Both sides really need an EU-UK trade deal
The UK’s focus on Brexit had been waning amid the pandemic, trade wars and impending US presidential election. Prime Minister Boris Johnson preferred to concentrate on his efforts to make the UK the “Saudi Arabia of wind power” and other issues during his Tory party conference speech this week, leaving little room for Brexit. This from a politician who won a landslide election victory on the slogan of “Get Brexit Done” as recently as last December.
But Brexit has moved back into focus. On the one hand, the UK garnered attention for its Internal Market Bill, which has passed its first hurdle in Parliament. The bill is aimed at ensuring the unimpeded flow of goods and services across all four UK nations and also affords the government latitude with regard to state aid. This stands in direct conflict with the Withdrawal Agreement (the divorce agreement between the UK and the EU) that became law on Jan. 31. The Withdrawal Agreement was, at the time, hailed as a big success by the Johnson government. Alas, while it kept the border between Northern Ireland and the Republic open, it necessitated limited border checks for goods crossing the Irish Sea in order to accommodate the integrity of the EU common market. It also ceded to EU state aid rules for Northern Ireland.
However, Secretary of State for Northern Ireland Brandon Lewis last month admitted that the controversial Internal Market Bill would break international law. In the end, European Commission President Ursula von der Leyen sent a “letter of formal notice to the UK” at the beginning of October, contesting the legality of the bill and starting the road to “infringement proceedings.”
While important, especially as the adherence to international law will determine the UK’s position as a stalwart of the rule of law in the family of nations, this remains a sideshow. The real question is whether or not the UK and the EU will be able to hammer out a trade deal to come into effect when the Brexit transition period ends on Dec. 31.
Currently, the two sticking points are state aid and fisheries. The former is important to the EU as it does not want to see government support for industries influencing the balance of competitiveness. While the UK has been clear it would stay away from 1970s-style support for unsustainable industries, it leaves open regulations on the environment and labor.
Both the EU and the UK would fare much better if they could get to a “yes” on a trade deal. Decision-makers on both sides of the Channel are well aware of that.
The fisheries issue is about whether EU fleets will get access to 70-odd species of fish within the 200 nautical mile UK exclusive economic zone. Most of the Brexit negotiations have been about lofty concepts of free trade and state aid, etc. Fisheries is different as everyone — especially fishermen — can see, touch and smell fish, making it far more real to the general public. Whichever way the fisheries debate goes, the question will remain as to how UK fishermen can sell their bounty without tariffs to the other side of the English Channel if there is no trade deal.
As always in negotiations with the EU, things are turning rather dramatic as the UK-imposed Oct. 15 deadline approaches. Last week, negotiations all but stalled, leading to a telephone conversation between Johnson and Von der Leyen. Little was reported about the exchange between the two leaders.
A new round of negotiations was kick-started this week. The vibes coming from both sides are tending to be a little more optimistic. The UK’s chief Brexit negotiator admitted that a deal might still be achievable, but it might also not be, which can be seen as code that the two sides are inching closer to an agreement.
Both sides, but especially the island nation, stand to lose a lot if there is no deal. The EU is the UK’s largest trading partner by far. Many jobs in the UK and also in Europe, especially in the automotive and aeronautic sectors, rely on heavily integrated supply chains of goods shipped back and forth across the Channel, each time adding value.
The City of London depends on unfettered access to EU financial markets in order to maintain its status as Europe’s major financial hub. This means that the City needs to obtain equivalence status post-Brexit. More than half of EU stocks are traded on the London Stock Exchange, amounting to a daily volume of $8.5 billion, according to Bloomberg. The EU withdrawing equivalence would sound the death knell for that trade. Brussels does not joke when it comes to equivalence, as the Swiss can attest to. The EU withdrew equivalence for Switzerland when talks on a comprehensive framework agreement stalled.
All in all, both the EU and the UK would fare much better if they could get to a “yes” on a trade deal. Decision-makers on both sides of the Channel are well aware of that. The key question could be how firm the Oct. 15 deadline is, and whether the date becomes a stock-taking event rather than an off-the-cliff deadline. There are ways to continue negotiating without either side losing face.
Privately, officials seem to be more upbeat on the possibility of a deal. However, we must remember EU Council President Charles Michel’s recent tweet that “the EU prefers a deal, but not at any cost.” Boris Johnson might have put it similarly. So there is at least one thing both sides can agree on, and for the rest we have to remain hopeful that reason will prevail.
- Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources. Twitter: @MeyerResources