Wednesday, March 21, 2018

The UK’s wins and losses in the Brexit transition deal

Published on CapX
On Monday, Britain and the EU announced a lot of progress on the terms of the British exit from the European Union, specifically when it comes to the so-called “transition stage” which will last until January 1st 2021, and during which Britain will take over EU rules in order to keep access to the EU single market.
Here’s an overview of some “wins” and “defeats” for the UK government.
Some UK “wins”
More control over trade policy during the transition
Britain will be able to negotiate and sign trade deals with third countries during those 21 months, although deals cannot enter into force until after the transition, unless approved by the EU.
EU negotiator Michel Barnier has however made clear that the UK Trade Secretary Liam Fox will probably need to focus more on keeping the trade access Britain enjoys to third countries thanks to trade deals negotiated by the EU, as he said: “They are leaving 750 international agreements. 750! The UK has work to do to reestablish relations with all those partners.”
Also, here, however, the British have obtained a concession. The EU has been convinced to adopt the British strategy of telling non-EU countries to treat the UK as a Member State during the transition period. Whether Mexico and South Korea will be happy to do so is another question, but one would suspect they won’t create a big fuss. They’ll probably save that for later, at the point when Britain would no longer enjoy full access to the EU’s single market.
Out of EU foreign policy, right to opt in to new justice and security measures
According to UK officials, the EU has listened to its concerns by fulfilling its desire to be opted out from EU foreign policy decisions during the transition phase while giving it during that time the right to opt in to new justice and security measures. In times of terrorism, and with a UK Prime Minister who has always been very keen on EU security cooperation during her time as Home Secretary, this is no surprise.
A pledge from both sides to act in “good faith” with a joint committee to oversee the agreement
The main concern for the UK government obviously is for Britain not to be called a “vassal state” during this time when it won’t be able to vote on the EU regulations it will be bound to apply. To make this bitter pill more acceptable, the EU has conceded to insert a promise that both sides will act “in full mutual respect and good faith” and “assist each other in carrying out tasks which flow from this Agreement”. Given that the transition period isn’t all that long and because both sides will be negotiating a new trade relationship at the same time, one shouldn’t expect anything less, but it’s a good idea to remind everyone of the obvious by including it in the withdrawal agreement.
This is no “right to delay rules”, as enjoyed by Norway, that other non-EU country that is in a “rule-taker” status in order to keep full access to the EU’s single market. In a previous commentone month ago, I’ve made clear how Britain is missing out on some of the perks enjoyed by Norway. Some of that has been mended. New is that the EU has also included a provision – in article 123(7) – for Britain to be consulted on newly proposed EU laws during the transition period, while a joint committee will oversee application of the arrangement. These are elements reminiscent of Norway’s deal. For the Norwegians, it is very important to be able to “shape” decisions, short of having the right to vote.
Fundamentally, the question will be how long the transition stage will turn out to be. There are no provisions to extend it, but apparently, many European governments think the duration can be reviewed. Legally it’s possible to extend it simply by having EU leaders and the UK government sign a Treaty to extend it, while enabling the trade aspects to enter into force provisionally, similar to the procedure of the EU’s agreement with Ukraine and Canada. Parliamentary ratification can then follow later. Without any doubt, one can and should raise some legal questions if this method were to be applied, but the urgency and importance of it all may well make this happen. If the “transition” is extended, the UK will likely ask for more sovereignty, as this would be decided right before the 2022 general election. Then, on the other hand, it should be possible to agree a lot. The UK’s pragmatic vision for its future relationship with the EU should stand a good chance of being accepted, as I’ve written.
Some UK “defeats”
Free movement
The UK government wanted to restrict freedom of movement from the point it will have legally left the EU, but it has backed down on this one. Therefore, freedom of movement will more or lesscontinue to apply during the transition, meaning that any EU citizen who wants to move to Britain in order to reside there for the rest of his or her life has time to make such a decision until the end of 2020.
The question is whether we’ll see a last-minute “rush” into Britain. Perhaps it will depend on what the UK’s future immigration laws look like. Given the fact that the UK public isn’t very keen on excessive migration restrictions after Brexit, we shouldn’t expect major restrictions. According to Open Europe polling, 56 per cent of British agreed with the idea of “controlled migration” while only 36 per cent supported simply “reducing the numbers of people coming into the UK”. Those British economic sectors dependent on EU workers will be happy to hear it. The fact that the UK government hasn’t played it hard here with the EU should also be an indication that when the UK has regained control over immigration policy towards EU citizens, it will remain a welcoming destination.
