How the UK can seize the initiative for the second stage of Brexit talks

How the UK can seize the initiative for the second stage of Brexit talks

Amidst the melange of awkward press conferences, dinner leaks and endless utterances of the phrase “sufficient progress”, not to mention the ongoing shenanigans over the EU Withdrawal Bill, it is easy to forget that the purpose of the Brexit negotiations is not to jump through procedural hoops conjured up by the EU, but in fact to secure the best possible outcome for the UK. To this end, it is imperative that the UK starts thinking ahead in broad strategic terms about how it approaches the substantive part of the negotiations – on the future trading relationship with the EU.

Last month I wrote about what Britain can do to try to regain the initiative in the first phase of talks, with the EU refusing to relent on its financial demands despite the concessions offered in Theresa May’s Florence Speech. The UK has ended up on the back foot in the first phase of the negotiations largely as a result of falling into procedural traps set by the EU. The long-term objective for the UK now should be to ensure that it avoids any further traps which could leave it hamstrung in the principal phase of the talks.

By forcing the UK to agree to the phasing of the talks, the EU has been able to neutralise Britain’s main point of leverage in the talks – money – and construct the narrative that it is the UK’s fault that talks have not made faster progress, rather than coming under pressure over their own rigid and inflexible approach to sequencing which is the ultimate cause of the delays.

Sir Ivan Rogers has not had much to say about Brexit since resigning as the UK’s Permanent Representative to the EU besides grumbling about the fact that Brexit is taking place at all, but he was right to say recently that Britain made a major strategic error by triggering Article 50 before agreeing the sequencing of the negotiations with the EU first.

This allowed the EU to set the terms of the negotiations by enshrining the phasing of talks in official negotiating guidelines, which, once approved by the European Council and Commission, have proved impossible for the UK to challenge. The UK has thus been negotiating entirely on the EU’s terms, while the EU has been happy to sit back and make references to ticking clocks, rather than negotiating with the UK in good faith.

Now that the European Council has announced that it will begin “internal preparatory discussions” on how it will approach the trade and transition negotiations, this makes the next few weeks a critical window of opportunity for the UK. Crucially, Council President Donald Tusk indicated that the EU would take into account anything put forward by the UK while drawing up its guidelines.

As with the first set of EU negotiating guidelines, these documents will be drawn up over a period of a few weeks by diplomats shuffling between Brussels and European capitals. Backroom deals and compromises will be hammered out behind closed doors before a draft set of guidelines is released, most likely ahead of the December European Council summit.

A further round of horse-trading will follow before the finished guidelines are presented at the European Council summit to receive formal endorsement from the EU27 leaders. There are unlikely to be major changes between the draft and the finished version, although Germany and France have reportedly been responsible for a hardening of the EU’s stance at this stage in the past. But if the UK wants to have any chance of avoiding being trapped again by new EU constraints in the main phase of the talks, this means it must set out its position as a matter of urgency before the EU’s position gets ‘locked in’.

While the UK cannot expect any favours from the EU, it is essential that the UK stakes its claim now for the terms on which it wishes to be negotiating over trade. Waiting until after the EU has approved its official negotiating guidelines will be too late. As the UK has found out to its detriment in the negotiations so far, once a mandate has worked its way through the EU’s legalistic structures and received formal approval, the EU is heavily resistant to any flexibility or compromise.

Fundamentally, the UK must make it clear as soon as possible what ‘end state’ it is seeking from the trade negotiations. While Theresa May’s Lancaster House Speech did delineate a number of key red lines, there is still sufficient scope within those red lines for very different kinds of Brexit, some of which would barely deliver it in any meaningful way at all.

This is a dispute which continues to divide the Cabinet, although recent reports that Michael Gove, Liam Fox and Jeremy Hunt (who himself backed Remain but has since embraced Leave after the referendum), have joined the Prime Minister’s Brexit ‘war cabinet’ – the sub-committee within the Cabinet making key strategic decisions on Brexit – is an encouraging sign that the Cabinet is starting to pull in the same direction towards the right Brexit end state.

The Sun recently reported that May has elected to put off the full Cabinet meeting where a common Government position on the end state will be thrashed out until the Spring. But given where the negotiations are at the moment, there would be a clear advantage to having this discussion significantly sooner and to get all Cabinet ministers singing from the same hymn sheet at the earliest opportunity.

The internal Cabinet dispute is essentially a microcosm of the broader argument over what Brexit should look like (leaving aside the noisy but ultimately irrelevant factions who are continuing to push for EEA membership or fight the battles of the referendum almost 18 months on.)

