In early March, the EU managed to ruffle London's feathers by spelling out how a hard border in the Irish Sea might be the only viable end-state which respects the Good Friday Agreement. Unsurprisingly, the UK government was forced to rule this option off the table.
At the same time, Jeremy Corbyn, the Labour opposition leader, came out in favour of the UK entering into a customs union with the EU after Brexit, although it is not clear that the EU would even consider Corbyn’s vision of a customs union in which the UK has a say over EU trade policy.
Meanwhile, the Remainers in the Conservative party were seeking to table amendments to government legislation which would oblige David Davis to negotiate with the EU on the basis of entering into a customs union “in the same terms as existed before exit day”.
Brexit negotiation: five guiding principles
While the political skirmishes seemingly are never-ending, Prime Minister Theresa May set out her position in a speech on 2 March, presenting five guiding principles in the Brexit negotiations:
- The agreement to be reached with the EU must respect the referendum result.
- The agreement must endure, so that the UK and the EU do not find themselves back at the negotiation table after Brexit.
- Jobs and security should be protected.
- The agreement should be consistent with keeping the UK a “modern, open, outward-looking, tolerant, European democracy”.
- It must bring the country together.
This stance essentially rules out the possibility of a no deal/cliff-edge exit, or the Norwegian option, and confirms that the UK will accept diminished access to the single market. It gives little or no clarity or details on the UK’s ideas for a future trade deal. Some ambiguity about what the UK really wants is probably desired to stave off local rebellions, given the differences in opinion between the Brexiters and Remainers about whether the UK should leave the custom union.
The Irish border problem
However, the lack of substance on feasible solutions to the Irish border problem or how to achieve frictionless trade while respecting the red lines of the two parties in the negotiations is unlikely to facilitate a speedy agreement.
Mrs May envisioned a deep and broad new partnership with the EU, where the new agreement would cover more sectors and the two sides would cooperate more fully than before. However, such an ambitious “managed divergence” from the EU could prove difficult due to its “cherry-picking” nature. Indeed, one Brussels official described the speech as "cake, more cake and buckets of cherries".
And speaking on behalf of Ireland, the Taoiseach, Leo Varadkar, noted that while Mrs May had given "some important reassurances... I remain concerned that some of the constraints of leaving the customs union and the single market are still not fully recognised."
Trading arrangements: what are the options?
In response to Mrs May’s speech, the EU published draft guidelines for the negotiations on the end-state trading arrangements (after the transition deal expires). These were as expected. The EU position has not changed: if the UK insists on escaping from under the jurisdiction of the European Court of Justice (ECJ) and exiting the customs union, a zero-tariff free trade deal is the best possible outcome.
Of course, while being good for goods, such a deal would still erect non-tariff barriers that could impede trade in services. The UK wants to maintain full access to the EU market for financial services, where it ran a direct trade surplus of GBP 24 billion in 2016. Current rules allow non-EU banks, clearing houses or exchanges to operate in the bloc where their rules are deemed 'equivalent' to those agreed in Brussels. But an 'equivalence-based' solution can be stopped at short notice and the UK does not want to simply be an automatic rule-taker when it comes to financial regulations.
Philip Hammond suggested that the UK would like to keep a say in European financial rule-making by having the ability to reject rules in return for reduced market access or by designing rules that achieve a similar outcome, subject to probably very lengthy negotiations and arbitrations.
At the margin, a milestone in March
On 19 March, the EU and UK agreed on a 21-month transition deal. More importantly, the EU softened its position slightly in a couple of areas:
- first, it did not stick to a hardline position on the sequencing (solve the Irish problem first, and then we will talk about trade)
- second, the EU will allow the UK to conduct trade talks during the transition period
- third, the EU has suggested an enhanced form of equivalence as an opening gambit in what should prove to be a critical debate over the terms of access for financial services in any future trade deal.
Much still needs to be done, but the negotiations appear to be moving in the right direction.