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Brexit – Understanding the EU’s negotiating position on Trade By Luis González García

Related Member(s):
Luis González García
Related Practice Area(s):
EU Law, Public and Private International Law

Summary

Shortly after the EU summit in Salzburg the Prime Minister of the UK, Theresa May, said that negotiations on the UK’s exit from the EU were at an “impasse”.[1]  Days later, the UK Foreign Secretary, Jeremy Hunt, suggested that the EU’s position in the negotiation was an uncompromising one and appeared to suggest that the EU wanted to “punish” the UK for leaving the EU. He compared the EU to the Soviet Union.[2]

“The ability to see the situation as the other side sees it is arguably one of the most important skills in a negotiation.”

The ability to see the situation as the other side sees it is arguably one of the most important skills in a negotiation. In trade negotiations, and this includes Brexit, a small mistake in diagnosing a negotiating situation is likely to prolong a negotiation and could make it more difficult to come to a solution that meets the legitimate interests of both sides. Understanding the multiple interests and the particular situation of the EU could also help people in the UK to manage their expectations on what can realistically be achieved in the Brexit negotiations.

The “impasse” in the negotiations is hardly surprising from a trade negotiation perspective. Negotiating trade is hard and time-consuming. This is irrespective of who is negotiating or the scope of the negotiation. Even negotiating the outline of the objectives of a future trade relationship is hard in itself. Negotiations become even more difficult when they involve the EU. This is partially due to the EU’s negotiating style and structure which is an aggravating factor in reaching a quick and practical solution. An additional factor to bear in mind is the EU’s approach to trade negotiations. The EU’s approach to trade with third countries is dependent on geopolitical factors. If the third country is a European neighbour (such as the EEA countries, Switzerland, and Ukraine) the only offer on the table is the integrationist model (alignment and approximation to EU law) because the EU’s primary aim is to maintain a level playing field. It is not and has never been a relationship between equals. If the third country is outside the European sphere (such as Canada, Mexico, Japan) then the EU’s approach is a straightforward elimination of barriers to trade (liberalisation of goods and services) accompanied by semi-loose provisions on regulatory cooperation. Given that the harmonisation and convergence of rules to achieve a level playing field is not the ultimate aim, cooperation between the EU and the third country is, at least in paper, between equals. However, the price is high. It provides the third country with limited access to the Single Market and countless trade frictions at the border. The EU, however, has never offered a liberalisation model to a European neighbour, not even Turkey.  It is very doubtful a liberalisation model will ever be offered by the EU to the UK.

More importantly, none of the EU approaches to trade (integration or liberalisation models) with third countries obviate the need for some sort of customs and safety controls or potential trade restrictions. Not even a customs union with the EU.  In other words, there is no frictionless trade with the EU unless the third country becomes a member of the EU Single Market and Customs Union. In other words, no third country could ever have the same benefits of the Single Market which member states enjoy. If they did, the EU would see it as attempt to undermine the Single Market. Rather than a deliberate attempt to punish a third state this is simply the way the EU approaches trade with the world.

Trade negotiations are never easy

The apparent lack of progress on the shape of the future trade relationship between the EU and the UK is not surprising from a trade negotiation perspective.  Negotiating trade agreements is in itself a hard, complex and time consuming affair. This is regardless of whether the countries involved in the negotiation share the same values and freedoms, the same regulations, common food and safety standards and/or whether their economies complement each other. Trade negotiations are hard because trade negotiators seek to obtain market access in the other side’s market while trying to protect their domestic industries. This inevitably creates a clash of interests with a political dimension where not everyone wins. Moreover, states — especially those with a stronger bargaining power — will fight to preserve and often attempt to expand their policy space while trying to limit the policy space of the other side. As a trade negotiator there is no fun and certainly no rush in accepting the other side’s offensive interest when you know it could potentially lead to the displacement of domestic production, would result in an increase in trade costs or could potentially undermine your country’s domestic policies.

There is also the feeling by the weaker side of not being treated fairly by the stronger side. Given that no two countries have the same economic power in trade negotiations, one side is likely to push harder for its offensive interests and give back less in return. This means that the weaker side is likely to feel that it has not been treated fairly by the other side. To determine what is fair often requires a complex exercise of understanding each other’s point of view and a willingness to compromise. This requires time.

Negotiations are also complex because it is often difficult to deal with situations when one side thinks the other side is using positional pressure tactics. Technical, political and diplomatic intervention is often required to recognise and fight bargaining tactics. This results political and diplomatic exhaustion which could erode the friendly relationship between both sides.

Negotiations are particularly hard in liberal democracies where internal political pressure can force a government to change course during the negotiation. Opponents of the agreement could potentially block ratification, which for example happened to the TPP in the United States.

