After the United Kingdom’s official exit from the European Union earlier this year, negotiations surrounding the two’s future relationship — particularly in the sphere of trade — have dominated political discourse. Key issues to be deliberated in the eleven-month transitionary period include access to fisheries, ensuring a level playing field for businesses and maintaining the integrity of the Northern Ireland peace process. Although these have led to an inevitable stalemate in the past — to the UK, the EU is seen as uncompromising and inflexible; and to the EU, the UK is seen as unprepared and somewhat untrustworthy — the ongoing COVID-19 pandemic has drained resources from both parties and strengthened the need for compromise and cooperation.
Key issues and sticking points in the negotiations
The European Union has stood its ground on its core demand for a level playing field with common rights and regulations, and without state aid for businesses in order to ensure that one side doesn’t have unfair competitive advantages, which the UK wants to emancipate itself from. This has been, and remains, one of the most pressing issues governing Brexit trade negotiations; the rhetoric of fostering a flexible and mutually beneficial relationship has long been forgotten. Access to fishing waters is another area of contention: the UK wants access to the European market to sell its fish, while the EU wants fishing rights in the UK’s waters. Both seem to be mutually exclusive now that the UK is an independent coastal state in control of its own waters.
The rhetoric of fostering a flexible and mutually beneficial relationship has long been forgotten.
The ‘Ireland question’ has also complicated negotiations: as a consequence of Brexit, the 310-mile border between Northern Ireland and the Republic of Ireland is the only land border between the UK and the EU. This is particularly problematic for the UK, who has been left with the choice of either creating border checks in Great Britain, thereby, creating an informal border between itself and Northern Ireland, or between Northern Ireland and the Republic of Ireland, which would go against the Good Friday Agreement (designed to promote peace by facilitating free movement between Northern Ireland and the Republic) — neither of which are ideal. The biggest challenge now is how the UK implements the withdrawal agreement
that it recently signed with the European Union, wherein it agreed to install border checks in Great Britain in an attempt to leave the Irish peace process undisturbed. What this essentially means is that while the UK will leave the EU customs union, Northern Ireland will continue to enforce the EU’s customs code at its ports for agricultural and other products — ultimately benefiting from both the UK and EU markets.
There is also the chance of the creation of an informal border between the UK and Northern Ireland, which has been a source of concern for those wary of the rise of a separatist rhetoric in the region. Furthermore, the recently published Internal Market Bill, aimed at enabling the free flow of goods and services between Northern Ireland and the rest of the UK and keeping Northern Ireland's market aligned with Great Britain in the event of no trade deal, allows UK ministers to break the withdrawal agreement in a ‘specific but limited
’ way. This has been severely contested both within the UK and the EU, with the UK’s credibility and proper implementation of any future trade agreement being called into question. Ireland has also threatened to block any negotiated deal while the threat of the bill remains.
There is also the chance of the creation of an informal border between the UK and Northern Ireland.
Additional to these deeper challenges is the problem of defining the relationship between the UK and the EU. The United Kingdom, despite wanting to carve a unique trade agreement with the European Union — focused on partial integration with a sense of regulatory autonomy — is being regarded as any other third country trading with the bloc. Based on preferences and precedence, it has thus been left with roughly two choices: to follow either the Norway or Canada model. Neither of these are ideal: the Norway model would give the UK complete market access while taking away its decision-making power, forcing it to comply with common rules set by EU institutions. The Canada model, on the other hand, revolves around a standard free trade agreement (CETA, or the EU-Canada Comprehensive Economic and Trade Agreement) while neglecting much of the financial service sector. Applying this would cause severe damage to the UK, given that the service sector accounts for 80% of its economy
. The best-case scenario for the UK would be to build on the Canada model, creating a bespoke agreement to ensure less restrictions and more of a Norway style market access, but the EU does not want to commit to a customised deal beyond those that already exist. Another problem is that with increased market access comes increased obligations and an increased presence of parallel supranational institutions, which the UK is unwilling to accept. But obligations come regardless of which model it ends up choosing; the ‘middle ground’ does not eliminate these.
