Chapter 4
IN THIS CHAPTER
Introducing the political declaration regarding future UK–EU relations
Outlining the plan for future trade
Aiming for regulatory cooperation between the UK and the EU
Looking at the vision for customs arrangements
Agreeing on the movement of people between the EU and the UK
Setting the scene for post-Brexit negotiations
If you set foot in the United Kingdom (UK) at any point during the 1980s and 1990s, you’ll be well familiar with the theme tune from Neighbours, the Australian soap opera that had Brits hooked when it first aired on the BBC in 1986. “Neighbors,” the annoyingly catchy tune began, “everybody needs good neighbors… .” (The theme tune’s still the same, by the way, even though the show was long ago relegated from the Beeb to Channel 5.)
And even though many Brits actively avoid making eye contact with their real-life neighbors, let alone bother to learn their names, the sentiment still means something. Everybody needs good neighbors, don’t they?
And so I turn to the UK’s neighbors on the continent, and the future (post-Brexit) relationship between the UK and the European Union (EU), as outlined in the joint political declaration released in November 2018.
Will “good neighbors become good friends,” as the theme tune goes, or will there be passive-aggressive arguments over whose trash can is blocking whose driveway? Read on to find out.
November 2018 was a key point in the UK–EU negotiations, because the final draft withdrawal agreement (see Chapter 3) and political declaration on the future relationship were both released. Together, these documents gave everyone a much clearer idea of how Brexit — and life after Brexit — would play out. Most of the media attention focused on the withdrawal agreement, but the political declaration shouldn’t be ignored.
The withdrawal agreement focuses on the exit process, but the political declaration on future relations (full title: “Political declaration setting out the framework for the future relationship between the European Union and the United Kingdom”) looks beyond Brexit to outline how the two sides plan to work together in the future, after the end of any transition period (see Chapter 3).
If it’s not legally binding, what’s the point of the declaration? For one thing, it sets out a goal of continued close cooperation between the UK and the EU, establishing an “ambitious, broad, deep, and flexible partnership.” In other words, the EU and the UK intend to remain friends.
Areas covered in the declaration include:
And although both sides have said they want a relationship that’s “as close as possible,” until all post-Brexit negotiations have been completed, we don’t know what that relationship will really look like in practice. That’s why the declaration itself is pretty vague.
But let’s look at what the agreement does say, and what this may mean for the UK. In this chapter, I largely focus on the parts of the declaration that will be of most interest to UK businesses.
Although the UK no longer wants to be part of the EU, it certainly doesn’t want to lose access to the world’s largest single market, which is what the EU is. Likewise, the UK is an important customer for European goods and a critical partner in matters like security.
The word frictionless is often mentioned in relation to future trade between the UK and the EU, but as the saying goes, there’s no such thing as a free lunch. What I mean is, easy trade between the UK and the EU can only be achieved with a certain amount of regulatory compliance between the two.
With the declaration wording as it is, the EU is subtly reminding the UK that the more economic rights it retains, the more EU obligations it’ll need to sign on for. In other words, a free-trade agreement with the European single market will likely come at the price of accepting certain EU laws and product standards. That’s the “level playing field” that the declaration is talking about.
Bottom line? “As close as possible” isn’t the same as “frictionless,” and you can expect trade to be one of the trickier factors in the UK’s future negotiations with the EU.
The UK can certainly trade with the EU under World Trade Organization (WTO) rules. In fact, if the UK leaves the EU without getting parliamentary approval on the withdrawal deal (a “no-deal Brexit”; see Chapter 3), then WTO rules will immediately come into force (because no deal means no transition period).
Trading under WTO rules would have its pluses and minuses for the UK. On the plus side:
But the downsides include the following:
These days, the UK excels as a service-led country, particularly when it comes to financial services; the London financial sector is considered by many as the number-one financial market in the world. Billions of euros of European business loans are financed through London, so this is a key area of negotiations for both parties.
According to the declaration, the future agreement for financial services will be based on a system of “equivalence,” which basically means London will need identical laws and regulations as EU financial sectors.
Both sides aim to have agreement on financial services sewn up by the end of June 2020. Whatever’s agreed may potentially impact the overall UK economy because financial services — indeed, the services sector in general — form a key part of the UK economy.
As a member of the EU, the UK trades with countries around the world under preferential EU free-trade agreements — agreements that the UK will no longer be party to after Brexit (or, more specifically, after the end of any transition period).
This has prompted a mad rush to “roll over” as many of the existing beneficial trade agreements with non-EU countries as possible. However, as of February 2019, just one month before the original Brexit deadline of March 29, 2019, the UK government had only managed to roll over 7 of the 69 existing trade agreements. Those seven agreements were with Switzerland, Chile, Mauritius, Madagascar, Zimbabwe, the Faroe Islands, and the Seychelles.
That leaves a lot of agreements still to sort out with the UK’s non-EU trading partners, including with major countries like Canada, Japan, and Turkey. And that’s on top of negotiating the attractive new trade deals with countries like the United States, as promised during the referendum campaign.
Many of those in favor of Brexit are keen to point out the potentially huge opportunity the UK has to negotiate new free-trade deals with the rest of the world. Of course, the EU is a significant part of the worldwide economy, but it’s dwarfed by the United States and China. And as emerging economies grow stronger, they may further tip the balance of economic power away from the world’s largest single market.
