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27.03.2018

TRADE AFTER BREXIT: A MATTER OF CAKE AND CHERRIES

The European Union and the United Kingdom have to define their future trade relationship after Brexit in March 2019. Even basic problems remain unsolved. A Brexit without a free trade agreement is not inconceivable.

By Eike Radszuhn

© Ionndubh | Shutterstock.comBoris Johnson, the Foreign Minister of the United Kingdom, once metaphorically described what a good Brexit deal for his country might look like: "My policy on cake is pro having it and pro eating it," Johnson said half-jokingly, referring to the English saying "You can't have your cake and eat it too." The Briton suggested that, once outside the European Union, the UK would be in the formidable position of enjoying the benefits of European integration - but without having to meet the obligations of EU membership.

The response from Brussels has been less than amused. The European Union's chief Brexit negotiator Michel Barnier chooses fruit rather than baked goods to illustrate the EU’s view on its future relationship with the UK. "We can't imagine a situation in which we would accept cherry-picking," Barnier made clear, underlining that a country outside the EU cannot be better off than the 27 remaining members. Either the UK must accept a whole package of benefits and obligations of collaboration with the continent - or be excluded from both.

The EU and the UK have until March 2019 to find a compromise between these two positions. If they fail, Europe would witness what is called a hard or cliff-edge Brexit, with only basic WTO rules remaining to facilitate EU-UK trade. VDMAimpulse gives an overview of what the British want, what the EU is willing to give, what has already been agreed and what still needs to be discussed.

British side: squaring the circle

The British government had long been accused of not knowing what relationship to the EU it actually wants after the Brexit. In a speech in London on March 2, 2018, Prime Minister Theresa May finally described some goals and red lines concerning a future EU-UK agreement. However, many observers consider the British position inconsistent, as it still contains elements of the 'have cake and eat it' logic.

On the one hand, May named quite a list of freedoms that the UK wants to gain by leaving the European Union. For example, the country aims to

  • leave the Single Market and the Customs Union;
  • end the jurisdiction of the European Court of Justice in the UK;
  • be able to negotiate trade agreements with third countries independently; and
  • take full control of immigration and legislation.

On the other hand, there are also ties with the EU that the UK wants to keep. Among the most important are

  • a soft border between Northern Ireland and Ireland, as well as between Northern Ireland and the rest of the United Kingdom;
  • the "broadest and deepest possible [trade] partnership" between the EU and the UK; and
  • continuous collaboration between EU and UK regulators.

Some of these aims may indeed be conflicting. Dropping out of the Customs Union, for example, would mean customs handling for goods crossing from the EU to the UK or vice versa - even if tariffs are zero. Additionally, any customs arrangement would need to be monitored, which might require some sort of controls, and therefore a noticeable border. This might contradict the British goal of frictionless trade and the will to avoid a hard border in Ireland or between the nations of the United Kingdom.

At this point, the British position becomes blurry. In her speech, May stressed that "existing models for economic partnership either do not deliver the ambition we need or impose unsustainable constraints on our democracy." To avoid hard borders, the British side proposes "’trusted traders' schemes and drawing on the most advanced IT solutions so that vehicles do not need to stop at the border". Questions remain over whether any of this is practical or reliable.

EU side: little room to maneuver

While the UK is calling for creative solutions, the European Union has always advocated much the opposite. European states - not only those in the EU - have a complex system of different degrees of mutual cooperation. Norway, Iceland and Lichtenstein have access to the Single Market as part of the European Economic Area. The same goes for Switzerland, through bilateral agreements. All these countries are also members of the Schengen area (the UK, curiously, is not). Then there is the Customs Union, to which the non-EU-state Turkey is attached.

In Brussels, there is little to no appetite for inventing yet another form of collaboration tailored to the will of the United Kingdom. In fact, there is little room to maneuver at all, since any deal with the British must not grant more benefits than existing agreements. Michel Barnier has explained this view using a slide showing the different steps of European integration. The UK could choose between a Norwegian, Swiss or Turkish model - or a comprehensive free trade agreement like CETA between the EU and Canada.

This position is broadly shared by the 27 member states. The draft guidelines for a future agreement between the EU and the UK, published by the European Council on March 7, 2018, call for partnership between the two economic areas that is "as close as possible." However, the paper names the obstacles caused by the repeatedly changing positions of the UK, which "limit the depth of such a future partnership."

