Trade Knowledge Exchange > Commentary > The road to Brexit: what needs to happen now, and will it?

The road to Brexit: what needs to happen now, and will it?

At the end of its informal meeting held in Salzburg, the president of the EU Council announced that he would like to call a special summit for the weekend of 17/18 November 2018. Its aim would be to allow the EU and the UK to reach an agreement on the terms of the latter’s departure under Article 50 of the Lisbon treaty. The announcement came at the end of two days of discussions that served more to highlight differences in positions between the two than it did to secure progress. The November date also highlights a slippage in the original timetable envisioned by the parties. While technically the withdrawal agreement needs to enter into force by 29 March 2019, the EU had flagged that it needed to be finalised by October 2018 to allow time for ratification. Now October – and specifically the European Council meeting of the 16th – is seen as the deadline for resolving the Irish border question, which, for reasons explained below, is seen as the biggest hold-out to agreement on the terms of withdrawal, and a major obstacle to a new arrangement between the parties.

What are the main issues?

It is important to distinguish between the terms on which the UK will leave the EU, on one hand, with the formal arrangements that will put into place that will govern the relationship between the two after the UK’s departure. The former is what the November summit would try to secure.

The two elements are nevertheless linked. At a political level, the parties’ – and notably the UK’s – willingness to accept the terms of the withdrawal agreement will depend on their level of comfort regarding future arrangements.  Therefore, for the November summit to succeed, it would also need at least a political declaration that will set out the broad contours of the future arrangement within which future negotiations will take place.

At a technical level, the future arrangements and the withdrawal agreement are linked through, amongst other things, the issue of the Irish border. This is one of the key elements of the withdrawal agreement. The current draft of the withdrawal agreement, in conjunction with the joint report issued by the UK and the EU in December 2017, specified a backstop solution that would preserve the principles of the Good Friday agreement, essentially by maintaining Northern Ireland within the EU’s single market, implying a border between Northern Ireland and the rest of the UK. The backstop would kick in unless a suitable arrangement could be negotiated within the broader framework of UK-EU arrangements i.e. a future agreement.

One format for such a future arrangement was set out in the UK’s White Paper issued in July (sometimes dubbed the Chequers position). That set out proposals for a “facilitated customs arrangement” and a common regulatory rulebook on goods that in part was a bid to solve the Irish border question in a manner that was consistent with the UK’s principal negotiating objectives (notably, exiting the single market and leaving the customs union and with it the common commercial policy). Those proposals have not to date found favour with the EU, which in Salzburg said first that the proposals needed to be “re-worked”, before then saying more bluntly that they were unworkable. Other options for future arrangements with the EU (applying single market rules and being part of the EU Customs Union) are not in favour with the UK, nor is the backstop solution. Hence the current impasse.

No deal?

Very often, the concept of “no deal” is understood to mean that the EU and the UK and would be unable to agree on a future arrangement and would revert to trading with each other on MFN terms under the WTO. That is true, but a more immediate meaning of “no deal” is a lack of agreement on the terms of withdrawal. If that were to happen, the consequences would be very disruptive indeed for both parties. Among the other key aspects of the agreement, on which both parties seem to have reached consensus, concern the rights of existing EU citizens in the UK (and vice versa), pathways to residency for those arriving before 31 December 2020 (the transition time period set out in the draft withdrawal agreement), and guarantees about the ease of travel.

Without a withdrawal agreement, the rights of millions could be thrown into limbo. Granted, drastic action is unlikely, and governments may unilaterally take actions to mitigate the impact. But the uncertainty created is likely to be socially very disruptive, and economically costly given the importance to many businesses of their pan-EU workforces and operations. After a recent mission to the UK, the IMF revised its growth estimate for the UK downward to 1.5% for 2019 (one of the lowest for major economies), adding that the forecast would be considerably lower in the event of a disorderly exit.

The transition time period itself, which was intended to buy some time for the UK and the EU to finesses future arrangements, and secure enough time for businesses and citizens to adjust to any changes that might be anticipated, would also disappear.

