And what if there is a Brexit deal?

Lars Hoelgaard Partner at Trade-Up Consulting Brussels

We are all intrigued watching the House of Commons moving from one vote on Brexit to the next with little seemingly changing in between the dates. At this stage it is pure guessing how this show-down between Government and Parliament will end – following May’s declaration on 26 February it looks like 12 March and the following days will be decisive!  

Little is today discussed what comes next once Brexit has been settled in principle. Any deal – to whatever degree renegotiated or not – covers in the main only the conditions of UK departure from the EU but says little about the future relationship between the two parties. If you read the Political Declaration accompanying the Withdrawal Agreement it simply promises everything to everyone and thereby leaves almost everything open for further negotiation. Theresa May in her letter to the nation from 25 November 2018 promised: “With Brexit settled, we will be able to focus our energies on the many other important issues facing us here at home.” This suggesting that once the Brexit deal is done, the UK can return to its priorities of domestic policy. The opposite is correct. The difficult negotiations will only start then.

UK needs to sort out its trade relationship with EU as first priority

The future of the UK will clearly be framed by its future relationship with the EU. Any EU-UK Relationship Agreement will by its very nature determine the future complex relationship between the two partners and this will go much beyond trade. But such Agreement will also provide the reference for the UK in developing its relationship with other countries. Brexiteers are making the argument that in case of a ‘Hard Brexit’ the UK will ‘come clear from the EU’ and be able to decide without any EU dependency on its future destiny. But the fact remains that the EU is by far the most important trading partner for the UK. Globalization and global trade is a necessity of modern times but regional trade is and will always remain the core of economic activity and wealth of a nation. Even within the EU and the EU Single Market trade remains mainly regional. Any plan to become a global trading partner without a regional trade base will not succeed. Not to mention joint EU-UK interests originating from geographical proximity in the areas of security, migration, energy, and transport. Therefore in almost any scenario – except if the UK would decide against Brexit as such – it will be important for the UK to negotiate a deep and broad Future Relationship Agreement with the EU. A Hard Brexit will be no exception in this regard.

A unique trade agreement will be required

Such a Future Relationship Agreement will have to be unique. Because Brexit is unique and no one has really ever thought about how leaving the EU after 20 years of integration should work. There is not any specific model to follow. The EU has a tirade of international agreements of all forms and shades with a series of third countries – but none comes even close to the requirements of this specific case. Any traditional agreement modeled on the EU’s most advanced Trade Agreements with Canada and New Zealand – independent of how many + you add –  will never live up to expectations. We are looking at a new type Association Agreement which might run on some aspects as deep as a Norway model and on other aspects develop new cooperation forms and formats. 

Very difficult negotiations lay ahead

The negotiations will be very challenging. The complexity of negotiations will be unprecedented. No comparison can be made with any other trade negotiations the EU has ever conducted. Traditional trade agreements focus on opening up each other’s markets for goods. Each side has to gain from giving. But with Brexit we are in a “lose-lose scenario”: no negotiation result will be able to maintain the status quo of trade and economic and social integration between the EU and the UK. The number one demand will be that things remain as today. Anything significantly worse than status-quo risks being rejected. It will be inherently difficult for negotiators to agree on an integration-reducing deal that will be difficult to sell to public and economic operators alike. Of course, these negotiations will cover much more than trade in goods – comprehensive trade agreements on services are still broadly unchartered territory with the WTO struggling for years to open up national services markets and putting basis rules on trade in place.

The process for these upcoming negotiations is rather clear. The EU promised to start negotiations immediately after the Brexit deal is cleared. For this, the European Commission as the negotiating EU institution will need a clear negotiation mandate from the European Council. EU Member States will not have a problem with agreeing a general mandate but specifics could get difficult. The upcoming EU elections, as well as the political process leading to a new EU Commission, will not hamper the negotiation process seriously. The process will first focus on technical discussions which the European Commission can handle until a new political team will be operational again towards the end of 2019.

The EU showed so far unusual unity in Brexit negotiations but this might quickly crumble when entering trade negotiations. This is then the time when divergent trade interests and therefore priorities for negotiations will emerge.

Conclusion

The UK will have to focus on sorting out relations with the EU for the years to come. Negotiating a good agreement with the EU will be more challenging than probably anticipated. Apart from dedicating resources to the negotiations and building expertise to match EU negotiators, there are other hurdles the UK will have to overcome. Mainly to convince EU member States and economic operators that a deal is in their specific interest.  They all might play on keeping things as they are and reject almost any deal.