European Hopes Dim for a Brexit Trade Pact
23 March 2017 - 10:01AM
Dow Jones News
By Simon Nixon
Theresa May declared that no Brexit deal is better than a bad
deal. It should hardly come as a surprise that many in the European
Union feel the same way.
All sides have been clear that they will go into the two-year
negotiating process, which will begin when the U.K. prime minister
invokes Article 50 of the Lisbon Treaty next week, hoping to secure
an amicable long-term relationship. But senior EU politicians and
officials have become increasingly pessimistic since the start of
the year that a deal can be reached: one top official puts the
chances of a successful outcome at less than 50%.
EU officials are downbeat because they doubt that Mrs. May has
sufficient political capital to make the compromises necessary to
secure an ambitious trade deal. They are aware that there are
powerful voices in the Conservative party who would prefer for the
U.K. to leave the EU without a negotiated deal rather than make
those compromises.
The prime minister's decision to take the U.K. out of both the
EU single market and the customs union means that the U.K. will end
up, from a technical standpoint, even further detached from the EU
than Turkey. That is a difficult starting place from which to
negotiate a deep and comprehensive deal that fulfills Mrs. May's
goal of frictionless trade.
Certainly Mrs. May faces difficult political choices. The reason
she gave for quitting the EU customs union was to enable the U.K.
to strike its own trade deals with third countries.
Yet the deeper and more comprehensive any trade deal with the
EU, the more the U.K.'s hands will be tied in terms of what it can
offer other partners or how far it can adapt its own economic
model.
For example, the EU will demand mechanisms to ensure that
British regulations continue to remain fully equivalent to, if not
compliant with, EU rules. This has been a condition of all past EU
deals granting deep market access, including those with Switzerland
and the European Free Trade Area which includes non-EU countries
such as Norway and Iceland. From the EU's perspective, full
equivalence means fully complying with all changes in EU
regulations either as a result of new laws or European Court of
Justice rulings. That would require the U.K. to comply with rules
over which it had had no say.
Nor are the EU's demands for regulatory equivalence likely to be
limited to product standards. One result of the British
government's clumsy threat to turn itself into a low-tax, lightly
regulated offshore competitor if it doesn't secure a favorable
trade deal is that the EU is now sure to demand assurances on
future U.K. tax and employment policies to protect the bloc against
"social dumping," officials say.
The EU will also insist on "rules of origin" requirements that
are sufficiently tight to ensure that the U.K. cannot turn itself
into a cheap staging post for third-country goods to avoid EU
tariffs to enter the bloc's market.
Meanwhile, the U.K. and the EU will have to agree on a common
arbitration mechanism to adjudicate disputes arising from all these
rules, given that the U.K. has said it would no longer be subject
to the jurisdiction of the European Court of Justice.
Yet the negotiations may never even get this far. Long before
the two sides start talking about trade, there is likely to be a
fight over process.
The U.K. government, conscious of public opinion, wants a
process in which it can declare some quick wins, with political
leaders agreeing on the principles of a deal even if that means
leaving technocrats to fill in the details.
But that is not how the EU, which has vast experience with
negotiating complex international agreements, works. It wants to
stick to standard deal-making practice in which negotiations
proceed chapter by chapter, with officials doing the preparatory
work and leaving the difficult decisions to politicians, and with
nothing agreed until everything is agreed.
On the European Commission's timetable, it could be early next
year before the negotiations even start to discuss the future trade
relationship. That would require Mrs. May to endure months of
potentially difficult headlines before the U.K. glimpsed any
upside.
Crucially, the EU's scope for compromise is far more limited
than is widely appreciated. In this respect, the key institution is
the European Parliament, which the British government has so far
virtually ignored but which must ratify any deal.
The Parliament sees its role as defending the European
perspective, independent of national interests. Its priority will
be to maintain the cohesion of the 27 remaining EU states, ensure a
future level-playing field and guard against any signs of
"cherry-picking" by the U.K.
Ominously for the U.K., the European Parliament will deliver its
own response to Mrs. May's Article 50 letter on April 3, more than
three weeks before EU leaders meet to decide on their response -- a
deliberate attempt both to influence the EU Council's deliberations
and to set its own bar for judging any final deal.
European Parliament leaders point out that any deal is likely to
come up for ratification just weeks before the 2019 parliamentary
elections, further politicizing the process.
Faced with these obstacles, some Brexiters have come to the
conclusion that the cleanest and easiest way forward is for the
U.K. to leave the EU without a free trade deal and default to World
Trade Organization rules. Some in the EU are coming to the same
conclusion.
Write to Simon Nixon at simon.nixon@wsj.com
(END) Dow Jones Newswires
March 22, 2017 18:46 ET (22:46 GMT)
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