Brexit negotiation takes decisive step forward but toughest issues lie ahead

Friday’s European Council meeting on the Brexit negotiation
Monday, March 26, 2018

On Friday, March 23, the European Council of the EU, meeting in its Article 50 configuration—that is, without UK Prime Minister Theresa May—welcomed the agreement of EU and UK negotiators on parts of the legal text of the Withdrawal Agreement and issued guidelines for the negotiation of an overall understanding of the framework for the future relationship between the EU and UK. That understanding will be elaborated in a political declaration that will accompany and be referred to in the Withdrawal Agreement.

But the heads of state and government of the EU 27 underscored the challenges that lie ahead. The negotiators must still agree on how the UK will ensure that the border between Ireland and Northern Ireland remains open and they must, of course, also agree on the framework of the future relationship, something about which the EU and UK have very different views. They must reach an agreement on these and all the other still-unresolved issues by autumn at the latest if the UK Parliament, the European Parliament and the EU Council of Ministers are to have sufficient time to consider and formally approve the Withdrawal Agreement by March 29, 2019. By the terms of Article 50 of the Treaty on European Union which governs the withdrawal procedure, the UK will leave the EU on that date, with or without a Withdrawal Agreement. Without one, on that date the UK will go over the cliff-edge in the hardest possible Brexit.

Several days before the meeting, the chief negotiators, Michel Barnier for the EU and David Davis, the British Secretary of State for Exiting the EU, presented a color-coded version of the 129-page draft Withdrawal Agreement. Significant portions were shaded in green, indicating text that has been agreed by the negotiators and needs only technical legal revisions in the coming weeks. But there were also significant portions shaded in yellow, indicating that, while the negotiators agree on the policy objective, drafting changes or clarifications are still required. And there were other portions that weren’t color-shaded, indicating text that has been proposed by the EU on which discussions are ongoing.

Prominent among the sections shaded in green, indicating agreement by both sides, were the provisions on the transition period the UK requested after its exit from the EU on March 29, 2019. All of the conditions stipulated by the European Council at its December meeting when it agreed in principle to the UK’s request for a transition period have been accepted by the UK. The transition period, during which the UK will remain in the EU’s Single Market and Customs Union, will end on December 31, 2020. During the transition period, all existing EU regulatory, budgetary, supervisory, judiciary and enforcement mechanisms will apply to the UK; it will continue to adhere to the EU’s “four freedoms,” including the free movement of EU citizens into the UK; it will continue to make its full budgetary contribution; it will continue to be subject to the jurisdiction of the Court of Justice of the EU; and it won’t participate in any EU institutions unless invited to do so in specific instances.

The agreement on the transition period will no doubt ease the anxieties of the British business community, which fears, as its worst-case scenario, a “hard Brexit” next March. On the other hand, as Barnier and the EU have said on many occasions, “nothing is agreed until everything is agreed.” The transition period will occur only if a Withdrawal Agreement is formally concluded by March 29, 2019.

If the differences between the EU and UK on the transition period have been resolved, the same cannot be said about the differences between them in regard to the Irish border. The negotiators have prepared a draft Protocol on Ireland/Northern Ireland the terms of which will be annexed to the Withdrawal Agreement and will apply unless a future agreement between the EU and UK is agreed which addresses the unique circumstances on the island of Ireland, including by avoiding a hard border and protecting the Good Friday or Belfast Agreement of 1998. Some portions of the Protocol are shaded in green, indicating agreement between the negotiators, and other portions are shaded in yellow, indicating that, while the negotiators have agreed on the objective, changes or clarifications are still needed. But some of the most important sections—in particular, chapter 3 on the “common regulatory area”—remain unshaded, indicating that there is, as yet, no agreement on either the objective or the language of the text proposed by the EU.

The Irish border issue is, of course, the one that derailed a December press conference between Theresa May and European Commission President Jean-Claude Juncker just as they were about to announce in Brussels that the EU and UK negotiators had made “sufficient progress” in the first phase of the Brexit negotiation, allowing the negotiation to move on to the second phase. The prime minister received a phone call from Arlene Foster, the leader of the Northern Ireland Democratic Unionist Party which, since the June 2017 election, has supported May’s Conservative minority government in the House of Commons. Foster said the DUP objected to a paragraph in the negotiators’ Joint Report that said there would be a “regulatory alignment” of Northern Ireland and the republic in regard to trade and commerce after the UK’s exit—an improvement, the British government thought, on earlier language that said there would be “no regulatory divergence.”

The DUP intervention resulted in the insertion of new language in the Joint Report. The UK placated the DUP by making it clear that, while it is committed to maintaining and protecting in all its parts the 1998 Agreement and avoiding a hard border between Northern Ireland and the republic, it also fully supported Northern Ireland’s position as an integral part of the UK and was committed to preserving the integrity of its internal market and Northern Ireland’s place within it. At the same time, the UK sought to address the concerns of the EU and Ireland by stating, in paragraph 49 of the amended report, that it understood that any future arrangement with the EU must be compatible with the overarching requirements of maintaining and protecting the 1998 agreement and avoiding a hard border on the island, that it intended to achieve those objectives through the overall EU-UK relationship and that, should that not be possible, it would propose specific solutions to address the unique circumstances of the island of Ireland. And in what has come to be known as the “backstop,” it said that, in the absence of agreed solutions, it “will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement.”

No progress has been made thus far in establishing a “common regulatory area”—defined as an area without internal borders in which the free movement of goods is ensured and North-South cooperation protected—between the EU and the UK with respect to Northern Ireland and in fact Theresa May explicitly rejected the concept of a “common regulatory area” in the House of Commons. In circulating the draft Withdrawal Agreement to the EU 27 member states and the European Parliament last week, the Commission noted that a “legally operative version” of the “backstop” solution for the border must be agreed as part of the text of the agreement and will apply unless and until another solution is found. And it noted that while the negotiators have reached agreement on some elements of the draft Protocol and agree that the full set of issues related to avoiding a hard border must be addressed in any solution, there is as yet no agreement on the right operational approach to the issue.