Neo-Remainers, or wet Brexiteers, have learned to talk the language of a clean Brexit – formally outside the Single Market and Customs Union – but behind the scenes are trying to model the UK’s future relationship with the EU as closely as possible on EEA membership. Their strategy is to change the minimum amount necessary to pay lip service to what they perceive to be the key Brexiteer red lines, such as ending free movement and the direct jurisdiction of the European Court of Justice, while in fact changing very little at all. By nominally satisfying these criteria they hope to be able to tick the box of ‘respecting the result’ of the referendum while effectively negating Brexit in all but name.

This is the ‘Norway minus’ or ‘EEA lite’ option, which has the backing of the pro-Remain establishment, still smarting from the referendum result but increasingly piling pressure on the Government, as well as the bulk of the UK’s economic and political cognoscenti, for whom the convoluted mass of EU regulations and technicalities is a benign curiosity or even a source of livelihood, rather than a handbrake on economic activity and constraint on civil liberties.

This approach is deeply flawed for a wide range of reasons. It would not respect the referendum result on anything more than a superficial level. Leaving the single market in name, but continuing to apply the vast majority of the body of EU single market law, the acquis communautaire, under the jurisdiction of the EFTA Court – which follows of the lead of the ECJ – or something very closely modelled on it, would clearly undermine the vote to take back control of our laws – and indeed the purpose of doing so.

Moreover, it is precisely the kind of ‘cherry-picking’ which the EU has clearly and repeatedly stated it will not tolerate. It presumes that the EU will be quite content to carve out a small number of exemptions for the UK from the principles of the Single Market while leaving all the other arrangements unchanged. If there is one thing the EU – and Germany in particular – has been unambiguous that it will not entertain any compromise on, it is the inseparability of the ‘Four Freedoms’, including the free movement of people.

Arch-Remain academic Jonathan Portes’ recent paper is the latest in a string of wishful thinking offerings on this issue, although he is at least explicit that his proposal to “modify” free movement is for the purpose of keeping the UK directly in the Single Market. Ultimately, this is just another symptom of the neo-Remain mindset that Brexit is a process that can effectively be negated by ticking a few boxes to keep Brexiteers quiet while preserving the status quo in all but a few headline areas. Suffice to say, this will not wash.

In contrast, the approach espoused by key Leave supporters, including Boris Johnson and Michael Gove, is a ‘Canada plus’ style deal, where the UK makes a clean legal break from the EU and seeks a deep and far-reaching trade agreement with the EU on level terms as an independent trading partner, rather than as a client state trapped in the outer orbit of the EU.

There may be some specific areas where ongoing regulatory harmonisation with the EU is in the UK’s interests, but this must be the exception, not the norm. In the vast majority of areas, the UK should seek free trade with the EU on the basis of equivalence, where both sides agree to the mutual recognition of equivalence of regulatory outcomes, rather than by mirroring EU regulations word for word, as harmonisation involves. And in many other areas, the greatest net benefits to the UK may come from diverging altogether.

Indeed, Theresa May referenced these three different approaches – divergence, equivalence, and harmonisation – in a somewhat overlooked section of the Florence Speech, acknowledging that the UK would need a mixture of all three [emphasis added]:

Now in any trading relationship, both sides have to agree on a set of rules which govern how each side behaves. So we will need to discuss with our European partners new ways of managing our interdependence and our differences, in the context of our shared values.

There will be areas of policy and regulation which are outside the scope of our trade and economic relations where this should be straightforward.

There will be areas which do affect our economic relations where we and our European friends may have different goals; or where we share the same goals but want to achieve them through different means.

And there will be areas where we want to achieve the same goals in the same ways, because it makes sense for our economies.

And because rights and obligations must be held in balance, the decisions we both take will have consequences for the UK’s access to European markets and vice versa.

The last point is important – the UK and the EU will not have access to each others’ markets on exactly the same terms as now, but this is not something the EU is offering in any case. And it is also important to remember what the baseline is – the EU-Canada deal removes 99% of tariffs on goods, despite being built on equivalence agreements, not harmonisation.

May is right to say that the UK should be aiming for better than the Canada deal, but it is the basic benchmark from which the UK should be starting. Barnier’s assertions that no deal is available other than Canada or Norway is negotiating bluster, not not a serious position. This is tantamount to the EU saying it has no desire to ever sign a more comprehensive deal than CETA with any country at any point in the future, which is transparently nonsense.

