Following the decision by the UK Parliament to implement the Brexit Agreement and the positive vote in the European Parliament, the United Kingdom (“UK”) has left the European Union (“EU”) at 11.00 pm GMT on 31 January 2020. However, this withdrawal date does not mean the end of Brexit – many questions remain open. On 1 February 2020, the so-called transition period has begun and will last for presumably 11 months. During this time, the EU and the UK shall agree on the details about various issues that are only dimly embodied in the Brexit Agreement. On top of the agenda will be the negotiation and conclusion of a free trade agreement between the UK and the EU.
Watering the immediate effects of Brexit down – the transition period until 31 December 2020
During the transition period, the UK will remain in the EU Customs Union and the EU Single Market. Most of EU legislation will continue to apply. The immediate effects of the withdrawal for the free movement of people and goods will therefore be very limited. The implications for trade in goods and services are minimal.
Our partner Anahita Thoms has discussed the immediate effects of Brexit on German news channel n-tv.
1 February 2020 has however put an end to the involvement of the UK in the legislative process of the EU. The UK members of the EU Parliament have lost their mandate. As of now, the UK is no longer bound by international agreements concluded by the EU, including trade agreements, unless the third country party of such agreement and the EU agree. For this reason, the UK has already started to negotiate free trade agreements and to replicate the EU’s trade agreements with third countries, in order to continue to have duty-free access to these countries after the transition period. Such agreements, like those with Switzerland or the South African Customs Union and Mozambique, are intended to provide for a smooth transition and enter into force when the transition period expires.
However, the long-term effects of Brexit will really depend on the post-Brexit agreement concluded between the EU and the UK. Achieving a final set of rules governing all outstanding issues between the EU and UK in less than a year is very ambitious. Chances are that the transition period will have to be extended, even though Brexiteers insist that their primary goal is to not extend the transition period, or even that no agreement is concluded at all. Unless the EU and the UK manage to conclude a post-Brexit agreement, their future trade relationship will be governed by WTO rules. Customs duties would arise in this case and customs controls would have to be implemented.
What will trade across the Channel look like in future?
It currently remains speculative to imagine what a future EU-UK trade relationship will look like. The months and years leading up to Brexit have shown how political, but also emotional, the discussions can become.
In light of the type of EU trade agreements in force, the following could be options for an EU-UK trade agreement in the future, a customs union (“Turkey model”), membership in the European Economic Area (EEA) (“Norway Plus model”), a bilateral customized trade relationship (“Switzerland model”) and a free trade agreement similar to CETA. However, given the recent discussions a free trade agreement is the likeliest outcome.
1) Customs Union (“Turkey model”): In this scenario, the UK would leave the EU internal market and the EU customs union. The EU and the UK would create a new customs union however on top allowing for the free trade of goods across the channel. Agreeing to a customs union would imply that the UK adopts the EU’s external tariff and applies the tariff reductions negotiated by the EU with third countries.
However, even such customs union would still be remarkably different from the EU Single Market, the UK ceases being a part of at the end of the transition period. In a single market, almost all restrictions on the free movement of goods are eliminated. A customs union does not amount to a single market, but nonetheless provides for the elimination of customs, quotas and taxes as well as rules on the origin of goods within the union. A customs union is therefore a fairly comprehensive and integrated framework binding all members to a common set of rules in their trade relationships with third countries. It is precisely for this reason, that a customs union seems rather unlikely as a future arrangement of the trade relationship between the EU and the UK. A common external tariff would prevent the UK from concluding their own free trade agreements with third countries; a capacity the UK attributes great importance to as a sovereign non-EU member state.
2) EEA (“Norway Plus model”): In this scenario, the UK would become a member of the EEA. The EEA goes further than the European Free Trade Association (“EFTA”) because members of the EEA enjoy the full rights and obligations of the EU Single Market (“the four fundamental freedoms”). EEA/EFTA states (e.g. Switzerland, Iceland and Norway) are not bound in a customs union with the EU. They can negotiate and conclude free trade agreements on their own. Consequently, customs controls between such states and the EU are necessary in principle. The notion “plus” refers to the idea of creating a customs union between the EU and the UK in addition to the UK becoming a member of the EEA. Hence, if the UK opts for the “Plus” option, it would be under the same constraints as under the first model (customs union – “Turkey model”). It is therefore unlikely that the UK would agree to the adoption of this model.
3) Bilateral relationship (“Switzerland model”): In this scenario, EU and the UK conclude agreements shaping their trade relationship in a customized fashion. The EU-Switzerland relationship is an example on point since their relationship is governed by numerous agreements concerning not only trade, but also other fields such as public procurement, research, the combatting of fraud and environmental protection. Switzerland acknowledges EU law shaping the internal market as binding for itself based on the bilateral agreements. Despite of not being subjected to the ECJ’s jurisdiction, the agreements with the EU often implement the ECJ’s case law and render it binding for Switzerland as well. Despite of its level of integration, the relationship between EU and Switzerland is not a customs union. Switzerland continues to negotiate and conclude free trade agreements separately.
Allowing for a customized design of mutual rights and obligations, the resulting trade relationship across the Channel could in theory result in a close and integrated relationship. While formally having left the EU, bilateral agreements could but don’t necessarily have to provide for a deep integration of both markets, while still allowing both the EU and the UK to negotiate and conclude free trade agreements independently of one another. The agreement between the EU and the UK will in either way be crafted in light of the discretion the UK wants to retain in the design of its political and trade relationships with third countries.
