The UK and EU on Tuesday signed off their opening positions for what are likely to be tense trade talks, starting in Brussels next week.
Although the UK won’t publish its negotiating mandate until Thursday, the EU has published its directives for chief Brexit negotiator Michel Barnier, following a meeting of European affairs ministers.
Here, the Financial Times considers the potential sticking points and the routes to a compromise.
What trade deal do the UK and EU want to reach?
UK prime minister Boris Johnson’s multiple red lines — notably his determination to “take back control of our money, laws and borders” — have imposed limits on the kind of trade agreement the EU is prepared to offer.
Mr Johnson calls it a simple “Canada-style free trade agreement”, which would have “zero tariffs, zero quotas” on manufactured goods at its heart. The EU, which ran a £94bn surplus in goods trade with Britain in 2018, is broadly willing to agree.
Services, where the UK enjoyed a £28bn surplus in trade with the EU, would be less well covered by a Canada-style agreement, especially as time is tight and Mr Johnson’s December 31 deadline is demanding to say the least.
Mr Johnson accepts this modest form of trade deal could lead to more friction to trade and costs at the border — form-filling, taxes, regulatory checks — but argues that this is a price worth paying for Britain to assume autonomy over its own rules.
What could go wrong?
The biggest stumbling block is the EU’s demand that any trade deal includes strict “level playing field” provisions to keep the UK in step with EU standards and to stop it undercutting its 27 neighbours in a deregulatory race to the bottom.
Downing Street last week accused the EU of adding new conditions to any trade deal, arguing that the bloc’s trade deals with countries such as Canada or Japan did not impose such onerous demands in areas such as state aid, labour law and the environment.
But Mr Johnson last year signed a political declaration with the EU — repeated in the bloc’s new negotiating mandate — that the “geographic proximity and economic interdependence” of the two sides required “robust” level playing field commitments.
Downing Street wants full autonomy on rulemaking, but the EU negotiating mandate adopted on Tuesday wants to use Brussels’ standards in areas such as climate change, tax and employment standards as “a reference point”.
On state aid the EU wants to go even further, saying a trade deal must ensure “the application of Union state aid rules to and in the United Kingdom”. That idea was dismissed out of hand by Number 10.
Although the EU has pulled back from French demands that Britain should be forced to adopt any new regulations in other areas such as labour and environmental standards — so-called “dynamic alignment” — the level playing field remains highly contentious.
What are the other sticking points?
The first word often uttered by EU diplomats when asked to name the biggest obstacle to a trade deal is “fish”. Although it accounts for 0.1 per cent of the British economy, control of fishing stocks is totemic for Brexiters.
The EU negotiating mandate wants to “uphold” continued reciprocal access with “stable quota shares” to be divided between British and EU fishermen. The UK wants to agree access to its waters on an annual basis.
Fisheries have to be settled by July 1 and failure to agree a deal could derail the rest of the trade talks. A new regime for financial services is being discussed on a similar timetable, creating a potentially toxic link between the two issues.
Meanwhile, EU foreign ministers warned yesterday that trade talks could be derailed if Mr Johnson tried to wriggle out of commitments — now enshrined in an international treaty — on trade with Northern Ireland.
Mr Johnson insists there will be no checks on Irish Sea trade between Great Britain and the region, but Brussels believes they are unavoidable because the region will stay within the EU’s customs code — part of a deal to retain an open land border in Ireland.
“My message is crystal clear,” said Germany’s Europe minister Michael Roth. “Keep your promises.” Downing Street insists it will stick to its legal commitments, but any hint of backsliding could wreck trust in the wider trade talks.
On financial services, the EU says it will be prepared to grant access on the basis of “unilateral equivalence frameworks”, provided the UK’s rules are closely aligned with those set by Brussels.
The UK is concerned that the EU could revoke those access rights to financial markets at short notice. Britain is seeking a more stable relationship.
Can the two sides reach an agreement?
Despite the pre-negotiation tension and megaphone diplomacy, trade experts believe a deal can be done and that both the EU and UK negotiating mandates leave negotiators enough room for compromise — if the politicians are willing.
“There will be a lot of noise and shouting but I think there will be a trade deal this year,” said Sam Lowe, trade expert at the Centre for European Reform think-tank. “I just don’t think it will be a very good trade deal when you think of the disruption it will involve.”
Mr Lowe added: “Both sides are pretty aligned on what they want.” David Henig, a former UK government trade official who helped to negotiate the EU/US TTIP trade deal, agreed: “You can see a landing zone here. Both sides are talking about the same kind of deal.”
What are the possible compromises?
Both the EU and UK mandates have been crafted to allow scope for a deal, although experienced trade negotiators believe there will be months of shadow boxing before the real compromises take shape in the autumn.
Georgina Wright, of the Institute for Government think-tank, wrote on Twitter that the EU mandate had some flexibility on the level playing field: “It doesn’t say the UK and EU must have the same standards but ‘corresponding high standards’ using EU standards as a benchmark.”
European diplomats say a deal could be cooked up. “You could have some kind of deal where the UK will say it can deviate from EU rules but the EU says it won’t.”
On fisheries, EU diplomats say there could be scope for a deal where some access to UK waters is permanent but, say, 20 per cent is agreed annually.
Source: Economy - ft.com
