Brexit Views 17 July 2018

Last Thursday saw the long-awaited publication of the UK Government’s Brexit White Paper The Future Relationship Between the United Kingdom and the European Union. This paper is a considerable document with more detail than anything previously put forward by the UK Government. The British Irish Chamber has welcomed the publication as a serious step forward in the process and a credible document on which negotiators from both sides can engage in a serious discussion on how the future UK-EU relationship will look.

Though publication of this Paper is welcomed, the Chamber is still concerned about the lack of progress in finalising the Withdrawal Agreement especially with regards to agreement on a legal text to support the “Backstop Arrangement”. While this paper includes assurances from the UK Government on this issue, without final agreement on this we are still at risk of a No Deal scenario that would see the UK walk off a cliff next March and would make all of the work in the White Paper redundant. It is a matter of urgency that this be agreed and we hope the publication of the UK’s White Paper will help facilitate this.

Within the paper itself there are clear indications that the UK is moving towards a softer version of Brexit and the Prime Minister should be commended for the strength she has shown over the past weeks in uniting her Cabinet (with a few notable exceptions) around this position.

The proposed free trade area for goods including adoption of a common rule book will be good news for our members in the manufacturing and agri-food sectors. Such commitments together with related permissions would go a long way to ensuring that frictionless trade in key sectors will be able to continue after Brexit. The proposals also represent a much-needed recognition from the UK Government of the importance of regulatory alignment to reducing the need for border checks on goods and food.

The EU has already proposed in its own guidelines a Free Trade Agreement with the UK under which all goods traded would incur a zero tariff and would not be subject to quotas, meaning the inclusion of this in the UK’s White Paper should be acceptable to the EU.

Future UK participation in agencies that provide authorisation for goods in highly regulated sectors such as the European Medicines Agency (EMA) is also welcomed. The UK holds considerable expertise in these fields and the loss of future cooperation between agencies would not only hurt the UK’s standing in these fields but also the EU’s, meaning continued cooperation will be mutually beneficial to both parties. The UK’s recognition that participation as a third country cannot be the same as that of a Member State (input with no vote, CJEU oversight and financial contribution) should also make such proposals more palatable to the EU in terms of accepting these.

Where the UK’s proposal on goods falls is the proposed Facilitated Customs Arrangement (FCA). This is essentially the previously dismissed Customs Partnership model but with a few added elements. It is difficult to see the EU ever accepting such a proposal. It has already dismissed the idea of allowing the UK to collect EU taxes on its behalf without oversight from EU authorities and outside of the jurisdiction of the CJEU. It is also difficult to envisage the EU allowing such a mechanism to operate where the UK could potentially undercut EU tariffs in its own negotiated trade deals and thus would have direct implications for the competitiveness of EU markets and businesses that export into the UK.

Furthermore, while such a system may be somewhat possible for final goods, it is very difficult to see how it would operate for intermediate goods and there remains substantial possibility that the system could be gamed for those who may wish to smuggle goods onto the EU market. There is also the likelihood that such a system will put an undue burden on business in terms of proving the final destination of imports and the administrative process of securing refunds when necessary. It is also unclear how such a system would operate in the cases of hauliers who would be delivering multiple consignments in one journey.

Finally, while it is stated that the introduction of the FCA would be phased, there is little detail on what the interim arrangements will be until this happens. It is unfortunate that the UK has stuck with a proposal already dismissed by the EU and one which committees within its own Parliament have found unworkable. Urgent work will be needed on the customs aspect for this to be palatable to EU negotiators and Member States.

On Services, the UK wants a better deal on services than any of the EU’s precedents. To that end, the White Paper includes ambitious proposals on the mutual recognition of qualifications, the breadth of service sectors covered, the depth of market access, and commitments on national treatment. The proposed mobility framework, if adopted, would help future trade in services especially via mode 4 (the movement of people to provide a service). Generous provisions around the ability of companies to facilitate intra-corporate transfers and for people to travel for short-term business reasons without the need of a visa will benefit service providers.

What is clear, however, is that Financial Services looks set to become the main victim of the compromise around Brexit. The UK Government, in its commitment to leave the Single Market, has accepted that as a consequence UK firms will lose their passporting rights for financial services. The Mutual Recognition model initially proposed by the City of London and referenced by both the Prime Minister and her Chancellor in speeches earlier this year has been abandoned in favour of what might be termed “enhanced equivalence”.

