Trade Watch 2018: Brexit

On March 29, 2019 the United Kingdom (UK)is scheduled to leave the European Union (EU). On what terms?What will Brexit mean for the future of the UK’s trading relations with the EU and the rest of the world?

Just over a year ago (on March 29, 2017), UK Prime Minister, Theresa May, informed the EU of its intention to withdraw from the European Union. Her act honored the outcome of the June 23rd Brexit referendum.This act also triggered a one-year deadline for the UK to negotiate the terms of its two-phased departure process from the EU.

Agreement on Leaving the EU

withdrawal agreement finalized between the UK and the EU one-day short of the deadline, on March 28th (2018), outlines the status of the UK during the first phase – a transition period which will end March 29, 2019. During this transition period:

  • The UK will legally remain part of the EU Single Market and be bound by its EU obligations.UK citizens will retain their rights within the EU. EU citizens living in the UK (or who arrive during the transition period) will retain their residency rights during and beyond the transition period.The UK will continue to be bound by its obligations under EU international treaties, including those on trade and investment.
  • The UK will have to abide by and comply with EU laws and policies but will no longer have a voteon EU decision-making bodies.
  • The UK won the right to begin trade negotiations with other countries during the transition period. This is a questionable win as the countries seeking to negotiate during this period of uncertainty about UK’s relations with the EU may perceive the UK as weakened and unable to negotiate on equal terms. UK’s weakened negotiating position can also be said to apply in its negotiations with the EU.

During an implementation phase which will end December 31, 2020, the EU’s laws and regulations will continue to apply in the UK. The European Court of Justice will retain ultimate authority to resolve disputes during this period. The UK will continue to pay into the EU budget up through this date.

The withdrawal agreement is comprised of 168 articles covering a full gamut of the issues that will need to be addressed during this separation phase.

Negotiating Future EU-UK Trading Relations

The EU and UK now turn to negotiating the terms of EU-UK trading relationship after the end of the transition period. Observers believe this process will be complex and requires several years to get it right. However, the UK has only several months until October 2018. The following two issues illustrate the complexity of the task.

Financial Services

London is Europe’s largest financial center and benefits greatly from its ability to move capital and services freely within the single market. In 2016, financial and insurance services contributed 7.2% to UK’s GDP.  The EU’s single market is based on the “four freedoms” – free movement of goods, capital, services, and people. Brexiters’ vote to leave the EU was in large part fueled by disenchantment and fears from the inflow of persons under this free movement regime. However, leaving the EU means losing all obligations and rights under this free movement regime. The UK is hoping to negotiate an exception for its financial services. The EU, however, has emphatically stated that Britain as a non-EU member will be treated as a third country in all aspects of EU-UK trading relations. According to the EU, countries over which EU laws, regulations and judicial decisions do not apply will have only the same or similar limited access to the single market as do other non-EU trading partners. The UK will therefore be seeking to negotiate terms for its financial services sector in the future EU-UK trading relationship that come as close as possible to the position enjoyed in the single market.

Irish Border Question

The hard-won peaceful and open Irish border of the Good Friday Agreement is one unintended victim of Brexit. The Republic of Ireland, an independent country will remain in the EU. Northern Ireland, part of the United Kingdom, will not. The British government has committed to maintaining a “frictionless and invisible Irish border”. This commitment can be assured by the UK’s continued participation in the EU customs union, which provides freedom of trade in goods only. Monaco and UK bases in Cyprus are currently part of the EU customs union but not of the single market and a customs union seems a workable compromise for the UK. However, the British government is so far resisting this idea(possibly because of concerns about the financial services sector which would be excluded).

However, the withdrawal agreement has stated that if the parties fail to reach an alternative approach for the post-Brexit period, a common customs area will be maintained across all of Ireland. This “backstop agreement” will effectively leave Northern Ireland within the EU customs union if the EU-UK trade agreement does not include an alternative solution.

Questions Remain

In the withdrawal agreement, the EU and UK have agreed that “nothing is agreed until everything is agreed”. What will happen if the EU and UK are unable to negotiate terms of their future relationship by the October 2018 deadline? The transition period may need to be extended. This option is not at all advantageous to the UK which will have to abide by policies and rules it may not have had a role in shaping and continue to pay into the EU budget.

Alternatively, the UK may leave the EU without an agreement. This alternative is a worst-case scenario which no one wants or expects to happen but cannot be completely discounted.We can hope that the high stakes guarantee the parties’ commitments to staying at the negotiating table.

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