Brexit negotiations between the UK and the EU create a “policy externality”. That is, their outcome will have effects on third parties that have no direct say in the negotiations. The scope for these externalities increases the more these parties are dependent on the UK and EU for their trade, and the bigger the share of trade in their GDP. The CARIFORUM member states form one group of countries for which such externalities could be significant.
After almost two years of intense negotiations, a deal between the European Union (EU) and the United Kingdom (UK) giving effect to the will of 17.4 million Britons (51.9% of the vote)[i] to leave the EU remains elusive. Many hoped that the cloud of uncertainty had finally lifted when, in November, UK and EU negotiators concluded a draft withdrawal agreement (DWA).[ii]
However, that agreement has bumped into strong political headwinds in the past week. In the face of what was a likely disastrous vote in the House of Commons on 11 December 2018, and having staved off a “no-confidence” motion by her own party, the UK Prime Minister, Theresa May, will in all likelihood have to return to Brussels to seek more concessions to make her DWA acceptable to the British Parliament.
This article explores the latest Brexit developments and what these might mean for future CARIFORUM-UK trade relations. We consider the possible UK-EU arrangements that could influence the deal the UK negotiates with CARIFORUM (CARICOM and the Dominican Republic). We begin with a brief overview of CARIFORUM-UK trading relations.
CARIFORUM-UK Trading Relations
Within the EU bloc, the UK is the main trading partner for most CARIFORUM countries and a major source market for tourism and investment. CARIFORUM’s predominant goods exports to the UK are bananas, sugar, and oil and gas. Although recent years have seen steady declines in the value of CARIFORUM exports to the UK, especially for goods, CARIFORUM-UK bilateral trade totaled £2.1 billion last year.[iii]
CARIFORUM and UK traders presently enjoy preferential access to each other’s markets under the CARIFORUM-EU EPA, to which the UK is currently party as an EU member state. In the case of CARIFORUM, for instance, generous market access preferences for bananas and sugar have been granted. While Brexit will not affect the trading regime between CARIFORUM and the remaining 27 EU countries, the UK’s departure from the EU means that preferences negotiated under free trade agreements (FTAs) with third parties, like those provided under the CARIFORUM-EU EPA, will no longer apply to the UK.
In an effort to provide some continuity for their traders and businesses, CARIFORUM and the UK are in the process of negotiating a technical “roll-over” of the EPA’s concessions (see below). A deal is reportedly close to being finalized, but details have remained outside of the public sphere.
Scenarios for future UK-EU relations and impacts for future CARIFORUM-UK relations
Based on the unfolding developments in the UK, we surmise at least four possible scenarios for future UK-EU political relations, each of which will have different ramifications for future CARIFORUM-UK trading relations. These are:
- Brexit pursuant to the DWA in its present form
- Brexit pursuant to a renegotiated Withdrawal Agreement
- A ‘No Deal’ Brexit
- No Brexit at All
- Brexit pursuant to the DWA in its present form
In March 2017, the UK became the first EU member state to make a notification to withdraw from the EU under Article 50 of the Treaty on European Union (TEU). The UK ceases to be an EU Member State on March 29, 2019 pursuant to the two-year limit set out under Article 50 (unless the European Council and the UK unanimously agree to extend this period) and the UK’s European Union (Withdrawal) Act of 2018. The DWA provides for a transition period to ensure some semblance of continuity while the UK and EU hammer out the details of their future trading arrangements. Failing such an agreement, UK-EU trading terms would no longer be preferential, but would revert to World Trade Organization (WTO) Most-Favoured-Nation (MFN) treatment, which means the re-imposition of (non-preferential) MFN level customs duties on each other’s goods, and only MFN-level access for services trade.
The DWA also contains a Protocol on Ireland and Northern Ireland which contains the controversial “backstop” option: in the event that the EU and UK fail to negotiate an agreement which prevents a ‘hard border’ between Northern Ireland (a country of the UK) and the Republic of Ireland (an EU Member State) within the transition period, the UK will be part of a single UK-EU customs territory until such an agreement is made. Although UK and EU negotiators have stated their intention to conclude an agreement by July 1, 2020, UK Parliamentarians question whether this would actually happen during transition period, and for this reason, have withheld consent for the DWA.
Under the DWA, the UK remains bound to all EU international agreements, including trade agreements such as the CARIFORUM-EU EPA, to which it is party as an EU Member State. However, during the transition period, the UK will be barred from participating in the work of any bodies established pursuant to such agreements, unless it does so in its own right or upon invitation by the EU. This would include any bodies, such as the Joint CARIFORUM-EU Council, established pursuant to the CARIFORUM-EU EPA.
The DWA does not, however, preclude the UK from negotiating, signing and ratifying its own trade agreements with third States or groupings, such as CARIFORUM, during the transition period, although they would need EU authorization. However, even if the EU withholds its consent the UK will remain a party to the EPA and therefore be bound to apply EPA concessions to CARIFORUM traders during the transition period.
- Brexit pursuant to a renegotiated withdrawal agreement
A second, likely, option given the current events is for a new withdrawal agreement. Although the EU has stated that it considers the DWA to be final, the current events in Westminster mean that PM May must re-engage the EU. The best Mrs. May will probably achieve under the current Draft would be addition of further best endeavor language for parties not to resort to the backstop. Alternatively, an entirely new withdrawal agreement could be contemplated. For instance, some have called for the UK to negotiate a deal like the “Norway-EU FTA” agreement which creates a single market between these two entities. Given the short timeframe until March 29, 2019 and the need for any renegotiated deal to obtain ratification from the UK and all 27 EU governments, any re-negotiation will have to be conducted expeditiously.
