Line chart of Number of collaborations with EEA countries (000s) showing British business research links with Europe have dropped sharply

Can the UK and EU finally net that trade deal?

It is remarkable that, even at this late stage, with the UK prime minister’s October 15 deadline for a political deal looming ever closer, the Brexit trade negotiation still hasn’t really kicked into high gear.

David Frost, the UK’s chief Brexit negotiator, will meet EU counterpart Michel Barnier in London this week, and the two sides will engage in “restricted format” talks to try to intensify discussions. But there must surely be a limit on how much the sides can tinker around the edges.

Optimists note that a high-level political channel has been opened between Boris Johnson and European Commission president Ursula von der Leyen — a move that reflects the fact that the Frost-Barnier track is widely seen to have reached its useful limits. 

But the “channel” is ultimately only as useful as what is communicated down it. For now we continue to dance around the well-worn issues of state aid, fishing and governance, amid reports of only incremental movements by either side. 

And yet both camps clearly want a deal and to say the “landing zones” are in sight — even if they still have divergent understandings of what those landing zones might look like.

Which means that the question of the political choreography of the coming endgame is becoming increasingly urgent: crudely put, this is how both sides can manage the timing and optics of the concessions each needs to make.

The outlying risk is that they continue to wait so long for the other to make a move that when the move comes it is too little, too late (there is a risk that each side has overinflated expectations of the other’s willingness to compromise).

The stand-off over fishing rights is one particularly combustible area. This week the British have put this issue front and centre of their negotiation demands — partly, I suspect, to distract from ticklish forthcoming concessions on state aid, and partly because the EU position (maintaining the status quo) is so obviously indefensible. The temperature is rising and that worries officials on both sides.

Mr Barnier phoned round the main EU fishing member states this week to — as one put it — “soften us up” for coming EU concessions and ask which stocks they wanted “prioritising” in the negotiations. But it seems the EU fishing states collectively refused to take the bait.

Mr Barnier was told to stick to his mandate to “uphold” current levels of fishing access for EU fleets and to maintain the linkage between a deal on fish and a wider trade deal, according to those familiar with the conversation.

This is not because EU fishing states are unaware that they will have to make concessions in the end, just that they see no point in doing so now — recalling that a satisfactory fishing deal was always meant, in their minds, to be linked to a free trade agreement. 

They argue that Mr Barnier should use that leverage, given that nearly 70 per cent of UK-landed fish is sold in the EU.

Fishing states’ logic is that, if the UK does a trade deal, they will have to concede some fish and Mr Johnson will get something he can then trumpet as taking back control of UK waters. That will be a clear Brexit dividend, even if the exact size of the payday is likely to be obscured and may well be smaller than many in the UK would wish.

And if there is a no deal? Well, then the UK’s own hard-over position will make sense, but it won’t change the fact that Mr Johnson will have “won” masses of fish for a British fleet that is not big enough to catch it all and — until a deal is done — has nowhere to sell it. 

So while a deal on fish is clearly in both sides’ interests, the political risk is that this kind of stand-off creates a potentially toxic dynamic — the EU stands its ground on fish, and the UK equally stands its ground on other parts of the FTA. Nobody moves.

There is another potential choreography issue over Mr Johnson dropping the offending clauses of the UK internal market bill. 

This needs to be done in concert with the FTA, but it would be wise to avoid an “ultimatum” or stand-off situation where the European Parliament refuses to ratify the deal until Mr Johnson drops the clauses, and vice-versa. Both sides need to avoid a parliamentary face-off.

So there remains a danger that accidents can happen. Mr Johnson’s deadline for a political deal might be October 15 (the date of the EU leaders’ quarterly European Council summit) but the EU side seems rather more relaxed.

Some EU diplomats and officials speculate that incremental improvements in the run-up to the European Council will open the door to a “tunnel” or the “submarine” (when the teams clam up and get down to the final business) in the final weeks of October, with a moment of political theatre in early November to seal the deal.

That all sounds orderly, and in keeping with the eleventh-hour timing of a typical Brussels negotiation. But it is also built on the presumption of the old EU tactic of running the negotiation into the end zone and forcing Mr Johnson to concede 80 per cent to the EU, while Brussels offers some concessions round the edges.

That could be how it goes down. It might also prove a miscalculation that overestimates how far Mr Johnson is prepared to walk back from his “sovereign” Brexit.

A deal absolutely remains to be done. It should be done. It probably will be done, but accidents can still happen. 

Brexit in numbers

One factor in UK decision-making on a no deal will be to balance short-term disruption (which is probably coming anyway) with a long-term relationship that leaves the UK at least notionally free to write its own future without reference to Brussels.

While much of the media coverage is focused on potential short-term disruption — which, like Michael Gove’s recent warning of 7,000-truck queues in Kent, is probably overstated — the more important questions may well be around maintaining the UK’s long-term attractiveness as a destination for investment. 

This week the FT highlighted that an analysis of Horizon 2020 grant applications had found that, since Brexit, the international collaborations of British businesses under the EU’s flagship innovations scheme had nearly halved since the referendum. 

In 2016 UK companies had 15,900 international research partners in Europe, but that figure had fallen to 8,300 by 2019, the last year for which data are available. All this during a period when UK companies were fully eligible to participate in the grant schemes.

Business groups were rightly concerned about those numbers, which point to a longer-term challenge that needs to be addressed as the new Brexit world unfolds: keeping the UK attractive relative to other countries.

That’s partly about other policy areas, such as investing in a skilled workforce, but also finding ways to ensure that informal barriers — different patent and regulatory regimes, for example, or a cumbersome immigration system — don’t deter engagement with the advanced economies on our doorstep.

That Horizon 2020 analysis should provide a wake-up call. A trade deal will help restore certainty and build confidence, but in the long term — long after exporters and importers have adapted to the new customs systems — this risks being the longer, slower tail-impact of leaving the EU.