So what would the ‘plus’ in Canada plus involve? Services, particularly financial services, are a key component of UK-EU trade, but this is not a one-way street. The eurozone would be at risk of a major systemic shock if it abruptly lost access to the City of London, making a comprehensive deal here strongly in both sides’ mutual interests. Notwithstanding the pretentions of Paris and Frankfurt to poach business from the UK, they simply do not have the capacity to compete with, let alone replace, the City. London is Europe’s banker, whether the EU likes it or not.

Other ‘pluses’ should be sought in areas such as aviation, security, ongoing science and research cooperation – the UK is streets ahead of the EU in terms of top universities – and other economic sectors the government identifies where a deal is likely to be of the most benefit. However, enhanced defence cooperation which threatens to undermine NATO should be approached with extreme caution, as the EU continues to ratchet up its permanent military structures.

The key benefit of this approach in terms of the negotiations themselves is that it tips the balance of leverage substantially in the UK’s favour. By starting from a perfectly viable, if non-optimal, baseline, additional agreements can then be negotiated on the basis of genuine mutual interest – as trade negotiations should indeed be. This approach would also fall more closely under the remit of the Commission’s trade officials, headed by the diligent Cecilia Malmström, who would be far more pragmatic and less ideologically hamstrung than the political operators with whom the UK has largely been dealing so far.

Conversely, the ‘Norway minus’ approach would continue to see the UK in the role of supplicant to the EU, pressured into making concession after concession as it desperately tried to cling onto scraps of EU membership, and in the face of fierce resistance from the EU to any abrogation of its ideological tenets. We have seen ample evidence in the negotiations so far that this will not result in a favourable outcome for the UK.

EFTA-style jurisdiction would be demanded by the EU, leading to further protracted battles over legal matters between both sides. By contrast, the Canada deal is adjudicated by measures such as arbitration panels and other mechanisms which do not undermine the legal integrity of either side.

Ongoing adherence to vast swathes of EU law in perpetuity would have additional negative impacts on the UK, besides the more fundamental issues of legal and democratic control. As US Commerce Secretary Wilbur Ross warned in London earlier in the month, if the UK is too closely bound to EU rules after Brexit, it will significantly hamper the UK’s ability to conduct deep and far-reaching trade deals with new partners around the globe.

This point is of crucial importance and was also discussed extensively in the recent Legatum Institute report, as set out for BrexitCentral here by Shanker Singham.

Wilbur Ross accused the EU of “talking a good job on free trade” but in fact practising “extreme protectionism” and slammed the EU’s rules towards GM foods and those infamous chlorinated chickens as “not based on science”. He was right on both counts.

But his further comments got closer to the heart of the EU’s core problem with trade, when he called out the EU’s obsession with trying to force its own regulatory system on other countries as the price of trade, rather than accepting an open global system based on countries mutually recognising each other’s different, but nonetheless acceptable, regulatory standards.

The chlorinated chicken row sums up this issue in a microcosm. When the US asks that other countries accept imports of US chicken as part of a free trade deal, it is not demanding that other countries all start producing chlorinated chicken too, only that they accept that it is also a valid method of processing chicken which can sit alongside their own methods of production, with any differences clearly labelled for consumers. Indeed, it is perfectly acceptable to 300 million consumers in one of the most litigious countries in the world.

By contrast, the EU’s preferred approach is to insist that their trading partners abandon their existing standards and accept the EU’s word-for-word instead. Its hostility to legislative competition and preference for harmonisation instead is one of the key factors behind the EU’s decline compared to the rest of the world, which will only exacerbate as the Commission continues to demand control over more and more aspects of European life (as it is doing with its current attempts to imminently create an ‘EU Pillar of Social Rights’).

The EU jealously guards its system of regulatory protectionism as it enables it to suppress competition and get away with inefficient economic practices rather than having to keep pace with innovations elsewhere – but ultimately it is the ordinary EU consumer who is the loser.

Barnier is keen to keep the UK pegged down to the same level after Brexit, with his frequent remarks that any UK-EU deal must prevent Britain from engaging in any so-called “regulatory dumping” after it leaves. Clearly the message has not got across yet, so it is time the UK sent the EU the message loud and clear. The UK is leaving. This is not the EU’s choice to make any more.

Leaving behind the EU’s tangled, myopic web of prosperity-crushing inefficiencies is one of the key advantages of Brexit, and yet this is precisely the outcome that neo-Remainers are continuining to push for in the UK. This is why it is so important that the Government, led by Theresa May, takes the active decision to make the clean break from Brussels which is required and starts championing the benefits of doing so.

It will be good for the public perception of Brexit, it will be good for the negotiations and, most importantly, it will be good for the UK. The clock is ticking. There is no time to lose.