The impact of this option on CARIFORUM-UK relations would depend on the terms of the renegotiated withdrawal agreement, but so long as it results in the UK’s withdrawal, the effect would be the same as under option one above.
- A ‘No Deal’ Brexit
Given the unpopularity of the options for withdrawal, a ‘No Deal’ Brexit has now become a real possibility. The absence of a deal with the EU would mean that, unless an extension is granted to Article 50 of the TEU, on March 29, 2019, the UK will have no transition period after it ceases to be an EU Member State. Its trading relations with the EU-27, and with the third parties with which it had trading relations by virtue of its EU membership, would revert to MFN status.
Repeated economic analyses have demonstrated that British firms that currently trade openly with their main trading partner, the EU, would suffer severely. CARIFORUM firms that use the UK as a stepping stone to the other 27 EU Member countries would also suffer since a conduit for accessing the wider EU market would be closed off.
Under a “No Deal Brexit’, the “roll-over” negotiation between CARIFORUM and the UK would be ideal because, without it, there would be no transition period during which the UK must continue extending preferential treatment required under the CAFIRORUM-EU EPA. Indeed, “roll-over” negotiations were begun with just the possibility of a ‘no deal’ Brexit in mind.
- No Brexit at All
Finally, there is always the unlikely option of the Brexit decision being reversed. Repeated polls have showed that many Britons who voted ‘Leave’ did so without a full appreciation of its consequences, prompting some to push for a second referendum. If successful, a referendum could delay or even halt Brexit altogether. Moreover, the ECJ has this week ruled that the UK can unilaterally revoke its notification of intent to withdraw from the EU under Article 50 of the TEU.
If the decision to withdraw from the EU were overturned, CARIFORUM-UK trading relations would remain as they presently are, that is, conducted via the CARIFORUM-EU EPA. There would be no need for any successor agreement.
CARIFORUM-UK Relations: Roll-over, a bona fide CARIFORUM-UK, or UK-Commonwealth FTA?
Assuming that Brexit happens, and the UK withdraws from the EU, the relationship between the UK and CARIFORUM will have to be reset. This presents CARIFORUM with an opportunity to re-engage and strategically engineer a more meaningful relationship with the UK, which has historically been a valuable trading and economic partner.
At this time, the UK is conducting “roll-over” negotiations with third parties with which it has preferential trading relations – and CARIFORUM is no exception. South Africa has reportedly been the first roll-over completed. “Roll over” means that substantive and procedural obligations undertaken by each of the parties under the existing Agreement will be transferred to the new one. For some pro forma obligations, a “roll-over” seems simple enough: it would just entail replacing the word “EU” in the text of the Agreement with “UK”. But where substantive obligations were undertaken, and concessions exchanged, under the EPA on the assumption that the UK would be part of a larger EU bloc, questions arise about the new value of the market access to the UK. Access to the UK and the EU-27 separately is simply not worth the same as access the UK as part of the EU-28. This is because of free circulation principles and rules of origin that currently allow goods to circulate without additional costs across the EU customs territory as a whole. And what will the roll-over mean for CARIFORUM businesses that formerly only had to conform to one set of EU-wide obligations and must now meet UK-specific standards.
Moreover, a “roll-over” also means that any deficiencies from the original agreement remain. For example, the EPA, which sparked fierce debate in the region, has been provisionally applied by all parties (except Haiti) since 2008 and its utilization has been poor, particularly by CARIFORUM traders. The EPA’s 5-year review revealed there was much to be done,[iv] and many parts of the EPA remain incomplete: to date, the issue of “octroi de mer” (dock duties charged by the French Overseas Territories) has not been solved; services enquiry points in the EU Member States, including in the UK, have still not been designated; and no mutual recognition agreements recognizing the skills and accreditation of services providers have been negotiated.
There is also the question of the continued relevance of the CARIFORUM-EPA disciplines. Since 2007, when that agreement was signed, FTAs have evolved to include newer issues such as data flow and ecommerce; financial services; regulatory convergence; and to reflect the more intense focus placed on linking trade to the seventeen sustainable development goals (SDGs) and the broader 2030 sustainable development agenda.
Finally, there have been questions about the extent to which the region’s private sector and members of civil society have been engaged in these “roll-over” negotiations. Without active engagement at the front end, any deal that is eventually concluded risks not being utilized by those for which it was intended.
CARIFORUM negotiators should therefore consider the possibility of a completely new FTA with the UK that addresses shortcomings of the previous trading relations, builds on the targeted areas of relevance, and engages the private sector and civil society. The roll-over negotiations would therefore not be seen as the end of negotiations between the two sides, and would pave the way for negotiations in the future in areas of mutual interest.
A third option that CARIFORUM could explore further is broadening its engagement with the UK as part of a wider Commonwealth trading arrangement. Although some have warned that the Commonwealth is not a post-Brexit priority for Britain,[v] the UK has indicated that it is open to new relationships with Commonwealth countries. CARIFORUM should not exclude options that provide opportunities for new configurations of trading relationships with new partners. It should participate in ongoing discussions to ascertain whether there is enough commonality of interest among Commonwealth countries to warrant further engagement on this issue.
To conclude, the current clouds of uncertainty stirred up by ongoing developments in the Brexit story will have implications for CARIFORUM-UK trading relations. CARIFORUM and the UK can try to shelter their relations from the inclement weather that these grey clouds portend, but for now it seems that CARIFORUM must wait out the UK-EU storm as it passes.
Dr. Jan Yves Remy is the Deputy Director of the University of the West Indies, Cave Hill’s Shridath Ramphal Centre for International Trade Law, Policy & Services. Alicia Nicholls is an international trade and development consultant and contributing author to the UWI SRC’s Trading Thoughts column.