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February 04, 2020

A glimmer of hope on EU/UK trade

The EU’s draft council decision on the upcoming trade talks with the UK runs to 33 pages. Boris Johnson's submission to the House of Commons, setting out his priorities, is a scant two pages long. 

If you read between the lines, you may find signs that a compromise may be possible. For starters, the EU plans to proceed on the basis of Art. 218(3) and (4). This means that these negotiations will take place at EU level only. It will not a mixed-competence agreement like the Canadian deal, which would require ratification by national parliaments. No single member state will have a veto on the UK deal. 

The EU draft is also relative light on specific requests for dynamic alignment, the principle that the UK formally mirrors EU law in its domestic legislation. But here the devil is in the details. 

If this trade deal comes to a conclusion, we expect the UK’s principled rejection of dynamic alignment to prevail. But alignment provisions are not binary. There are shades between dynamic alignment and regulatory autonomy. As always, there is some scope for smoke-and-mirrors compromises, on both sides. If Johnson and Michel Barnier want to compromise, they can. If there is a deal, Barnier will be able to say that the EU has maintained a level playing field, while Johnson will emphasise the lack of dynamic alignment with EU rules.

But there are many formidable obstacles. The EU continues to insist on full dynamic alignment on state-aid rules, where it suggests an independent enforcement authority that works in close co-operation with the Commission. Johnson retorted yesterday that the UK has historically had fewer state-aid cases than either Germany or France. We think this is the EU trying to protect itself against a future Labour government. We also believe that some of the new technologies, like artificial intelligence, could give rise to complex state-aid cases. For example, we noted that VW wants to transform itself into an AI-based software company. Software will be one of the key value-adding parts of the next generation of cars. We assume that the derelict state of the European car industry will influence the future direction of EU competition policy. The UK, however, will set different priorities. 

We think that the most effective way for the EU to protect its interests is through remedies, in particular through fines set by an independent arbitration body, and the right to early termination. The EU is right, of course, that only the ECJ can adjudicate on EU law. We don’t think this fact is disputed.  

We don't see fishing necessarily as a stumbling block. The UK clearly has overcapacity. We have been told that the UK is looking at a system of licensing, rather than granting access rights and quotas as the EU wants. The big problem with fishing is the timetable: the EU is seeking an agreement by July 1.

Experience has taught us to be careful with any predictions of future negotiating outcomes. Besides the usual issues that arise in trade agreements, this one is politically more loaded. We noted yesterday that the anger and insanity that have accompanied the Brexit process were back in action, with the fanboys of both sides starting to abuse each other. The post-election moderation has ended.

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