24
December 2020

Written by:

Gareth Morgan

Director

A Deal Is Done

Nine months of negotiations are done – the EU and UK have (provisionally) agreed a new trade deal.

The twists and turns of the negotiations that have played out over nine months reached the point this week where negotiating teams had to step aside and let those with a political mandate take over. The past 72 hours have seen the UK Prime Minister and EU Commission President negotiating directly. A final call was conducted at 7am this morning and negotiations are now complete.

Those that have been following the negotiations closely have been acutely aware that all dates for progress have been fluid and seemingly set-in-stone deadlines have been regularly cast aside. Observers have seen briefings that one moment exude confidence that progress was being made, swiftly followed by pessimistic assessments that a No Deal scenario was instead likely. The substance of negotiations versus the choreography necessary to placate domestic audiences has often been hard to distinguish.

However, in the past week it has been clear that we were at the end game where a path to a deal was there, if the necessary compromises could be made.

The top tier negotiating positions have been relatively clear from the start. The UK framed their demands as seeking a Canada-style deal that reflected the desire for “sovereignty” with no jurisdiction from the European Court of Justice. The EU needed a deal that had to be underpinned by fair competition and protected the Single Market, was enforceable in European Courts and could not be as advantageous as membership of the EU. The UK Government consistently claimed it would walk away if required and the EU and its members often said that the UK had more to lose and must be the ones to compromise.

It is doubtful whether any other trade negotiation of this scale has taken place over such a condensed time and with the backdrop provided by 2020. The Covid-19 pandemic, global recession and US Presidential election all contributed to the respective positions throughout and we have also seen flare-ups driven by domestic politics, most notably the UK Internal Markets Bill that threatened to tear up the Withdrawal Agreement signed up to only a year before.

But for all the grand sweep of global politics the consistent tripping points were fisheries, level playing field provisions and dispute resolution. Their discussions have been highly technical where the emphasis has been on finding mechanisms that allow both sides to feel that their priorities are being addressed.

Highly technical they may have been, but they were also, inevitably, highly political. Fisheries in particular has been the example of how a small sector on paper (the EU catch from UK waters is only around £650m) has almost derailed discussions. For the UK it has been a symbolic and easily understandable issue, dating back to the 1970s and with fishing communities in politically important regions (the Red Wall and Scottish marginals). For the EU it has been symbolic too with their fleets set to lose access to historic fishing grounds and angering a well organised and powerful industrial lobby. Indeed, a great deal of the focus of the calls between Johnson and Von der Leyen has been haggling over proportions of catch for specific fish species – a remarkable, granular subplot to this process.

The deal is many thousands of pages long and will be pored over by trade experts from here on in, but key features briefed so far are:

1. Trade in Goods – tariff and quota-free trade in goods between the EU and UK has been preserved. “Wins” being briefed are the EU’s decision to grant third country listing status to the UK and approve exports of meat, dairy and other products of animal origin, plus electric vehicles will be traded tariff-free even if a relatively high proportion of their components come from outside the EU and UK (critical news for the continued presence of Nissan and Toyota in the UK).

2. Level Playing Field – much of the concern had been around fears on the EU side that the UK would have access to their market but could diverge on workers’ rights, environmental standards and state aid that would put its industry at a disadvantage. Progress was made when the UK published its state aid principles and now the deal includes a mechanism for “managed divergence” between the UK and EU, where an independent arbitration system would determine whether divergence bestowed an advantage, which would then trigger retaliatory action in the form of tariffs. In a sign of how this deal will be spun, the UK Govt is already dubbing this the “freedom clause”.

3. Fisheries – the last major sticking point (where a lot of the “betrayal” rhetoric will inevitably be focused) where even last night negotiations on specific fish species were still taking place. The UK originally wanted 80% of the EU’s catch from UK waters returned, a three-year transition period and restricted access to the coastal zone of UK waters (up to 12 miles). The EU only wished to concede 18% and wanted up to a decade long transition. We have ended up with 25% (although British officials are spinning this as Britain’s share of catch in its waters going from half to two thirds) and a 5.5-year transition. Access after that will depend on regular negotiations.

4. Energy Market Access – the cross-border energy market has been preserved. This is literally a case of “keeping the lights on” with imports through those connections vital for the UK during the 2018 ‘Beast from the East’ freeze, our exports to France and Belgium helping them weather the precautionary closure of French nuclear stations two years earlier and Ireland’s route through the UK being their only route to trade with the rest of the EU.

5. No Trade in Services – this is referred to as a “thin deal” as it covers only goods (where the EU has a surplus) and not the services sector that makes up 80% of the UK economy. Of particular importance will be financial services and there is pressure for swift progress towards a separate “equivalence agreement” that will grant UK firms access to EU markets and customers (the UK has unilaterally committed to doing so for EU firms).

Next Steps

The focus now switches to how this deal is applied and the role of the respective Parliaments that have to ratify the deal.

The deadlines that would have allowed the European Parliament to ratify the deal have passed and the emphasis in recent weeks has been on how to adapt to ensure there is no accidental No Deal period between the end of transition and formal ratification.

We expect to see the following:

UK Process – a relatively straight forward process in the UK Parliament will see MPs called back from recess between Christmas and New Year (most likely December 30th) for a straight up vote to accept or reject the deal.

EU Member States – a flexible arrangement to avoid an interregnum No Deal period will be focused on delivering a “Provisional Application” from January 1st. Member State Ambassadors will be briefed this morning and then a process of sending letters to the Commission accepting provisional application will take place.

EU Parliament – The EU Parliament’s ratification process usually involves scrutiny and debate in committees and in plenaries that can take a number of weeks. The provisional application route is ripping up norms (it usually takes place after the EU Parliament has voted and is only used while national/regional parliaments go through their processes) and takes some of the cliff edge tension out of this process. It is likely that the EP will look at the deal during their January or February plenaries.

Beyond the formal processes this deal needs to be communicated to domestic audiences – a consideration that has been there on both sides during negotiations. The UK Government, EU institutions and Member States all have their own political pressures to contend with and need the deal to be seen as a “win” for them and their agenda (Johnson held a Cabinet call last night where he sought their help to sell the deal to colleagues and there have been cries of betrayal already from more hardcore elements).

All sides will draw breath over the next few days but attention then turns beyond ratification to implementation – particularly the changes at the border from January 1st. This deal softens the edges of Brexit but for business it will mean border checks and paperwork which they haven’t had to deal with for almost fifty years. As we have seen in the past few days and weeks disruption at ports can escalate quickly and business groups are already lobbying for sensible grace periods to allow adaptation for the re-labelling of products and phasing in of border checks.

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But for all the above – the timetable, the scale of the challenge, the politics and the backdrop – the negotiators have delivered a deal. Challenges lay ahead but this is a historic juncture and the start of a new relationship with the European Union.

You can find out more about what this deal means by attending the Cavendish Advocacy EU-UK Trade Deal webinar on Thursday 7th January (11am to Noon) with guest speakers which include the Federation of Small Businesses, Rt Hon Damian Green MP (former First Secretary of State) & Miller Meier, our EU partner. Details for registration can be found here.