Feature

A complex web of deals

Charles Grant explains the complex set of negotiations that will happen following the Brexit vote, arguing they will take much longer and be far more complicated than many British politicians realise.

 

BRITAIN’S EXIT FROM THE EU will require not just a single deal, but at least six interlocking sets of negotiations, each highly complex in their own way.

The first deal – the divorce settlement prescribed by Article 50 – will divide up the properties, institutions and pension rights, and deal with budget payments. It will also cover the rights of UK citizens in the EU and vice versa.

The Treaty on European Union sets out a two-year period for this negotiation, extendable by unanimity. But the 27 other EU member states are unlikely to extend and many may want Britain out before the June 2019 European elections, and before talks on the EU’s next seven-year budget cycle get underway (the current cycle ends in 2020).

The second deal will decide what shape a Free Trade Agreement (FTA) with the EU will take.

It could be similar in scope to Canada’s recently negotiated FTA with the EU, not least because the much-discussed ‘Norwegian model’ looks increasingly unviable as an alternative.

Norway, as part of the EEA, participates in the single market, but pays into the EU budget and has to accept free movement of people. The latter condition, and perhaps the former, is likely to be unacceptable to the British Parliament following the referendum result.

But even a Canadian-style FTA will require the British Government to make significant trade-offs. Such a deal may eliminate tariffs on manufactured goods – but only if the UK agrees to comply with key EU regulations.

And it would probably only guarantee limited access to the single market for services, with negative impacts not just for financial firms but for other sectors such as tourism, accountancy, law and air transport.

Whether talks on the deal start before or after the UK has left the EU, it’s clear that the FTA will take many years to negotiate and ratify and that there will be a significant gap between Britain leaving the EU and the FTA coming into effect.

That calls for a third, interim deal. One possible interim solution would be for the UK to become an EEA country for a limited period, while FTA talks proceed. But that would involve the UK accepting substantial EU budget payments, free movement of labour, and most of the EU’s single market rules. Furthermore, the existing EEA  countries show little desire to reconstruct their own treaties and institutions to accommodate the UK as a temporary visitor.

The fourth deal involves the UK attaining full WTO membership. Britain is currently a member via the EU. There are huge complications here, not least the fact that any deal requires the approval of all the other 163 WTO members. Although British officials hope this can be achieved, they recognise it will be hard to sort out WTO membership within the two years of the Article 50 negotiation.

The fifth negotiation concerns the series of deals that must be struck with the 53 countries that have FTAs with the EU. Here the legal position is that the FTAs cease to apply on  the day that Britain leaves the EU. The UK will have to  quickly cut its own bilateral deals with these countries, before that exit date. While most of the 53 will probably try to be helpful, some may have competitive reasons to be more difficult.

Striking new deals with countries that have not yet agreed an FTA with the EU – such as the U.S., China, Australia and New Zealand – will be also be tricky, legally and practically.

So long as the UK is part of the EU, it cannot legally complete an FTA with another country. It can only talk about talks. But given that its current capacity for trade negotiations is stretched, it is likely to prioritise the EU FTA and securing bilateral deals with the 53 countries.

In any case, it’s difficult to see why countries like the U.S., New Zealand or China would want to negotiate an FTA with the UK before knowing answers to some pretty fundamental questions, such as: Which bits of the single market, if any, will the UK be in? And which parts of EU competition law will apply to the UK?

The sixth negotiation will cover UK/EU ties in areas like foreign and defence policy, police and judicial cooperation and counter-terrorism. Here, the UK is in a relatively strong position. It has important diplomatic, intelligence and military assets that can be useful to its partners.

As we wait for these negotiations to get underway, one thing seems pretty clear. The other 27 EU member states are likely to take a much tougher line than some in the UK expect.

Brexit and the rise of populist anti-EU movements in some member states may have changed the political climate and have certainly weakened those pursuing a federalist agenda.

But European leaders are unlikely to compromise on fundamental single market principles, such as free movement of people. And they will not want the process of Brexit to be painless – not least as it will deter others from trying to follow the UK’s example.

The diplomatic endeavour involved in completing these negotiations is clearly immense.

If Theresa May’s Government believes it is important to  reach a conclusion quickly to limit economic uncertainty, there will be a strong incentive, and considerable pressure, to compromise.

SIX DEALS THAT NEED TO BE DONE:

  • Article 50
  • A new UK/EU trade deal
  • An interim (possibly EEA) agreement
  • The UK and the WTO
  • New bilateral trade deals internationally
  • An EU/UK agreement on defence and security

Charles helped to found the Centre for European Reform (CER) in 1996. In January 1998 he became the CER’s first director. He is the author of numerous CER publications, including Russia, China and Global Governance (2012) and How to Build a Modern European Union (2013). His specialisms include EU foreign and defence policy, Russia, China, the euro and global governance. He is a member of the councils of the Moscow School of Civic Education, the Turkish think-tank EDAM and the French think-tank Terra Nova.

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