been reached by consensus; the UK’s position is more opaque.  The UK and EU both want a free trade agreement after Brexit – but the EU is unlikely to agree to terms that allow access to its markets whilst leaving the UK free to pursue a low tax, deregulatory business regime.