The hard Brexit choices that could yet deliver a deal

The hard Brexit choices that could yet deliver a deal

The EU-UK future-relationship talks remain deadlocked on two main sticking points — fishing rights and state subsidies — with no immediate solutions in sight despite Michel Barnier and David Frost meeting for further discussions this week.

Mr Barnier, the EU’s chief negotiator, warned last week that “the time for answers is quickly running out”, but both sides have signalled that the range of disagreements is narrowing, potentially clearing the way for a deal in September or at the very latest October — albeit one that will introduce new costs and frictions for business.

At an internal briefing with EU diplomats on Friday, Mr Barnier said the UK had scaled back some of its aspirations in the trade talks and was now seeking what amounted to a “low-quality, low-profile” agreement, but one that would still provide tariff-and-quota-free access to the EU market.

Officials on both sides say compromises are there to be struck. Much will depend on the political will on both sides to make hard choices in a handful of key areas.

State aid and the level playing field

This was one of the areas where no decisive progress was made in July. The EU is adamant that it will not allow the UK “zero tariff, zero quota” access to the EU single market unless it signs up to a set of “level playing field” principles that minimise the risk of Britain undercutting the EU on environmental regulation, workers’ rights and state aid to business.

Brussels has signalled a willingness to drop its demand that the UK accepts future EU state-aid rules and the oversight of the European Court of Justice (ECJ), but in exchange it wants the UK to sign up to a “shared philosophy” on future subsidy policy. Britain argues that an independent dispute resolution system should be sufficient to give confidence to both sides, but has thus far refused to tell Brussels what the UK’s new subsidy regime will look like. 

Mr Barnier told EU diplomats on Friday that the level playing field was the most difficult subject in the entire future-relationship negotiation. Closing the gap here will be critical to any deal.

Governance of the agreement

Brussels has consistently called for an overarching “strategic partnership” with the ability to seek redress by imposing cross-cutting sanctions. Britain prefers an array of separate agreements that do not allow transgressions in one sector to be punished by sanctions in another.

Mr Frost confirmed last week that the UK was willing to look at “simpler structures” for overseeing and enforcing any deal compared with its initial proposals. This was confirmed by EU officials, who said nonetheless that Britain still wanted standalone agreements on aviation, fish and civil-nuclear co-operation. While further work is needed, a middle ground is clearly emerging.

Criminal justice co-operation and data sharing

Mr Barnier confirmed to diplomats on Friday that positions are converging on future police and judicial co-operation.

Talks have been eased by the EU’s willingness to explore options for keeping the ECJ out of the future EU-UK relationship — a core British red line. This will restrict the depth of future co-operation. Britain is already resigned to losing access to some EU crime-fighting databases, including the Schengen Information System (SIS II).

For non-law enforcement data sharing, the UK is seeking a so-called adequacy decision from the European Commission. This will be unilateral and vulnerable to legal challenges, as an ECJ decision this month striking down the US-EU Privacy Shield data sharing agreement demonstrated. One solution is to agree a contingency process that will help maintain data flows in the event of no agreement.

The Port of Dover, where many of the 10,000 lorries that cross the Channel each day flow through © Bloomberg

Freight transport

Britain wants an ambitious facilitation agreement to smooth the flows of the “roll-on, roll-off” freight system that sees up to 10,000 lorries a day flowing through Dover and the Channel tunnel. It is also seeking a deal that would see both sides recognising the other’s truck permits.

Both sides have an interest in agreeing this deal, but the EU is clear that it must be linked to agreement on the “level playing field” and maintaining minimum environmental, social and labour standards, so that haulage companies cannot set up in the UK and undercut their EU counterparts and standards. 

Rules of origin

Britain wants so-called “cross cumulation” that would enable it to count industrial inputs (components, raw materials or ingredients) from non-EU countries as “British” when assessing whether a product is sufficiently “UK-made” to qualify for tariff-free access to the EU single market. This would apply for inputs from countries with which the EU and UK both had trade deals. 

The EU says it will not agree to this because of the risk that Britain would become an “assembly hub” on the bloc’s perimeter. Possible solutions could include time-limiting a period of cross cumulation where inputs from, say, EU trade partners such as Canada, Japan or South Korea could still continue to count as British for an adjustment period. Another alternative would be for the UK to join the pan-Euro-Mediterranean convention that allows cumulation with about 20 countries, including Turkey and Israel. 

Mutual recognition

Britain began the negotiations seeking close to automatic mutual recognition of professional qualifications, as well as powers for UK inspection organisations to certify goods as conforming to EU standards in order that they could be exported to the European market.

The EU took a firm line against these UK requests, explicitly ruling out allowing Britain to become a “certification hub” after having given up its EU membership. But people close to the talks confirm that the UK has now moderated its ambitions: Mr Barnier told EU diplomats on Friday that Britain had abandoned attempts at “cherry picking” several benefits of the EU single market, adopting more realistic positions on issues such as market-access rights for UK lawyers and recognition of qualifications.

Financial services

The negotiation on financial services is taking place outside the talks on the EU-UK future relationship since Brussels has insisted that market access will depend not on a mutual agreement, but on a unilateral assessment by the EU of whether UK regulations are as tough as its own. A deadline for assessments to be completed by June 30 has been missed and Mr Barnier has rejected attempts by Britain to find ways to lock in access rights for the long term. 

Brussels said in a policy paper this month that some of the most sensitive market access rights, for example for investment firms, would not be available in the near future because the EU’s own rules are in flux. There is little the UK can do about this, meaning that the almost inevitable landing zone is an incomplete patchwork of rights that firms will have to work with and around. 

Fishing rights

This is a highly politically sensitive area for both sides, even though fishing accounts for less than 1 per cent of EU gross domestic product and 0.1 per cent of UK GDP.

The EU entered the negotiations seeking continued “status quo” access for its fishing boats to British waters and to retain as many catching rights as possible; Britain wants significant new quotas for UK fishermen. 

Despite all the political sensitivities, both sides see scope for a compromise on fish. This will almost certainly come only in the end-game of talks, when Britain will try to leverage the issue to secure compromises on the level playing field.

A deal on fish will require the EU to cede quotas to Britain, but in a phased manner that gives medium-term certainty for the EU’s fishing fleet. For the time being, the two sides remain far apart.

With additional reporting by Mehreen Khan in Brussels