In view of this, it is understandable that both parties saying that time is short and are calling for flexibility – by which each mean that the other side needs to change its position. The difficulty is that issues such as the Irish border, and the questions of customs administration and regulation that surround it, run into deep-seated political sensitivities on both sides.

That this is the case is demonstrated, for example, by Michel Barnier’s latest pronouncements in which he sought to “de-dramatise” the backstop solution by saying that most of the mooted administrative arrangements (apart from standard-related inspections) could be implemented away from the border. That was meant to allay UK concerns about a hard border in the Irish sea emerging via the backstop agreement. But if that logic is true, why not apply it to the Irish/ Northern Ireland border as well? If facilitated arrangements could be implemented there, the backstop would not be needed. The reason for this asymmetry in logic, is that this could pave the way for the UK having a bespoke arrangement with the EU and its single market principles, which it is not inclined to encourage at a time when other EU members might feel a need to question those principles. But that is a political position, not a technical one.

Alternatively, the regulatory alignment on goods and remaining within the EU customs union would solve both the Irish issue and achieve what the White Paper tries to achieve, with greater clarity. But this would come at an unacceptable political cost to the conservative government because it is anathema to hard Brexiteers within the party.

Future deal?

For reasons set out above, the withdrawal agreement would need to be accompanied by a political declaration on the shape of the future agreement. Getting that declaration will be challenging. It will need to do two things: first, to steer clear of the inevitable temptation (common to all negotiators) of trying to negotiate the outcome. The declaration sets the framework, not the results. Secondly, it will need to contain sufficient detail so that the issues plaguing the withdrawal agreement are solved so both parties can sign off on it. The difficulty is that, given the issues in play, it is hard to see how both requirements can be met simultaneously.

For example, a statement that the UK and the EU would agree to regulatory alignment and mirroring customs arrangements with the rest of the world could address the Irish border issue, but depending on its implementation would either be seen by the EU as unacceptably compromising its single market project or by the UK as crossing its red lines. Both sides would require more detail, but that detail will inevitably require the sort of substantive negotiations that will require a lot of time – and almost certainly more than the time left before November. And this is before we come to matters such as market access in goods and services, or the movement of people, all of which are areas that are meaty in their own right which both sides will link to progress on the overall package.

A will to find a way?

The chances of achieving a breakthrough by November are not good. The UK government is pressed by the “hard-Brexit” faction of the Conservative Party not to give ground. In the EU, the French are renewing calls for a strong approach to the negotiations, partly with an eye to dealing with populist-fed hostility to the single market project in Italy and in Eastern Europe, that may well seek to exploit any selective application of the rules agreed to with the UK.

It is possible for the withdrawal agreement negotiations to be extended. That would require the consensus of the UK and all of the EU-27. Whether that is possible has not been tested. There are no incentives as yet to seriously consider it. Whether it is desirable is also unknown. Clearly, it is in neither party’s interest for the UK to crash out of the EU, especially in turbulent times in international trade, and with a number of economists raising concerns about the fragility of the world economy and a re-run of the global financial crisis. An extension of the Article 50 process will nevertheless create its problems, with prolonged uncertainty for businesses. The effects of the 2019 EU Parliamentary elections, in which a surge in support for right-wing populist parties is expected, add a further layer of uncertainty.

It’s a general rule of negotiations that they follow a J-curve: things get worse before improving, as both sides indulge in brinkmanship to try and secure a better outcome. Participants dare not settle until the very last moment before all the options run out, for fear of being accused of not having extracted every possible concession from the other side. The events of this long, hot summer of 2018 conform to the first part of this pattern. It remains to be seen, though, whether, in the autumn, the expected upturn will materialise as cooler heads prevail.


About the Author

Amar Breckenridge

Amar
Breckenridge

Amar Breckenridge is a manager in Frontier Economics' public policy practice, and leads its work on international trade policy.

Amar’s work on trade spans trade policy analysis and modelling, support to dispute settlement and litigation, and trade negotiations. Amar spent five years as a staff economist at the World Trade Organisation prior to joining Frontier.

He is also a member of the Experts Network at ICTSD.


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