The UK reconfirms its demand for regulatory divergence from the EU.

Introduction

Following the adoption of the EU negotiating positions, the UK Government released yesterday its own "Approach to the Future Relationship with the EU" (UK Mandate). The UK Government wants a relatively standard Free Trade Agreement (FTA) arrangement with the EU, in addition to continuing close cooperation on such issues as security, criminal law enforcement, and action against climate change. The UK proposes:

• to eliminate virtually all tariff barriers with the EU,
• to reduce discriminatory restrictions on the cross-border provision of services,
• to obtain ambitious reciprocal levels of access to public procurement markets, and
• to ensure robust provisions for temporary entry of workers.

The UK Government wants to treat this negotiation as one that the EU would conduct with any other third country potential trade partner, substantially modelling the parameters of the future EU-UK relationship on that of the Canada-EU in the CETA Free Trade Agreement. This differs significantly from the EU perspective, which does not view the UK as "any other FTA partner," but rather as a large and integrated market on its doorstep, requiring a higher level of alignment with EU rules to ensure fair competition. The EU repeats this was the commitment given by the UK Government in the Political Declaration attached to the Withdrawal Agreement.

The EU and UK on Different Tracks

The UK Government approach has a number of implications for UK-based businesses seeking to continue economic relations with the EU, and vice versa.

First, even if the EU were to assent to the UK proposal, this will represent a significant regression from the existing open economic exchanges between the UK and the EU. Goods crossing between the two spheres will be subject to regulatory checks and verification of mutual tariffs and rules of origin, likely resulting in disruption to integrated value chains. Cross-border provision of services will revert and remain limited to "third party" levels of access, making it difficult for services suppliers to operate in both the UK and EU without dual qualification. Labour mobility will be restricted from the current freedom of movement levels to the Temporary Entry provisions typical of FTAs.

Second, the UK Mandate is so distant from the EU position that it increases the chance of a breakdown in EU-UK negotiations, calling into doubt the parties' ability to conclude even a Canada-style FTA by the end of 2020. The UK Mandate provides for a "check in" by June 2020 to determine whether or not sufficient progress has been made. This signals that the UK may walk away from negotiations to prepare for a "no deal" Brexit, perhaps accompanied by separate agreements on less controversial issues. This is unlikely to be accepted by the EU, which will resist any effort to 'cherry-pick' FTA elements in the absence of a commitment on level playing field issues. Furthermore, the UK Mandate reiterates the Government’s position that the transition period currently ongoing until the end of December will not be extended.

Other points of disagreement include the UK Mandate's opposition to any role for the Court of Justice of the European Union, and its refusal to commit to continued adherence to the European Convention on Human Rights. The UK Mandate makes no mention of Northern Ireland and the presentation to Parliament reiterates ambivalence about fully respecting the Northern Ireland Protocol of the Withdrawal Agreement. Such a positioning could have a wider impact for the UK. Notably, the US Congress has made clear that it would not be ready to accept a UK-US trade deal if Brexit adversely affects the Good Friday Agreement.

A Focus on the Domestic Audience? 

While a certain amount of posturing and brinksmanship is typical at the outset of all trade negotiations, the opening positions of the parties to the UK-EU negotiations seem focused on domestic audiences. 

The UK Government may be positioning itself to tout a no-deal outcome as "freedom from EU regulatory shackles" and the result of an unreasonable EU. Should the negotiations fail, falling back on WTO-levels of EU market access would be the price for the UK's regulatory independence. This approach is consistent with the positioning that led to Brexit in the first place. If the UK Government chooses to begin preparations for a no-deal scenario, emergency legislation may need to be introduced which, for devolved parts of the UK, would have to be enacted locally (e.g. in Scotland).

The narrative set out in the EU Mandate reflects the position the EU consistently has adopted throughout the post-Brexit period: while the EU seeks the closest possible relationship with the UK, it will not do so at the cost of undermining fundamental principles of the functioning of the Single Market.

What Happens Next?

It remains to be seen which of the two parties will offer concessions or whether acceptable compromises can be found. Based on the positions currently set forth by the two sides, the odds of a hard Brexit from the EU trading space are increased.

Multi-track negotiations between the EU and the UK on the basis of these mandates will start next Monday in Brussels. We can expect a sustained pace of negotiations.

The UK Mandate includes a commitment to a public consultation on the economic implications of the future UK-EU relationship with a broad range of stakeholders. However, such consultations are only slated to take place 'in the Spring' – just 2 months before the UK Mandate indicates a fundamental assessment of the negotiations will take place. This leaves little time for effective engagement. Businesses should prepare now for these consultations with a view to having as consequential an input as possible now and during the formal consultation period.

About Steptoe's Brexit Team

Our Brexit team offers our clients a multi-disciplinary approach to advising our clients on the regulatory preparedness for the end of the transition period for the UK withdrawal from the EU. We have extensive experience in advising on trade and investment agreements and policy, as well as in cross-border work in environmental law, competition, employment law, international regulatory compliance, and financial services, including insurance. That experience, and our presence in Brussels, London, and Washington, enables us to provide an analysis of the impact of Brexit and practical strategic and tactical advice to companies in different sectors and areas of law.

Our Brexit team is led by David O'Sullivan, who as EU Ambassador to the United States, oversaw the EU's bilateral relationship with the United States including political, economic, and commercial affairs. It also includes lawyers involved in negotiating recent EU bilateral Free trade agreements: a former senior counsel to Canada in the negotiation of the Canada – European Union Comprehensive Economic and Trade Agreement (CETA), and a former official of the Ministry of Foreign Affairs of Japan engaged in the negotiation, drafting and legal verification of the Japan–EU Economic Partnership Agreement.