The Greenwich reset: a future UK-EU free trade agreement
While the Prime Minister gave a powerful affirmation of the importance of free trade, helpfully mentioning Smith, Ricardo and Cobden, the EU has stuck to its guns, linking market access with so-called Level Playing Field obligations. But the PM is calling the EU’s bluff, as is clear from both the speech and the Written Ministerial Statement laid before the House of Commons on Monday. He is forcing them to reveal that their preference is not just a Level Playing Field, but that they want dynamic regulatory alignment, locking the UK in as a rule-taker, much as Theresa May’s Chequers Deal would have done. By agreeing to have the sort of provisions one would typically find in a free trade agreement (FTA) for labour and environmental rules (not derogating from existing treaty obligations, not derogating from standards in order to seek trade advantage), he is saying that there will not be social dumping. By saying the UK will administer its own economy in a manner in which Smith, Ricardo, and Cobden would be proud, the UK will not distort its market for trade advantage either. Indeed, he has also threatened the EU that their market distortions which do affect trade will be equivalently called out. As things stand the French and Germans are far more often in violation of EU state aids rules than the UK.
The PM’s speech and the UK’s Ministerial Statement set out its desire for a comprehensive free trade agreement. It builds on the Political Declaration’s commitment to WTO-plus commitments in the areas of TBT (technical barriers to trade) and SPS (sanitary and phytosanitary). This is at variance with the EU’s recent pronouncements that they will be quite limited in granting regulatory recognition, even on something as basic as conformity assessment for testing. It also is at variance with the WTO’s commitments to sound science in the agricultural regulation area. The UK is entitled to assume that TBT and SPS plus means that the EU is prepared to go further in terms of equivalence than it has in the past, both in the WTO and in other deals. Yet it looks like the EU is not prepared to go so far, and is instead suggesting some sort of SPS-, TBT- type arrangement now.
The EU’s mandate contains a number of challenges, but also opportunities. First on fishing, the EU’s mandate is that the EU’s agreed quota rights are locked in for as long as the EU wants them, whereas the UK has made it clear that consistent with recovering its fishing grounds, it will agree those access rights through a normal negotiation as the UK takes up its seat on the North East Atlantic Fisheries Organisation (as well as other relevant Regional Fisheries Management Organisation (“RFMOs”)). These negotiations would take place every year and would be significantly different from existing allocations. The EU seeks the fisheries negotiations to be concluded by July 2020 so that they can be effective next year. But the UK will resist any sequencing that means the rest of the FTA will be negotiated after fisheries access and will seek to have these negotiations on separate tracks.
Although data is likely to be a difficult part of the negotiation, the EU seems to have at least opened the door to adequacy concepts.
On customs, a highly facilitative relationship is envisaged by both parties, including a clear and welcome statement by the EU for mutual recognition of AEO (authorised economic operator) programmes.
On regulation, the EU has signalled openness to a Good Regulatory Practices chapter as well as regulatory coordination mechanisms. The UK will want as much recognition and equivalence as it can get across the three dimensions of testing, standards and underlying product regulation. So there is scope for an agreement here. The issue is not whether there will be some recognition – there will be – but rather how much.
On rules of origin, the EU will seek to use its own rules of origin (PEM Convention), which the UK will need to adopt in order to facilitate cumulation across supply chains. The only area where this might present challenges would be in the auto sector given the recent tightening up of US rules of origin under USMCA. This increases the likelihood of a purely EU-27 + UK solution to the trade of parts in the auto supply chain (possibly leading to a nestled auto pact in the FTA for existing production).
On SPS, the EU advocates SPS+ but then goes on to try and build on the Precautionary Principle, as described in the EU’s treaties (TFEU). Most countries would regard this as SPS-, given that the EU is in current violation of WTO rules in a number of SPS areas (and this is growing).
On state aids and on competition, the EU appears to want the UK to apply EU state aids rules. While much of the reasoning behind this would be supported by the UK government (reduction of anti-competitive market distortions), the UK will not accept the application of EU law and enforcement over its economy. A better approach would be to seek to agree disciplines over market distortions, or public sector restraints of trade which would be subject to FTA dispute resolution. If UK firms believed that the EU was not enforcing its own rules, they could sue in the CJEU, or if EU firms felt that the UK was not enforcing its rules, then they could sue in UK courts. If one party felt the other was violating the agreement, that would be subject to FTA dispute resolution.
While the rhetoric looks hostile at the moment, which is not surprising at this stage at the beginning of negotiations, there is much at stake. The revealed preference of the EU is to lock the UK into dynamic alignment, and it believes the UK will collapse as it did in Phase 1 and accept this in the face of no further agreement. The UK wants a comprehensive FTA, preferably with some level of recognition and equivalence. However there is much overlap between the UK and EU mandates and the basis for a negotiated agreement is certainly here.
The UK approach is a powerful signal to its trading partners around the world. No longer can they claim they do not know what the ultimate UK-EU relationship will be. It will be a normal FTA just as they are negotiating with multiple parties who are negotiating trade agreements with other parties. The PM spoke about the UK’s external trade policy before he came to the arrangements with the EU in his speech – an indication of the priorities of the government. He is saying that the EU agreement, important though it is, will not be a constraining influence on the rest of UK trade policy. That will make other agreements more likely and will in turn increase the leverage for a better agreement with the EU.
The take away is that a possibility of a deal does exist, once the EU has internalised that the UK is not about to dynamically align to EU regulations, but is prepared to enter a relationship on the basis of good regulatory practices, some coordination, and the sorts of commitments on competition, labour and environment that generally exist in trade agreements.