Another aggravating factor which makes a negotiation even harder is the lack of common objectives for the future trade relationship between the trading partners. This was the case in the recent renegotiation of the North American Free Trade Agreement (NAFTA) between Mexico, the United States and Canada. The US position was to reduce its trade deficit while Canada and Mexico wanted more market integration. Here, none of the EU27 want the UK to leave the EU. For the EU and the EU27 the UK exit of the EU is a “tragic” moment for the European project.[3] This means that the member states are not rushing to offer concessions to the UK. In addition to that, there is the Irish border issue which would require a solution that meets the political sensitivities of both sides.

The EU’s negotiating style

According to some trade negotiators from third countries, EU negotiators often take a relentless, dominant and uncompromising approach. Although professional and cordial, they often display a take-it-or-leave-it approach to negotiations and can even be reluctant to explain the reasons behind their positions. In addition to that, the sequence of negotiations often results in a perception that the EU is in full control of the negotiation. Unsurprisingly, trade negotiators of third countries often get extremely frustrated because this style leaves a sense of being treated unfairly by the EU.

The EU’s style may be attributed to structural, cultural and personality factors. Let us not forget that EU trade negotiators always negotiate from a position of strength. The EU prides itself for being the world’s leading host and source of foreign direct investment and the world’s first exporter and first importer of goods and services. It sees itself as a “market leader” and an economic powerhouse with the highest democratic and liberal values in the world. When negotiating market access with third countries, EU negotiators are well aware that they are offering preferential access to a lucrative market of more than 500 million consumers with a high level of income. This gives the EU a strong bargaining power over most countries. On top of that, EU negotiators arrive at the negotiating table with the confidence that the Single Market project is a success story. It should not come as a surprise that the EU in its negotiations wants to export the rules of the Single Market to the world.

Moreover, the EU trade negotiators negotiate under heavy institutional and structural constraints. The Commission’s power to negotiate is controlled by the Council (member states) and the European Parliament. The Commission’s mandate on trade which is approved by the Council tends to be narrow. In addition, the rules of the Single Market, the vast web of EU trade agreements which all follow the same model, inevitably limit the scope of what EU negotiators can and are willing to offer to third countries. In addition to that,  the difficulties in maintaining the delicate unity amongst the member states on any topic gives little incentive to EU trade negotiators to “think outside the box” when negotiating with third countries. EU negotiators are also very mindful that any trade concession or change to its trade model may undermine the EU’s negotiating position in other forums or undermine the Single Market and Pan-European rules and principles. This lack of flexibility of EU trade negotiators is also owed to their primary need to protect the integrity of the Single Market and the EU budget (mainly the need to protect EU subsidies). Their behaviour is influenced to a great extent by these factors.

The EU’s approach to trade

The EU’s approach to international trade with third countries is dependent on geopolitical factors. It follows two distinct approaches: (1) the integration model which it uses in its trade relationship with European countries such as the EEA countries, Switzerland, and Ukraine; and (2) the liberalisation model which is used in its trade relationship with non-European countries.  In the UK the latter is often called the “Canada-style” trade model. Both models are similar in the sense that they offer reciprocal commitments on market access through the elimination of tariffs and non-tariff barriers to trade. The difference between the two models is, however, significant. The integration model applies the concept of dynamic regulatory approximation which means that the third country must ensure that its domestic law reflects the development of EU law in trade-related areas such as technical regulations, sanitary and phytosanitary measures, geographical indications, cross-border supply of services, e-commerce, government procurement, competition and state aid, and even labour and environmental standards.

In some instances the integration model offers a high level of participation in the Single Market with most of the benefits of full membership of the EU (EEA and Switzerland). The integration model is, however, only being offered to European neighbours. The high level of economic integration requires a high degree of convergence and harmonisation of rules and standards (European standards). From the EU perspective, a high level of participation in the Single Market requires unified legal rules (derived from EU rules), strong supervision and enforcement (by EU agencies or joint committees) to avoid divergences. The purpose of this ecosystem of regulations is to ensure a level playing field with the member states. The EU believes that this also applies to mutual recognition in financial services where the centre of gravity of financial activity would be located in a major economy in Europe such as the UK. Such mutual recognition arrangements can only be acceptable if strong legal commitments are in place to ensure convergence by the third country.

Not all integration agreements provide the same level of participation in the EU Single Market. In the case of the Ukraine and Switzerland the level of participation is partial yet both must ensure full alignment to that of the EU acquis on the relevant economic-related area. From the EU perspective, a high level of economic integration (i.e. free movement of goods) can only be achieved if it is accompanied by free movement of people. According to the EU, these two freedoms are indivisible. This means that restrictions on free movement of persons results in restrictions on cross-border trade.  In the EEA area, EEA states fully apply the entire EU acquis related to the four freedoms in order for the EEA states to fully participate in the Internal Market.

