Brexit: The UK government has plenty on its plate in 2018

Dharshini David

The European Commission’s chief negotiator, Michel Barnier had barely returned to his desk after Christmas when he was visited by a delegation of leading Brexiteers. They came bearing gifts – marmalade, Marmite, pickle – a hamper of Britain’s trademark products. The aim was to show that an independent UK has the assets to thrive on its own (although the fact that some of the products were made by non-British companies rather served to undermine their case).  Apparently welcomed by Mr Barnier, the gifts may have also been intended to sweeten the deals ahead. But those deals, like Marmite, won’t be to everyone’s tastes.

Brexit Hamper
Source: Steven Woolfe MEP (@Steven_Woolfe) Tweet on 10th January, 1:41pm.

So what is on the menu for the Brexit negotiations in 2018?

First, there’s unfinished business left over from 2017. In December, the UK government struck that last-minute deal with the EU on the first phase of Brexit negotiations, the terms of separation.  Prime Minister Theresa May hailed the deal on thorny issues, such as the Irish border and rights for expats, as “good news for everyone”, a triumph against the odds. Critics on all sides preferred to label the so-called Joint Report a fudge, a feeble compromise designed to save face but insufficient to reassure financial markets. The UK government wanted to demonstrate its negotiating prowess, setting the tone for 2018’s discussions. Instead, the deal suggested that it was the EU side that was largely calling the shots, while the most intractable issues and tensions revealed will be a recurring theme this year.

The detail of that first-phase agreement has yet to be fully hammered out, with technical discussions having recently resumed on the issues involved. But there seems to be little room for further compromise from the EU side – it has to be ‘respected in full and translated faithfully into legal terms as quickly as possible’ according to the European Council. A draft withdrawal agreement could be published as soon as this week.

In the case of Ireland, promising to avoid a hard border means that a Brexit at the harder end of the spectrum has been averted. In the absence of another solution, instead there’ll be regulatory alignment, meaning the UK will mimic the EU’s internal market and customs union that underpin the all-island economy, a key plank of the 1998 Good Friday agreement. While this isn’t the same as the UK remaining in the customs union or single market, it makes divergence on product standards and many rules hard in practice. The individual elements – and the language – of the deal will almost certainly prove controversial.

Talks on the transition deal also now appear to be underway. This adjustment period would give UK and multi-national businesses breathing space to adjust to a new system (invaluable in a world of interwoven supply chains) and reduces short-term uncertainty. It will also allow extra time to wrangle over the fine print of the future relationship. 

But even here, there’s plenty to bicker about. How long should the adjustment period last? The EU says 16 months should be sufficient, UK business says the two years its government touted isn’t long enough.  And what will happen during that time underlines that the UK really can’t have its cake and eat it. The EU has dictated that Britain would remain bound by essentially all its rules - but will not have a say in their making. And the UK won’t be able to negotiate other bilateral trade deals during this period either. For the Brexiteers, so intent on “seizing back control”, it’s a bitter pill. Chances are, however, that Prime Minister May will be relatively amenable to the EU’s demands on transitional arrangements, hoping to pave the way for a more sympathetic hearing for her government’s demands in the following rounds of talks. 

We’ll probably find out more about Mrs May’s thinking on those when she makes another key Brexit speech in February, which will be predominantly about Phase 2: the UK’s future relationship with the EU.  All indications so far suggest she’s eyeing a customised deal which replicates the current economic benefits of the EU (without accepting all the obligations) while maintaining some semblance of political alliance.

The rest of the EU may baulk at such entitlement. Those nations will have their chance to set out the guidelines on this phase at the EU summit on 22nd March. And detailed negotiations on the future trade relationship can’t actually commence without this framework in place.

