A Year of Tough Talks Awaits the EU and U.K.
By: Analysis | Stratfor.comJanuary 2, 2018
Highlights
  • The United Kingdom and the European Union probably will reach an agreement on a post-Brexit transition period in 2018.
  • A free trade agreement will be more difficult to negotiate, considering the conflicting strategic interests of Britain and the European Union.
  • A trade agreement between London and Brussels would have to be ratified by the European Union and the United Kingdom, which could create further complications and delay its enforcement.

The new year will be one of intense negotiations between the United Kingdom and the European Union. On Dec. 15, the European Council decided that the first phase of Brexit talks, which focused on the terms of the United Kingdom's departure from the European Union, had progressed enough to move to the next phase, which will focus on Britain's future relationship with the bloc. The EU-U.K. divorce talks were complex; the negotiations about their future ties will be even more difficult. Britain's desire to regain sovereignty in areas such as trade and immigration will clash with the European Union's goal of protecting the unity of the single market, the area where goods, people, services and capital move freely.

In the coming months, the negotiations between them will focus on two main topics: a transition period and a trade agreement. During the transition period, which would last about two years beyond Britain's departure from the European Union in March 2019, the United Kingdom would no longer be a member of the European Union but probably would still be a part of the single market. It would not have a say on EU policies but would still contribute to the EU budget and be under the jurisdiction of the European Court of Justice.

Some hard-line members of the British government oppose a transition period, because to some extent it would continue the status quo for two more years. However, the European Union and the United Kingdom will likely reach an agreement on a transition period in 2018, because it would give companies and households in both Britain and the European Union time to adapt to the post-Brexit economic environment. Moreover, it would buy the governments in London and Brussels extra time to discuss the truly difficult problem: their future trade agreement. Trade is where the two parties have conflicting priorities and where negotiations will have to deal with several complex issues.
 
 

Conflicting Views on a Trade Agreement

The European Union wants the future trade agreement with the United Kingdom to respect the unity of the single market. The European Union opposes a deal that would allow goods, capital and services to move freely between Britain and the bloc but deny the free movement of people. This opposition is connected to a basic EU concern: Brussels wants to make sure the EU-U.K. agreement is less comprehensive than EU membership, out of fear that other countries will try to imitate Britain in the future and leave the bloc.

From the European Union's perspective, Britain could remain a member of the single market, and accept its four freedoms regarding goods, capital, services and people, or it could leave the single market and sign a trade agreement that covers most goods but not many services. The first option is known as the "Norway model," as the Scandinavian country is a member of the single market without being a member of the European Union. The latter option is the "Canada model": Canada and the European Union recently signed an agreement that covers 98 percent of the goods they trade but only a short list of services.

But the United Kingdom wants a comprehensive trade agreement that allows the free movement of goods, services and capital but leaves London free to have an independent immigration policy and sign trade agreements with non-EU countries. During the Brexit campaign, the "leave" camp promised that Britain would no longer accept EU workers, and that the country would sign trade agreements with allies such as the United States. The United Kingdom also wants a deal that allows its massive financial sector to continue trading freely with Europe. As a result, London has proposed a "creative" agreement that goes beyond the Norway and Canada models.

Switzerland offers another model the parties could try to emulate. The Alpine nation uses a hundred or so ad hoc bilateral agreements to manage its relationship with the European Union. Through these deals, Switzerland follows EU norms and regulations on issues ranging from agricultural standards to public procurement in exchange for access to EU markets. But that model presents a problem for the United Kingdom in that Switzerland is required to accept EU workers, and Swiss financial institutions face restrictions to access the EU market (which forces Swiss firms to have offices in the European Union). This likely would make a similar arrangement not an acceptable solution for the British economy, which is heavily dependent on financial services.

Beyond the Existing Models

Because of the conflicting strategic goals between the United Kingdom and the European Union, the negotiations probably will be long and complex. The United Kingdom will push to include services in the free trade agreement, but the European Union will refuse to agree unless the United Kingdom accepts EU workers. Should the negotiations linger, the United Kingdom could soften its position and offer to pay the European Union to access its services sector, to mention one possibility, or accept an annual quota of EU workers. Brussels, however, would still be skeptical of signing an agreement that could inspire other countries to leave the bloc. Moreover, some member states like France and Germany hope to attract companies in Britain's financial sector to relocate parts of their operations to the Continent because of Brexit.

The United Kingdom also will have to decide whether it wants to remain in the EU customs union, which imposes a common external tariff on all goods entering it. If it leaves the customs union, Britain would be free to sign trade agreements outside the European Union, something London is interested in doing. But British exports entering the customs union would then be subject to border controls to determine their origin. Exports from Norway, which is not in the customs union, entering Sweden, which is, are subject to random controls at some border crossings, for example. At other crossings, cameras are used to recognize the plates of trucks carrying goods.

 
A Snapshot of British Trade
 

Britain has promised to keep the border between Northern Ireland and the Irish Republic open. Should the United Kingdom leave the customs union, controls of some kind probably would have to be introduced at the border between Northern Ireland, which would leave the customs union with the rest of the United Kingdom, and the Irish Republic, which is in the customs union.

Even if London and Dublin solved the political part of the problem, there would be logistical issues to address, as the Irish border is more active than the Norwegian border. There are roughly 200 border crossings between Northern Ireland and the Republic, versus 80 border crossings between Norway and Sweden. Roughly 180,000 heavy vehicles carry goods across the Irish border every month; 118,000 such crossings occur at the Swedish-Norwegian border. The Swedish-Norwegian border is a favorite for smugglers illegally importing goods into the European Union. More vehicles traversing more crossings could make the Irish border an even more attractive illicit entry point. This concern could prompt the European Union to push Britain and Ireland for more effective border controls.

Time Constraints

Two additional factors still would delay a trade agreement's enforcement even if the United Kingdom and the European Union solved all the political, economic and logistical issues between them in 2018. First, the European Union cannot sign a free trade agreement with a member state, which means any arrangements that London and Brussels reach in 2018 would have to wait until the time of Britain's formal exit from the European Union to be signed.

Second, the EU Council, the European Parliament and the British Parliament would each need to ratify the agreement. Depending on the content of the deal, it may also have to be ratified by national, and in some cases regional, parliaments in each of the remaining 27 EU member states. (According to a recent ruling by the European Court of Justice, trade agreements that include provisions such as the creation of special mechanisms to settle disputes between companies and governments must be ratified in each EU member state.) This requirement would open the door for delays and challenges both in the United Kingdom and in the European Union, as British or EU lawmakers could object to the deal. Should this happen, the parties probably would have to return to the negotiating table.

At the end of the day, the United Kingdom and the European Union are interested in reaching a trade agreement. But the multiplicity of issues involved means that 2018 will be a year of intense discussion, but not necessarily one of agreement.

This article originally appeared on Stratfor.com

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