4) Free Trade Agreement (“the CETA model”): A fourth and currently most likely option is a free trade agreement between the EU and the UK, similar to the other free trade agreements the EU has concluded in the recent past with among others Canada, Japan and Singapore. Such free trade agreement would not go as far creating a customs union, but would nonetheless allow excluding or lowering tariffs, quotas and customs. It could also provide for common harmonized standards and common rules in various other areas, such as environmental protection, workers’ rights, public procurement or the mutual protection of foreign investments. Such agreement would place the EU-UK trade relationship on a similar footing as the trade relationships the EU has adopted with other countries across the world. It would leave the UK full discretion to negotiate and agree on its trade relationships with third countries.
What vision for a relationship across the Channel?
The Political Declaration of 17 October 2019, despite of not being legally binding, indicates that the EU and the UK could envision a far-reaching but classic free trade agreement for goods, services and investments. The Declaration is left vague. What can be inferred from it however is a vision of a trade relationship across the Channel free of tariffs and quotas combined with a degree of regulatory coordination. The dimly recognizable features of a future relationship based on the Political Declaration suggest a free trade area, but not a customs union. Customs controls at borders and the identification of the origin of goods, including rules to that end, will be necessary. The trading partners will be required to prove that the goods originate from their respective customs territory. According to the Declaration, the parties seem to be intent to provide for trade liberalizations for services, including financial services, as well. The degree of trade liberalization sought certainly exceeds the standards of the WTO regime. The Declaration also indicates that both sides understand the importance of regulatory harmonization for free flow of trade in goods and services. The degree of harmonization ultimately pursued by both sides currently seems highly unclear however.
Aside of the Political Declaration, further statements by political leaders allow to draw conclusions on the preferences of both sides for a future trade relationship.
The UK has given four reasons why it would prefer a classic free trade agreement. One of the main reasons for Brexit was the EU-wide freedom of movement of workers. Hence, the UK does not want a solution that provides for the right of EU citizens to work and reside in the UK at their discretion. Second, the UK wants to determine its economic relationship with other countries independently. This suggests that it will not be in favor of a customs union with the EU, since the common external tariff would not allow the UK to conclude free trade agreements with third countries independently. Third, the independence and sovereignty envisioned by those in favor of Brexit could hardly be reconciled with being bound by EU law and regulations without being able to shape them. The UK seems reluctant to accept the jurisdiction of a European court on its trade relationships.
In light of these presumable interests of the UK, it seems rather unlikely that the UK will agree to a Customs Union (“Turkey model”) or an integration in the EEA (“Norway Plus model”). Indeed, similar to the “Switzerland model”, the trade relationship between the EU and the UK, despite of potentially being much less integrated, is likely to be of a customized nature and in the form of a free trade agreement.
However, the UK will not be able to decide on the future trade unilaterally, or, in the words of European Commission President von der Leyen: “With every decision comes a trade-off. Without the free movement of people, you cannot have the free movement of capital, goods and services. Without a level playing field on environment, labor, taxation and state aid, you cannot have the highest quality access to the world’s largest single market. […] We will work for solutions that uphold the integrity of the EU, its Single Market and its Customs Union. There can be no compromise on this.”
The EU-UK trade relationship and the future of UK’s external trade relationships
The UK’s negotiating mandate during the transition period
Until today, the UK was only allowed to negotiate and conclude trade agreements with states that have concluded trade agreements with the EU. As of 1 February 2020, the beginning of the transition period, the UK can also negotiate free trade agreements with countries not having concluded trade agreements with the EU, such as the USA. This freedom comes at a cost for the room for maneuver for a future EU-UK trade agreement. Any agreement concluded by the UK with a third country limits the options for a trade relationship with the EU. Creating a common trade area always entails setting its boundaries. Setting up a customs union with the US for instance, would foreclose that option for the EU-UK trade relationship, unless the EU and the US could agree for the EU to join.
The indirect restriction of the UK in negotiations with third countries would, in the event that the UK and the EU move towards a solution similar to the EU Single Market, follow primarily from the regulation of non-tariff barriers to trade. A commitment by the UK to adhere to EU technical product standards would exclude this topic from the negotiation table in negotiations with third countries. This is an important insight, since there appears to be a tendency across the globe to no longer limit trade agreements to customs issues, but to provide for a deeper and more comprehensive dismantling of non-tariff barriers.
Declarations at the beginning of negotiations for a future agreement on trade across the Channel
The most probable outcome of the negotiations on a future trade relationship across the Channel is a free trade agreement.
The British Prime Minister, Boris Johnson, has only today invoked Canada and Australia as two examples of a range of possible outcomes. He underscored the importance in his view of liberal market-economy based trade system and the benefits the UK could gain from regaining economic sovereignty. The UK wants free trade, but does not aim at the harmonization of standards or procedures.
Michel Barnier, EU-Chief Negotiator of Brexit, has reiterated today the EU’s goal to achieve a highly ambitious deal. However, both the British Prime Minister and the EU agree on a free trade agreement as the preferred outcome at the time. Their views diverge with respect to the details of such agreement. According to Barnier, the EU aims at a deal excluding tariffs and tariffs from the trade in all goods between the EU and the UK. The EU envisions a deal providing for rules on a wide range of sectors such as digitalization, intellectual property and public procurement. Provided that the UK agrees to a framework of open and fair competition, as well as a fisheries agreement, the EU is willing to pursue a comprehensive trade agreement with the UK.
The EU’s vision for now is arguably that of a more integrated partnership than that of the UK. However, both visions of a future trade across the Channel only a few days after Brexit do not seem irreconcilable.