On this topic, Michel Barnier and his fellow negotiators won’t be in a generous mood. The logic of Theresa May’s red lines, ruling out freedom of movement of people and ECJ jurisdiction, implies the EU will offer merely a “Canada-dry” deal – replicating the kind of free-trade relationship EU has with Canada, with a few bespoke add-ons. So, tariffs would likely be non-existent and regulatory restrictions light on much of UK-EU trade in goods. But the set-up would be a pale imitation of the access currently enjoyed by British business via the single market and customs union. Profits and jobs would undoubtedly suffer from the new cost burdens and barriers to trade that would require. And compatibility with the first-phase agreement on the Irish border might still be difficult to achieve.

The UK is likely to push for more benefits – “Canada plus-plus”, incorporating free trade in services, which of course account for almost 80% of the UK economy – and importantly financial services. It is here where the EU is unlikely to acquiesce to the UK’s demands, reaping rewards at the City’s expense. Then there are other potential stumbling blocks that need to be negotiated – from aviation to security.  

In any case, the most that can be achieved this year on the future arrangement is a “political declaration” of intent. That will likely be another broad – and vague – agreement that will skate over the more contentious and economically potent issues. As with the Joint Report on Phase 1, it’ll be the more easily achieved agreements, possibly on trade in goods – which promises the greatest mutual benefits – that the government will direct attention to. The focus may be more about securing favourable headlines than the UK’s future prosperity. Details on areas such as financial services may be frustratingly sparse, the toughest conversations kicked down the road. Expect more cries of “fudge”.  And there’s not much time to wrap this all up; EU negotiators want this stage completed by October to allow for the withdrawal agreement to be ratified in good time before exit day, 29 March 2019.

Moreover, even if substantive deals are agreed, full negotiation on an actual legally binding trade treaty can only begin after March 2019, once Britain becomes a non-member or “third country”. Then the race will be on to strike a deal before the end of the transition period, to avoid the UK facing a “cliff-edge”.

Time is also running out for the UK to conclude other important agreements before exit day. For example, once it is no longer a member state, the UK will lose the right to benefit from the free trade agreements (FTAs) that the EU already has with more than forty countries, including Japan, Korea, Canada and several large emerging economies. While UK ministers have claimed that it will have replicated those agreements before then, time now looks too tight. So, to avoid the imposition of new barriers to trade with those countries – which collectively account for more than 10% of UK exports – an alternative agreement, perhaps allowing the UK to remain party to the EU’s FTAs throughout the transition, might well be required.   

Politically, dissent will be everywhere. Mrs May’s own Cabinet of senior ministers disagree on what Brexit should or could look like. As the pressure grows, they may knuckle down and put on a show of unity. But compromises will be inevitable, which won’t sit easily with many of them or their backbench colleagues. They’ll be pulling in different directions. Indeed, despite the first-phase agreement, some are still seeking an emphatic departure, a decoupling from any European identity and the prospect of new free trade deals (which are, however, always easier to promise than to sign, seal and deliver). Among that group, the newly-appointed junior Brexit minister, Suella Fernandes, is a vocal supporter of a “no deal” scenario. (An impact study commissioned by London’s “Remain”-supporting Mayor, however, predicts that outcome would cost the UK over half a million jobs and £50bn in investment.)

MPs will also get a “meaningful” vote on the withdrawal agreement. If they exercise the power of veto, almost anything is possible. The UK could find itself having either to attempt to renegotiate, withdraw its Article 50 notification, or resort to crashing out of the EU on WTO trade rules. The process also means that a second referendum, the fall of the UK government and a second snap election in less than two years are all possibilities that can’t be discounted.

So, some nail-biting moments are in store. David Davis, the Brexit secretary has rightly come under fire for his chaotic and contradictory handling of the process. But his comments that decisions tend to be made in the “59th minute of the 11th hour of the last day” at least may be prescient. And while recent months have been relatively calm for UK financial markets, the Brexit process in 2018 is likely to be marked with sufficient volatility and antagonism to keep investors on edge. Ultimately though, even if the various hurdles are cleared and compromises struck, we may know little more about the precise details of the future relationship between the UK and the EU than we do now. 

This blog is the first in a series of articles on Brexit and the UK economy by our guest writer, Dharshini David.

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