The United Kingdom (UK) officially left the European Union (EU) on January 31, 2020, after which the two parties will kick off talks on a new phase of bilateral relations. However, many of the outstanding issues, that are expected to be discussed during the transitional period which will last until the end of 2020, will determine the nature of these relations and whether they will be framed within a cooperation framework leading to a win-win deal, or exit from the transitional phase without a deal.
Many politicians and economists in the UK and the European Union believe that wrapping the transitional phase with a consensual formula that streamlines the future relationship will be in the interest of both parties. But at the same time, they warn that leaving the transitional stage without any form of agreement will harm economic interests in the first place. Additionally, the failure to reach an agreement will also negatively affect cooperation in other areas, such as the security field.
What will happen during the transition?
In practice, the UK is still part the European Union. Despite the tumultuous celebrations held by "Brexiteers", considering January 31 as "Britain's Independence Day" and the restoration of its sovereignty by emancipation from EU legislation, the legislation will remain biding for the duration of the eleven-month transitional period, which ends on December 31, 2020. The UK will remain, during this period, part of the European Single Market and the EU Customs Union. Freedom of trade and movement of individuals will also continue between the two parties without the need for a visa. During this period, the nationals of EU member states will reserve the right to work and reside in the UK. The UK will also have to contribute almost as much to the European Union budget as it did before the Brexit. It will also continue to be able to receive funding from EU programs.
The only effective changes during the transitional period are the UK's exit from the political structures of the EU, namely the European Council and the European Commission. Also, the British representatives in the European Parliament are no longer members in this parliament, and this means that although the UK lost the right to vote in the European Parliament, its legislation will remain binding on it during the transitional period. The European Court of Justice (the highest judicial body of the EU) will also have the final say in any legal dispute, and its rulings will still be able to overturn any ruling by any UK court, including the Supreme Court, throughout the transitional period.
In order to avoid imposing tariffs or restrictions on trade between the UK and the EU, negotiating a trade agreement and the form of future trade relationship are among the top priorities for negotiations between the two sides during the transitional period. In this regard, trade with EU accounts for about half of the UK's total trade at 49 percent in 2018, according to the UK Department for International Trade. Both the EU and the UK have announced that they are pursuing a free trade agreement that spares both sides imposing tariffs or setting trade quotas.
There are other issues that the two sides will have to settle, along with reaching a trade agreement, which are:
By mid-February, the British government should set out a list of its goals and priorities in the negotiations for a future trade agreement with the EU. At the same time, the EU will have to issue a mandate at its ministerial meeting slated for February 25, 2020, giving the European Commission the legal authority to start negotiations with the UK on March 1st.
The negotiations agenda is expected to be busy; something the EU has warned of by indicating that the transitional period may not be sufficient to complete the negotiations and reach agreements that settle all outstanding issues, especially reaching a free trade agreement. The two sides will meet again next June to assess the progress made in their negotiations. The UK will, if it wishes to extend the transitional period, have to submit a request to do so to the EU no later than the end of the same month (June 30th, 2020), but the British government has announced that it will not resort to extending the transitional phase even if it does not reach a free trade agreement with the bloc.
The biggest challenge in negotiating a comprehensive EU-UK trade is reconciling between allowing the UK to take advantage of the European Single Market and the EU Customs Union and ensuring the applicability of European legislation on trade competition on this agreement. These laws particularly relate to ensuring a level playing field and controlling government subsidy for private companies. Through this, the EU aims to ensure European companies have fair competition opportunities with their UK counterparts in any bilateral trade agreement. For example, the EU wants to ensure that if the European Single Market remains open to UK goods without customs tariffs, this will not lead to dumping European markets with UK goods that will be free from the restrictions of European standards and legislation. Otherwise, this means a violation of the principle of level playing field and fair competition.
Areas that the EU insists on applying the legislation related to the principle of a level playing field in the event of reaching a comprehensive trade agreement with the UK, include the following:
The UK will be required in the event that it wants better trade relations with the EU to apply level playing field legislation as widely as possible, but these legislation will effectively limit the freedom of UK trade with other countries, and here lies the dilemma of negotiations.
There are two options on which the application of level playing field legislation would be negotiated: The “non-regression clauses,” which mean that the current standards binding on the two parties are not changed in some areas such as labor rights protection, government subsidy for business, and environmental protection. While the second option is known as "dynamic alignment", which means that any change in European legislation and standards will be matched by a change in UK standards, and vice versa. In the event that the UK, for example, relaxes climate restrictions on car manufacturers, the EU will meet this with more protective measures to ensure fair competition for European companies that are subject to its more stringent standards in this area.
On the other hand, however, both sides will ensure that the transitional period does not end without reaching a comprehensive trade agreement that regulates the relationship between them (although this possibility remains). This is due to the two parties ’realization that each of them represents a vital economic sphere of the other, as stipulated in the framed political declaration for the post-Brexit talks, which was agreed upon between the two sides in October 2019.
What if EU-UK negotiations falter?
The two parties will have two possibilities: The first, to extend the transitional period from one to two years at most, provided that the UK submits an extension request before the 30th of June 2020 and that the EU agrees to this extension. But this prospect seems currently unlikely for the UK government, which has announced that it will not resort to an extension even if no agreement is reached by the European side. Although extending the transitional period may provide greater opportunities for both sides to reach a broader range of agreements, it will keep the UK economy in a state uncertainty and instability it has already been experiencing since the referendum on the UK's exit from the EU. It will also harm the popularity of the Conservative British government among its most hardline anti-EU grassroots base favoring Brexit as soon as possible.
The second possibility is to get out of the transitional period without any agreement with the EU, and therefore the trade relationship between the two parties will be subject to the WTO agreement. This, of course, means imposing tariffs on UK exports to the European Single Market, which will lead to an increase in their prices compared to European goods. This will affect the British business and services sectors, particularly the banking sector, but it will also give the UK the freedom to conclude broader trade agreements with non-European countries and search for new markets without being bound by European legislation. It will also significantly affect the dealings of EU member states with London as a global hub for finance and business, which will also negatively harm these countries. In addition, leaving the EU without reaching an agreement will end the free movement of individuals and residence for citizens of both sides, and will minimize bilateral security cooperation.
The UK and EU realize that reaching an agreement that regulates trade relations and other pending issues in the post-Brexit era is important for both, but they do not offer access to such agreement as an inevitable option at any price, but rather keep the door open to the possibility of a no-deal Brexit as well.
EPC | 03 Jun 2020
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