The reaction from the sector to these proposals has so far been quite negative with many realising that such an outcome would have a very real impact on how financial services are currently traded. While most of the focus to date has been on UK based financial services, an “enhanced equivalence” based model would also have a direct impact on Irish based financial services firms, many of whom operate to sell directly into the UK market. Even the model proposed will be difficult for the EU to accept. Under this model, the UK would be established as an equal to the EU in terms of granting market access with a shared structure between UK and EU regulators and supervisory regimes. The EU is unlikely to want to enter such an arrangement and, up until now, has been firm that the best the UK can expect outside of the Single Market is the standard third country equivalence regime.

Another potential difficulty for the UK is its proposal on “Institutional Arrangements”. The UK would like a politically based oversight model for any future agreement with various levels for dialogue and cooperation. For a deal of this breadth and depth, it is highly unlikely that the EU will agree to such a request, preferring instead a courts-based model with legal underpinning. While a CJEU-led solution will be unacceptable to the UK, it might be worth both parties looking towards the EEA and EFTA court system as a possible compromise.

Despite these challenges, there are ideas in the UK’s White Paper that will be good news for business. UK membership of agencies like the EMA, a proposed Air Transport Agreement, reciprocal access for road hauliers, continued operation of the Single Electricity Market (SEM) and possible future participation of the UK in the Internal Energy Market (IEM) will all be critical for Irish-UK trade and are outcomes that the British Irish Chamber has strongly advocated for.  

The UK has also identified some cross-cutting areas where it would like to establish special arrangements with the EU to support the future relationship. Cooperation on Data is included and will be vital as data sharing will underpin all aspects of the future arrangement and we would encourage discussions on an EU “Adequacy Decision” for the UK to begin in earnest.

The development of cooperative accords in areas such as science and innovation and culture and education should be pursued in the light of the mutual benefits such accords could have for both parties. While the UK is very ambitious in the role it will have in such arrangements, especially in the controversial Galileo project, such vision should be welcomed in the pursuit of a compromise that will benefit both the UK and EU without risking EU oversight and control.

Proposals around fishing rights show the UK’s recognition of its strength in this area offering EU access subject to adherence to UK regulations and controls. Such a hard-line stance in this sector might encourage EU negotiators to adopt a similar approach to the UK in areas where the EU is deemed to have the stronger hand.

The reaction to the White Paper since its publication has demonstrated that we are still a long way from fait accompli. The Prime Minister looks secure in her position for now but as we have learned over the past two years, nothing in this process is certain.

The Prime Minister is facing her first major tests in Parliament this week as the Customs Bill (the Taxation (Cross-Border Trade) Bill) and the connected Trade Bill finally come before MPs. Last night, the Customs Bill narrowly passed through the Commons after the Prime Minister accepted four amendments laid down by the Conservative Brexiteer, European Research Group (ERG), which have now put in doubt the operability of the FCA (amendment requiring EU to collect tariffs on behalf of UK) and also the feasibility of the EU’s backstop proposal for the Irish border (amendment making it illegal to establish a customs border in the Irish Sea). In reaction to last night’s debate, Remain-supporting Tory and Labour MPs have laid down an amendment to the Trade Bill (to be debated tonight) that would require the UK to seek membership of a Customs Union should no deal not be agreed by January 2019. It is expected to be another hotly contested debate with much anger among the Conservatives of the Prime Minister’s perceived capitulation to the ERG.

What is certain is that there is a forever ticking clock counting down towards an October 2018 deadline. The UK’s commitment to engage with the EU “at pace” on finalising both the Withdrawal Agreement and setting out the framework for the future relationship will be welcome by all who had become frustrated with the lack of progress and speed in the negotiations.

The UK Government’s White Paper is unlikely to be the end point of the negotiations, but it is a much more credible and positive starting point than what we had before, and that in itself is a very welcome development.

 

To assist our members’ understanding of what the UK Government is proposing, the British Irish Chamber has produced a detailed Summary of the UK’s Brexit White Paper. Members who are interested in receiving a copy of the Summary can email the Chamber’s Head of Brexit Policy Katie Daughen at katie.daughen@britishirishchamber.com.