Hanover

28 Jan 2019

By 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 seemingly little changing. However, rarely is it 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 the UK departure from the EU but says little about the future relationship between the two parties. The Political Declaration accompanying the Withdrawal Agreement simply promises everything to everyone and thereby leaves almost everything open for future negotiation.

Any EU-UK Agreement will, by its very nature, determine the future complex relationship between the two partners and this will go much beyond trade. But such an Agreement will also provide the reference for the UK when developing its relationship with other countries. No third country will be ready to enter into a trade agreement with the UK without knowing the exact terms between the UK and the EU. Brexiteers are making the argument that in the case of a ‘Hard Brexit’, the UK will have a clean exit from the EU and be able to move towards becoming “Global Britain”.

Yet, the fact remains that the EU is by far the most important trading partner for the UK. UK global trade may be further developed but cannot substitute regional trade in Europe. As experience shows, regional trade is the predominant trade pattern all over the world. 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 decides to remain an EU member – it will be important for the UK to negotiate a deep and broad Future Relationship Agreement with the EU. Even in the case of a ‘Hard Brexit’, there will be interest to negotiate a deal in the future.

A Future Relationship Agreement will have to be unique because Brexit is unique. There is no blueprint on how leaving the EU could work after 45 years of membership with increasing economic integration. 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 creating a common trade area as desired by the UK and the EU. Any traditional agreement modeled on the EU Trade Agreement with Canada – independent of how many + one adds – will not live up to expectations. We are looking at a new type of Association Agreement which might run on some aspects as deep as a Norway + model and on other aspects to develop new cooperation forms and formats.

Future trade negotiations will be very challenging and unlikely to succeed if the UK maintains its present red lines. No comparison can be made with any previous trade negotiations the EU has conducted. Traditional trade agreements focus on opening up each other’s markets for goods. But Brexit is a “lose-lose scenario” leading to less integration: No future Agreement will be able to maintain the present state of trade and economic integration between the EU and the UK. Everyone hopes that trade can remain as today. Anything significantly worse than the 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 in place rules on trade in services.

The process for these upcoming negotiations is rather clear. The EU has promised to start negotiations immediately after the Brexit deal is cleared. For this, the European Commission will need a clear negotiating 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 easily handle until a new political team is operational again towards the end of 2019.

So far, the EU has shown unusual unity in Brexit negotiations, but this might quickly crumble when entering trade negotiations. This is then the time when divergent trade interests and priorities for negotiations will emerge.

Negotiating a good agreement with the EU will be more challenging than anticipated. Apart from dedicating resources to the negotiations and building UK expertise to match EU negotiators, there are other hurdles the UK will have to overcome, such as convincing 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.

Securing a Withdrawal Agreement to exit the EU is only the first step. The UK will have to focus on sorting out relations with the EU for years to come.