Deal or no deal? What do the UK and EU negotiating objectives tell us?
28 Feb 2020 03:56 PM
As the UK-EU negotiations begin, what do the two sides positions tell us about the likley outcome?
This week the UK Government published its negotiating objectives ahead of the commencement of negotiations with the EU next week. The EU set out theirs earlier in the week following agreement by the European Council on 25 February.
The UK Government has set regulatory autonomy as its core objective for the negotiations and is using precedent from the EU-Japan, EU- Canada (CETA) and EU-South Korea agreements when structing its asks for the UK-EU deal. The EU has broadly accepted this request, using EU precedent to structure much of its own negotiating objectives.
However, there are three main sticking points between the two sides. The so called ‘level playing field’, the governance arrangement and fishing rights.
The EU argues that due to the size and proximity of the UK to the trading bloc the UK must accept enhanced provisions on a level playing field, where the UK must update its rules so that they are equivalent to those of the EU in areas such as competition, tax and state aid. In state aid the EU has made a specific request that EU state aid rules continue to apply within the UK. These requests are due to EU concerns that the UK may pursue deregulation and Government subsidies that may undercut the Single Market. While the UK Government has made oral commitments to maintaining high standards, trust is low between the two sides with the EU believing a legal mechanism is required in the agreement to protect its market.
There are also disagreements over the governance arrangement for the Agreement, with the EU requesting a comprehensive Governance and arbitration structure, while the UK would prefer a more limited governance structure more akin to those included in the EU’s agreements with Canada, Japan and South Korea.
The EU is also seeking to protect its access to UK fishing waters through the free trade agreement while the UK does not want fishing access within the scope of the agreement, instead subject to separate negotiating rounds over quotas and access.
However beyond these three sticking points there is a high degree of alignment between the two sides, providing a clearly identifiable landing zone if the above issues can be bridged.
Aside to the trade agreement the UK will also seek to be granted equivalence status for financial services and data (data adequacy). The political declaration calls for both sides to make best efforts to conclude these agreements in July and December respectively.
Both the UK Government and EU have suggested that they will use the high-level progress meeting in June agreed between the UK and the EU in the political declaration as a critical junction point whereby the progress of the negotiations will be reviewed. At this point the UK Government will assess whether the UK’s attention should move away from negotiations and focus solely on domestic preparations for a no trade deal scenario.
Overall there is clearly a deal to be had, even within the tight timeframe, if the UK and the EU can make the necessary compromises and divine the creative solutions needed to bridge their differences on the three main sticking points of the level playing field, governance arrangement and fishing rights.
The UK’s decision to structure its asks along the lines of what exists in already agreed free trade agreements such as in the EU’s agreements with Canada, Japan and South Korea, as well as the EU’s agreements in principal with Mexico and Australia will help a deal be concluded with clear precedent to draw upon. UK Ministers have been briefed not to use words such as “bespoke”, “unique” or “deep and special partnership” so that messaging is consistent and that avenues for the EU to try and broaden the negotiations are restricted.
For the tech sector the high level of agreement between the both sides is to be welcomed, however as ‘nothing is agreed until everything is agreed’ techUK urges both sides to be creative and pragmatic in resolving their differences.
The UK tech sector is the largest in Europe and highly integrated into EU markets. In some sectors, such as fintech the UK accounts for more than half of all investment in EU tech and has created more unicorns (companies valued at over $1 billion) than any other EU country. A failure to reach an agreement would damage both the UK and the EU tech sectors, reducing the international standing and competitiveness of both parties.
In any scenario where a deal is agreed the final deal will resemble a standard third country free trade agrement. This means things will change no matter the outcome with increased friction in the importing and exporting of goods as well as the trade in services. techUK members will therefore need to prepare for these outcomes, first of all by addressing known knowns such as building up capacity to handle importing and exporting, HR capacity to manage new business visa requirements and identifying named individuals to be appointed as representatives to EU regulators.
However, both sides in their negotiating objectives have spelled out a desire to establish frameworks and partnerships to allow for information sharing and efforts to reduce any friction to the minimum possible under this kind of free trade agreement. techUK will continue to engage with both the UK Government and the EU to identify the best mechanisms to do this, however this is likely to be a gradual process with friction being reduced over time after any agreement has been reached.
The UK Government must also ensure that this agreement is successful by supporting businesses prepare for the future relationship. This will mean ensuring businesses have the correct information throughout the process. Allowing them to begin preparations for the known knowns (such increased friction at the border and HR capacity for moving staff around), as well as updating guidance throughout the year as new information becomes available, allowing businesses to pace their work and prepare with confidence.
The Government must also seek to take pragmatic decisions that support businesses at the point of the new relationship entering into force. For example, unilaterally recognising EU certification and regulatory processes in the immediate term to reduce costs faced by business before seeking, where advantageous, to diverge later. The Government should also seek to phase in parts of the agreement where there may not be enough time to prepare appropriately if negotiations are concluded late in the process.
Finally, the Government must push ahead with its pro tech agenda. The UK is one of the easiest places in Europe and the world to set up and run a businesses, maintaining this and ensuring the continuation and improvement of the UK’s high standard, business friendly and competitive environment will be as important as securing a good deal with the EU for the medium and long term success of the tech sector as well as the wider economy.