There is, of course, one obvious way to create a “common regulatory area” that would ensure an open border and the free movement of goods between the EU and Northern Ireland while also maintaining the full integration of Northern Ireland in the UK internal market—by the UK remaining in the EU’s Customs Union. But the British government has consistently ruled out that option—most recently, in Theresa May’s recent Mansion House address. Absent membership in the Customs Union, it is not obvious how the UK can ensure that the border between Northern Ireland and the EU remains open. But if it doesn’t ensure an open border in “legally operative” language, there won’t be a Withdrawal Agreement or a transition period.

At first glance it would appear that agreeing on the framework of the future relationship will be much less difficult than agreeing on “legally operative” language that will ensure an open border and the free movement of goods between the EU and Northern Ireland. After all, as Michel Barnier demonstrated to the European Council at its December meeting with a PowerPoint slide, the UK’s frequently-reiterated “red lines”—its refusal after the termination of the transition period to make a financial contribution to the EU budget and accept the jurisdiction of the ECJ, the free movement of EU citizens into the UK, and the regulatory authority of the EU in trade policy – exclude every type of possible future relationship— membership in the European Economic Area (the Norway alternative), membership in the European Free Trade Association (the Switzerland alternative), a Deep and Comprehensive Free Trade Agreement (the Ukraine alternative), membership in the Customs Union (the Turkey alternative)—except a Free Trade Agreement such as the EU-Canada Comprehensive Economic and Trade Agreement (CETA).

The European Council reiterated that position in the guidelines adopted Friday in regard to the negotiation of an overall understanding of the framework for the future relationship. It confirmed its readiness to initiate work toward a “balanced, ambitious and wide-ranging free trade agreement (FTA)” to be finalized and concluded once the UK is no longer a member state. But it noted that such an agreement cannot offer the same benefits as membership and cannot amount to participation in the Single Market or parts thereof. And it reiterated once again what it has often said—that there can be no “cherry picking” through participation in the Single Market on a sector-by-sector approach, something that would undermine the integrity and proper functioning of the Single Market.

According to the guidelines, the free trade agreement will address trade in goods with the aim of covering all sectors and seeking to maintain zero tariffs and no quantitative restrictions with appropriate accompanying rules of origin. There will be appropriate customs cooperation, preserving the regulatory and jurisdictional autonomy of the parties and the integrity of the EU Customs Union. And the FTA will address trade in services with the aim of allowing market access to provide services under host state rules, including in regard to the right of establishment for providers, consistent with the fact that the UK will be a third country and will no longer share a common regulatory, supervisory, enforcement and judiciary framework with the EU.

In her Lancaster House speech in January 2017 and her speech last September in Florence, Theresa May described in general terms the “bespoke” relationship the UK wants with the EU. At its December meeting, the European Council urged the UK to provide further clarity on its position regarding the framework for the future relationship. May did that in her Mansion House speech on Mar. 2. In it, she noted once again that the UK won’t pursue the Norway model—i.e., staying in the Single Market—because that would require it to continue to accept the free movement of EU citizens into the UK. But she also said the UK won’t seek a free trade agreement similar to Canada’s because that would reduce the access of the EU and UK to each other’s markets. Instead, the UK wants the “broadest and deepest possible partnership – covering more sectors and cooperating more fully than any Free Trade Agreement anywhere in the world.” Such an agreement, she said, would encompass not only goods but financial services, would include reciprocal binding commitments to ensure fair and open competition, and would create an independent arbitration mechanism, an ongoing process of dialogue and consultation in which EU and UK regulators work together, and a comprehensive system of mutual recognition of regulatory standards for goods with a mechanism to oversee the arrangement. The agreement would allow the EU and UK access to each other’s financial markets based on a collaborative framework that is reciprocal, mutually agreed, permanent and maintains the same regulatory outcomes over time. The UK would have associate membership and continue to participate in various EU agencies. There would be either a customs partnership with the EU or a highly streamlined customs arrangement in which the EU and UK would agree on measures to minimize trade frictions. The EU-UK partnership would, in short, be “tailored” to the needs of the two economies and would provide for “varying market access” depending on the interests of the EU and the UK. Anticipating the EU’s frequently-repeated warning about “cherry-picking,” she said, by way of rationalization, “if this is cherry-picking, then every trade arrangement is cherry-picking.”

At the risk of oversimplifying, the EU wants a Free Trade Agreement and the UK wants EU lite. But it’s obvious, both from the extraordinary bargaining advantage Article 50 gives the EU vis-à-vis a departing member state and from the results of the negotiation over the past year, that what the UK gets will depend not on what it wants but on what the EU is willing to give it. As long as the UK’s “red lines” remain in effect, that means a free trade agreement. And the UK may not even get that; after all, once the transition period begins on March 30, 2019, it will have only 21 months in which to negotiate the free trade agreement. Most trade specialists think that will not be enough time; it took the EU and Canada more than five years to negotiate their Comprehensive Economic and Trade Agreement (CETA)—an agreement which, although not nearly as complex as the one envisioned in the Mansion House speech, is more than 1600 pages in length. No wonder some are already anticipating that, at some point between March 30, 2019, when the transition period begins, and December 31, 2020, when it ends, the UK will have to request an extension of the transition period—something the EU may not grant—or relinquish its “red lines” and agree to remain in the Single Market and Customs Union.

Written by David R. Cameron, a professor of political science and the director of the MacMillan Center’s Program in European Union Studies.