The EU27’s share of global gross domestic product (GDP) will be 9 percent in 2050; China alone will account for 20 percent of global GDP.
The EU27 is the name given to the remaining 27 EU member states, excluding the UK.
PwC’s paper states that emerging economies will need to invest heavily in infrastructure if they’re going to realize their growth potential. This need for emerging economies to invest in infrastructure could lead to significant business opportunities for the UK (and the EU, for that matter).
Central to all future trade talks between the UK and the EU is this idea of a level playing field, meaning similar or identical rules and regulations on either side. So, although the declaration talks about the “regulatory autonomy” of both sides, it also talks about “common principles in the fields of standardization, technical regulations, conformity assessment, accreditation, market surveillance, metrology, and labeling.”
Employment law is a particularly interesting area to watch because the UK’s two main political parties have quite different stances in this area. The Labour Party has been very vocal in relation to future protections for employees, while the Conservative government has, over the last few years, attempted to weaken employee rights (for instance, by giving employers an extended period under which they can make new staff redundant with no reason).
Alignment with the EU may not just affect the UK’s own laws and practices; it may also limit the UK’s ability to strike trade deals with non-EU countries. For example, the UK may be prevented from accepting certain goods from non-EU countries that don’t meet EU standards. Or, if the UK joins a customs union with the EU, as many in the UK Parliament have proposed, it’ll mean the UK charging the same external tariffs as the EU — another factor that may limit the UK’s ability to strike new trade deals.
Closely related to trade and regulatory alignment is the issue of customs arrangements.
Here’s what the declaration has to say about customs:
The economic partnership should ensure no tariffs, fees, charges, or quantitative restrictions across all sectors, with ambitious customs arrangements that, in line with the Parties’ objectives and principles above, build and improve on the single customs territory provided for in the Withdrawal Agreement… .
Sounds good right, no tariffs or other customs barriers to trade? Yet customs arrangements are likely to be a major bone of contention between the UK and the EU.
If the UK were tied to the European customs union indefinitely, it might restrict the UK’s ability to strike independent trade deals with other countries, and mean the UK has to continue to follow EU rules and regulations.
Those on the UK side might prefer to create a new single customs territory with the EU, which would allow the UK free access to the EU market, without compromising the integrity of the EU’s single market. But, at the time of writing, we don’t yet know what the formal customs arrangements will be and how they may restrict the UK’s ability to strike trade deals with other trading partners around the world.
Under EU rules, VAT is not payable on goods imported from within the EU. Depending on the customs arrangement agreed between the UK and the EU, this may well change, and UK businesses may need to change their VAT processes.
For example, if the UK were to revert to WTO rules for trade with the EU, then VAT would be payable upon the arrival of those goods within the UK. This would create a cash-flow nightmare for many businesses in the UK, and it has prompted the government to promise that it will step in to help businesses overcome this potential VAT nightmare.
A key promise of Brexit was that the UK would take back control of its borders and stop the free movement of people from the EU. This is confirmed in both the withdrawal deal and the declaration. In theory, this position won’t change; however, if the UK decided to remain in the EU single market after Brexit (see Chapter 1), then it would have no choice but to accept free movement of people. This prospect seems unlikely, though, and, at the time of writing, the intention is for free movement to end after Brexit.
But don’t worry, this won’t affect your summer holiday to Tuscany or Corfu. The declaration says that both sides aim to allow “visa-free travel” for short-term visits. Longer-term stays and employment, on the other hand, may require a visa — although, like everything else in the declaration, this is yet to be negotiated in any detail.
Depending on what the UK agrees with the EU, after the end of the transition period, EU citizens who want to come and work in the UK may have to apply for a skilled worker visa. They may also have to meet minimum salary requirements if the UK government’s proposed immigration plans come into force (see Chapter 3). Low-skilled workers from the EU, who are so vital for sectors like agriculture, will likely be allowed to work in the UK for up to 12 months without needing a visa.
Read more about the UK government’s immigration plans in Chapter 3 and employing EU citizens in Chapter 7.
Remember that the declaration isn’t legally binding, which means everything contained in it is still, at the time of writing, up for negotiation — including whether the UK will enter into a permanent customs union with the EU, as many in the UK Parliament are pushing for (see Chapter 3).
But assuming the declaration stays as it is for now, how will it underpin ongoing UK–EU negotiations? Read on.
What will these ongoing negotiations look like? Well, if you thought the withdrawal agreement and political declaration were difficult to negotiate, you ain’t seen nothing yet! Negotiating every aspect of the UK’s ongoing relationship with the EU will probably take years and will no doubt prompt some juicy insults and burns on both sides, just as the withdrawal negotiations did. (See Chapter 3 for some of the best quotes to come out of the withdrawal negotiations.)
The declaration may state the intention of remaining “as close as possible,” but you know what they say about good intentions and the road to hell. Glass-half-empty types may point out that we don’t yet know how those good intentions will hold up under the strains of tough negotiations, where each side is out to protect its own interests.
As a glass-half-full type, I prefer to put a more positive spin on the negotiations. It may not always be obvious, but there’s a general consensus between the UK and the EU to find workable solutions while maintaining their independence and negotiating positions. It’s in both sides’ interests to find common ground.
Considering that the negotiations are likely to take a while, what sort of issues are there on the horizon that may influence (and/or be influenced by) negotiations? Let’s take a look:
In Chapter 12, you can find ten other Brexit developments to keep an eye on.