The Swiss model although integrationist, follows a unique path. Switzerland does not dynamically integrate EU acquis. The sectoral agreements follow a mutual recognition or equivalence system. Switzerland, however, is, de facto and often on a voluntary basis, adopting EU acquis to ensure access to the EU Single Market. The EU considers the current trade arrangements with Switzerland as unsatisfactory and that it should be reformed.[4] For this reason the EU is highly unlikely to offer this model to the UK.

The customs union with Turkey (only on industrial goods) forms part of a wider integrationist arrangement between the two sides. Under the trade arrangement Turkey has committed to align to EU’s customs tariffs and rules, commercial policy, competition policy, intellectual property rights, as well as to the EU’s regulations covered by the Union Customs Code. In addition to the Customs Union with Turkey, there are four additional trade preferential agreements between the EU and Turkey including one on fishery and agricultural goods. The existence of these agreements and the alignment to EU acquis does not mean there are no trade barriers between the EU and Turkey. Moreover, the EU has criticised Turkey for imposing restrictions to products from third countries and for not updating its policies on recent EU trade policy developments. This shows that the customs union model does not avoid the existence of trade disputes between the two sides.

The customs union model, on its own, offers little benefit to economic operators in the UK because it only removes the obligation to pay customs duties and show proof of origin of goods. Proof of free circulation of goods would still be required at the customs authority of import. Given that a customs union does not extend to safety and security or other regulatory controls, other customs and border controls will remain in place such as checks on the customs value of goods, VAT, risk based controls and security and safety controls of certain animals, fruits, vegetables and industrial goods[5].  As a result, a customs union with the EU does not, on its own, avoid all controls at the border unless it forms part of a broader arrangement of deeper integration.

None of these integration trade models are relationships between equals. The burden of convergence is on the third country, not the EU.

The second model is the liberalisation approach and applies to third countries outside the European sphere of influence (such as Canada, Mexico, and Japan). This model is also referred to as the “FTA” model which is aimed at the elimination of barriers to trade (liberalisation of goods and services) and cooperation on economic regulatory matters. This trading relationship is, at least in paper, between equals. However, the price to pay is high. Access to the Single Market is restricted. Perhaps the most interesting fact in the Brexit discussion is that the EU has never offered a liberalisation model to a European neighbour and it is doubtful it will offer one to the UK. The reason for this is that the FTA model does not ensure the level playing field the EU seeks to obtain from the UK.  Moreover, the FTA model is unlikely to reduce, let alone guarantee, frictionless trade between the EU and the UK because operators will need to comply with rules of origin, customs declarations and other technical and safety controls increasing trade costs and disruptions.  This aspect is particularly important since the EU and the UK have committed to avoid physical customs controls at the border between Ireland and Northern Ireland.

With regards to its negotiations with the UK, what appears to be clear is that along with a customs union or a Canada-style model, the EU will seek a strong mechanism to ensure convergence with EU trade-related areas such as competition and state aid, intellectual property and safeguards to prevent unfair competitive advantages through tax, labour, environmental and regulatory measures and practices.  An ad hoc model which does not ensure a level playing field in these areas is highly unlikely to be accepted by the EU.

To conclude, it seems that any attempt to pursue a liberalisation approach which is not aimed at maintaining a level playing field would be an inefficient way of negotiating with the EU. From an EU perspective, the challenge of maintaining a high level of mutual market access (both goods and services) and a minimum level of disruption can only be achieved by maintaining a common “ecosystem” of regulations (a common set of regulations and a strong supervisory regime). The dilemma for the UK is that in reality this common ecosystem implies a one-way street where the UK would have to converge and align to EU acquis and the relationship would not be between equals.  This then begs the question of whether any of the current EU models can offer an effective and fair system of managing divergence, maintaining high levels of access to both markets, keeping disruption at the minimum and where the UK will be treated as an equal. From an EU perspective, there is only one model which can provide such guarantees. And it is called membership of the EU.

 

[1] New York Times, “Brexit Talks at ‘Impasse,’ Theresa May Says, After a Rancorous Summit”, 21 September 2018. https://www.nytimes.com/2018/09/21/world/europe/eu-theresa-may-brexit-salzburg.html

[2] Jeremy Hunt Speech at Tory Conservative Party, 30 September 2018, https://www.conservativehome.com/parliament/2018/09/never-mistake-british-politeness-for-british-weakness-hunts-conference-speech-full-text.html

[3] BBC, “Brexit: UK will soon regret leaving the EU, argues Junker”, 13 September 2017, available at  https://www.bbc.co.uk/news/uk-politics-41252653

[4] Commission Staff Working Document on Implementing Trade Agreements 2017 at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52017SC0364&from=en

[5] EU slides on customs controls, dated 22 May 2018 available at https://ec.europa.eu/commission/sites/beta-political/files/customs_controls_0.pdf