UK-EU trade talks – five key points for business

After Boris Johnson’s speech today on future trade deals, and the European Commission’s proposed mandate for EU trade talks with the UK, how much more certainty do we have on their future trading relationship? Here are five points businesses need to keep in mind.

1. The two sides start very far apart

As expected, Michel Barnier and Boris Johnson set out very different visions for the future relationship. The Commission’s proposal – which the EU 27 must sign off, but which they are likely only to toughen – is very far apart from the UK's red lines. Level playing field (LPF) commitments to maintain EU standards in a host of areas will be one flashpoint; access to UK fishing waters another. The EU will want both as the minimum price for a zero tariff zero quota deal – or in fact any deal at all.

However, Boris Johnson explicitly rejected future UK alignment on competition policy, State aid subsidies, social protection or the environment, instead offering a voluntary UK commitment to maintain high standards in these areas. The UK position rests on two basic ideas: seeking mutual recognition of rules and standards, and threatening no deal (re-branded as the ‘Australia deal’). This takes us back two years. The EU was unimpressed by these tactics in phase 1 of the Brexit talks and this approach is even less likely to gain traction now the UK has left and the EU has already secured its bottom lines on the Irish border, EU citizens’ rights, and money.

2. A crisis in June

All of this makes an early crisis likely. The UK position was aggressively briefed out over the weekend, accusing the EU of moving the goalposts (despite Johnson having already signed up to much of this in the political declaration attached to the Withdrawal Agreement). Talks are scheduled to start on 3 March, but these wide differences in approach will probably come to a head by June, when fish quotas are supposed to be sorted out. If there is not outline agreement on LPF, governance and fish by the time of the EU summit on 18-19 June, we can expect EU leaders to step up the pressure by delaying further talks. As in phase 1, the EU sees the ‘ticking clock’ as key to its leverage, and will know that markets – not least Sterling – will also react if the prospect of a deal recedes.

3. But a deal this year is likely, on goods at least

Nonetheless, a deal this year is in both sides' interest and Johnson showed in the first phase of Brexit that he understands the political value of being a deal-maker, rather than a no-dealer.

In fact, the two sides are not so far apart on LPF. Johnson’s promise to maintain high ‘European’ standards suggests that the real negotiation here will be about governance and dispute resolution. Barnier’s draft mandate is clear that “robust” mechanisms will be needed, including binding references to the European Court of Justice for any EU law and, crucially, the right to suspend all or part of the trade deal as well as other protective measures if the other side undermines the LPF. Fisheries, as a binary, totemic issue is harder to resolve – and politically toxic.

If the two sides can agree on these EU preconditions, however, the bigger question is whether Johnson is prepared to be a rule-taker for goods. That could preserve much of UK manufacturing access to the EU Single Market, but would require the government to shift back to Theresa May's Chequers position, which Johnson resigned over on his way to the Tory leadership and has firmly ruled out since the general election. Sticking to his current red lines, on the other hand, would cause severe disruption to UK manufacturers, including large-scale job losses during this Parliament, many in newly-won seats which make up the Conservatives' majority.

We should know the answer by the Autumn but any move back towards Chequers would be a major shift by Boris Johnson, who will perhaps believe the economic effects are manageable, and could be partly mitigated by government spending and incentives for businesses to stay.

4. A formal extension of the transition is unlikely – but many areas may only be settled after 2021

Johnson's commitment to leave the standstill transition period by the end of December is now enshrined in law. Temperamentally, as well as politically, he will believe that a deal can be done in that time. He is right; a goods-only deal is possible this year, but only an off the shelf deal. In practice that means WTO terms, or a close-alignment, Chequers-type deal.

But that still leaves a lot to do – services, transport, security, and especially customs. Barnier’s draft mandate explicitly envisages a phased approach to an aviation deal, for example, in the expectation that it will not be settled this year. Businesses need to know – and engage on – what interim access Johnson may seek here, while the future relationship in these areas is negotiated from 2021 onwards.

5. Business needs to be ready for WTO terms, and push the government to seek more

Businesses know that, from January 2021, WTO trade terms are the default. Even if a deal is done for goods, it won't be much more than WTO terms without ongoing rule-taking by the UK. That would be the outcome even if the UK only said it wanted to diverge, whether or not it ever did.

Businesses should be thinking now about what they want the government to ask for in EU trade talks this year, beyond a core goods deal. What matters to business? A standstill transition on customs? Ongoing mutual recognition of professional qualifications? Ongoing transport rights beyond the EU's 'no deal' planning minimum? Any such 'extras' beyond WTO terms will have to be sought and prioritised by the UK; there will be very little time. Everything not covered in a deal this year increases EU negotiating leverage from next January onwards, so the onus lies in London.

Conclusion

This year will be all about the EU deal, and Johnson's choice of a political u-turn or a potentially severe, slow bleed of jobs away from manufacturing heartlands, many of which sustain his current majority.

June and Autumn are the likely key moments, when negotiating positions, especially in London, may start to shift. There is a huge amount at stake for business, whether on the degree of UK alignment/disruption, or what extras could be negotiated beyond WTO terms for the areas not covered in a deal this year. Business should be engaging now to get their priorities understood before the trade-offs are made, at speed, and at the top of government, later this year.

For more information on how Lexington could help your business navigate and influence the forthcoming trade talks contact our Senior Counsel, Paul McGrade ([email protected])