What the EU has to offer is indeed a free trade agreement, including arrangements for

  • trade of goods and services;
  • customs cooperation;
  • voluntary cooperation to avoid technical barriers to trade;
  • access to public procurement markets; and
  • protection of intellectual property rights.

On the other hand, the Council makes clear that "a non-member of the Union, that does not live up to the same obligations as a member, cannot have the same rights and enjoy the same benefits as a member… Being outside the Customs Union and the Single Market will inevitably lead to friction."

Concerning the border question, the EU has proposed keeping Northern Ireland effectively in the Customs Union and the Single Market. This would mean there was no hard land border between the EU and Northern Ireland, but one running down the Irish sea, with controls at ports and airports. Though the UK has already rejected this solution, the EU has said it would pursue this idea - unless the British side could come up with a better proposal.

The industry side: as little friction as possible

 Theresa May, Prime Minister of the United Kingdom <br>© photocosmos1 | hutterstock.comFew if any industrial companies in the EU or the UK consider Brexit a smart decision. Industry's position can be summed up as "the less change, the better." VDMA has developed an in-depth position paper on the most urgent Brexit-related questions that need to be answered in order to create as little frictions as possible in existing flows of goods and value chains. Here are just three examples.

First, customs handling and border controls would be a problem for companies, creating bureaucracy and delays. VDMA has showed sympathy for the idea of keeping the UK in the Customs Union, as proposed by the British Labour party. However, Prime Minister May has repeatedly refused this solution. Economically, it would limit the freedom of the UK to negotiate own trade agreements; politically, it would be hard to sell to the die-hard Brexiteers.

Second, industry has stressed that the flow of goods and investments goes hand in hand with the flow of workers. If a manufacturer sells to an UK client, it must have the ability to dispatch experts, for example for set-up and training. Foreign workers employed in industrial companies in the UK must keep their full rights, and it must be possible for companies to hire experts from abroad if Britain is to remain an attractive location for investment. This might be achievable, since the UK also has an interest in protecting the rights of their citizens living in the EU.

Third, technical differences between the EU and the UK have to be avoided, since they pose a barrier to trade. There is a real danger that, once both areas are free to develop their own rules, systems will slowly drift apart. Both sides have committed to close cooperation, but this point will be tricky. It takes optimism to believe that standards, their application in practice and certification schemes will remain comparable when cooperation is only voluntary.

VDMA has constantly reminded EU and UK officials of these issues and demanded that the mechanical engineering industry is comprehensively included in any agreement on future EU-UK relations. At the VDMA evening reception at Hannover Messe on Monday, April 23, 2018, Michel Barnier will give more insights into the possible outcome of the Brexit negotiations for the mechanical engineering industry.

What is next?

It would be unfair to say that no progress has been made since the UK decided to leave the European Union on June 23, 2016. At the end of last year, the EU and the UK agreed on principal terms for the exit agreement, including an exit bill and the protection of citizens' rights, but without a real solution for the Irish border problem. The two sides have also basically agreed on a transition period until end of 2020. During that time, the UK would stay within the Customs union, and keep access to the Single Market.

However, the UK will drop out of the EU on March 29, 2019. A bulletproof exit agreement - not leaving out the tough problems - will have to be in place by then.

Since all 27 member states and the UK have to ratify these agreements, both sides hope to finalize the texts by October 2018. In other words: Europe has little more than six months to sort all the unanswered questions regarding Brexit.

With so much uncertainty in the Brexit negotiations, one thing is certain: it will not be a piece of cake.

Further Information

VDMA European Office   |   VDMA position paper (PDF)   |   The Spectator: "Theresa May’s Brexit speech: full text"   |   European Commission: Slide "Future relationship" (PDF)   |   Council of the European Union: "Draft guidelines" (PDF)   |   VDMAimpulse 04-2017: "How hard will Brexit be?"   |   VDMAimpulse 02-2018: "Trade policy reaches a crossroads"   |   VDMAimpulse 02-2018: "Moscow is ready to use protectionism" 

 

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Contact
Holger Kunze, Director VDMA European Office.
Eike Radszuhn, VDMA European Office.