The UK has also indicated that it would settle for an alternative ‘Australia’ model if no agreement is reached by the deadline. Australia trades with the EU largely according to the default rules set by the Geneva-based World Trade Organisation (with tariffs on imports and exports) which, to the UK, is essentially the same as a no-deal Brexit. When analysing this, it is important to understand that comparing the UK-EU trading relationship to that of Australia-EU is inherently flawed, particularly given the vast differences between the two in geographical distance and volume of trade. The EU trades much more with the UK than it does with Australia, and the two often rely on each other for access to last-minute supply chains. In terms of numbers, trade with the European Union accounted for 43% of exports and 51% of imports
in the UK in 2019. The stakes for the UK are thus much higher as compared to Australia, which is on the other side of the world and trades with the EU in a far more limited capacity.
The EU does not want to commit to a customised deal beyond those that already exist.
Consequences of a no-deal Brexit
If no deal is agreed upon by the 31 December, the UK will trade with the EU on WTO rules. A recently published report
by insurance giant Allianz indicates that a no-deal Brexit could potentially result in massive losses for the EU — almost €33 billion — with Germany, France and the Netherlands being the hardest hit. This highlights a big risk for the bloc, who until now has seemed indifferent towards the idea of a ‘no deal’ or Australia-type outcome. Moreover, monetary losses are not the only cause for concern: a recent paper published by Chatham House implies that aside from existing and potential economic losses, Brexit has resulted in the EU losing a ‘significant pro-free-trade voice’ which has, in turn, had an impact on the bloc’s ability to speak with a united front in the global community (Schneider-Petsinger, 2019, pp. 18–19).
In simple words, the EU position is to protect the bloc at all costs, with no compromise on the pillars of the single market. This entails the indivisibility of the four freedoms of the internal market — goods, services, people and capital — as well as of the market on a sector-by-sector basis (Patel, 2019, pp. 8-9
). This is particularly important to prevent a ‘Brexit contagion’, or more specifically to quench separatist rhetoric rising in other countries inspired by the United Kingdom. The EU wants to make sure that the UK doesn’t walk away with all the benefits of remaining in the bloc while avoiding the bureaucratic challenges, as this could provide a big incentive for other Eurosceptic countries to follow suit. That being said, however, the negative impact of a ‘no deal’ outcome is far greater for the UK than it is for the EU, mainly because of the relative size of the two economies and varying levels of economic interdependence. The UK is expected to face a 5% drop in its GDP and 15% drop in its exports
if no deal is reached by the deadline, with the immediate cost to public finances reaching up to £90 billion
. There is further potential for up to 482,000 job losses
, and losses to various sectors due to an absence of mutual recognition of qualifications and regulatory frameworks.
The UK is expected to face a 5% drop in its GDP and 15% drop in its exports if no deal is reached by the deadline, with the immediate cost to public finances reaching up to £90 billion.
Intransigence by both parties has exacerbated the struggles of ongoing negotiations. The European Union, in particular, has refused to discuss other key areas, such as security and foreign policy, until a trade deal is agreed upon and as long as the threat of the Internal Market Bill remains. The bill poses further challenges to international relations as well: the election of Joe Biden has made it clear that any agreement between the US and UK depends on the UK’s adherence to the Good Friday Agreement
With the final deadline for a trade agreement looming closer, a compromise is yet to be reached; and in light of the aforementioned obstacles, it seems highly unlikely that the two parties will come to an agreement — in fact, the chance of a no-deal situation has risen to 40%
in the eyes of experts. Trade talks must be completed within the next two weeks
at the latest to allow time for ratification. Given this narrow timeline and the chaos caused by the pandemic, neither the UK nor the EU seem fully prepared to adequately handle the blow of a no-deal outcome. It remains to be seen whether trade talks fall through and the United Kingdom and European Union develop colder third-country ties, or whether the two parties manage to arrive at a compromise and salvage their relationship.
Tara Sahgal is a research intern at ORF.
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