Fisheries policy
When it comes to the annual fishing negotiations on how much EU countries’ fishermen can catch in each other’s waters, the UK has accepted that its share of the total allowable catches will remain the same during the transition period.
David Davis said that: “Through 2020 we will be negotiating fishing opportunities as an independent coastal state, deciding who can access our waters and on what terms.” That doesn’t satisfy Scottish politicians or the Scottish Fishermen’s Federation, which stated that “we will leave the EU and leave the Common Fisheries Policy, but hand back sovereignty over our seas a few seconds later” as “our fishing communities’ fortunes will still be subject to the whim and largesse of the EU for another two years.”
Under the transition arrangement, Britain will only have the right to be consulted, not to vote during the annual haggling on fishing quotas. France has been pushing for the EU to increase its share relative to Britain, so the UK government has negotiated that the British share of “total catch” will remain unchanged during two years after EU exit.
The idea is now to link any changes in fishing quotas to the future EU-UK trade arrangement. Here, Britain has a strong hand, as European fishermen would catch four times the value of the catch allowed for the British fleet in British waters, but then UK fishermen catch a lot more fish than British consumers are able to consume, so the UK will want to keep the ability to sell British fish in Europe. That is why environment secretary Michael Gove had already pledged last summer to continue to grant European fishermen access to British waters.
What’s not agreed yet
On the issue of the Irish border, both sides have agreed that there should be a “backstop” option in the withdrawal agreement, which would enter into force if no other solutions are agreed. It doesn’t really go much beyond that, as the legal text is currently “unacceptable” for Britain, so expect quite a bit more drama on this issue, which is ultimately linked with the future relationship between Britain and the EU. Britain has suggested it’s keen to follow the “Swiss model” for selected sectors, by voluntarily cut and pasting EU rules that apply where there’s a lot of trade, to avoid disruption – with the caveat that the UK may still ultimately refuse to apply EU rules, accepting that it would then risk losing market access. A solution may be to apply this to the Irish border issue, with Britain taking over EU rules in those sectors that are relevant for Northern Ireland and the all-island economy. For now, the EU has branded this “pick and choose” – but on the other hand it had agreed in December that Britain should selectively “align” its rules only with the “rules of the Internal Market and the Customs Union which, now or in the future, should support North-South cooperation, the all-island economy and the protection of the 1998 Agreement.“ Supposedly, all other rules shouldn’t be aligned. Isn’t that picking and choosing as well? Never mind that there wasn’t, of course, agreement on the content of the word “align”.
Maybe the EU was a bit frustrated when it suggested that Britain should erect a customs border within its own territory, but let’s hope that following the British outcry, the EU has realised it’s not exactly making a great contribution to solve the Northern Irish puzzle, also given that it was agreed in December that the whole UK – not parts of it – would leave the Customs Union. Also Labour has stressed that the EU’s backstop option for the Irish border as currently drafted could never be acceptable to any British Prime Minister. On March 26, talks will begin between the EU, Britain and Ireland, so let’s hope cooler heads prevail.
Despite stressing it is acting as a single bloc, the EU has provided a de facto veto to Ireland regarding the border question and to Spain regarding Gibraltar. Barnier has stated that no deal can apply to Gibraltar without a bilateral agreement.
Tensions over Gibraltar and Spanish border checks have been nothing new, but whereas the UK could in the past count on the EU to safeguard a smooth border over there, the European Union suddenly seems much less interested in preserving smooth cross-border movements during the transition – at least as compared with the passion it (rightly) shows for EU citizens in Britain. Are the 10,000 people – including many EU citizens – who cross from Spain to Gibraltar to work every day not worth the attention?
Of course, Spanish politicians are aware they aren’t going to manage to use Brexit to negotiate Gibraltar out of British hands and overturn the 1713 Treaty of Utrecht. Actually, Spain is one of the EU member states most friendly to Britain, given the importance of the UK for its tourism sector. Then, haggling over Gibraltar during Brexit talks constitutes a political posturing opportunity that may be hard to resist for any local politician. Possible Spanish demands mayinclude joint control of the airport and ending what Madrid sees as Gibraltar’s status as a tax haven.
The arbiter
Although Britain has agreed to selected supervision by the EU’s top court, the European Court of Justice (ECJ), over aspects of the transition, for example EU budget law rules, it is still refusing to agree to letting the ECJ be the ultimate arbiter over disputes relating to the withdrawal and transition arrangement, especially as the EU is proposing that the ECJ can impose penalty payments as a remedy.
Is the prospect of a transition period working to avoid disruption for businesses?
According to the Chartered Institute of Procurement and Supply, one in seven European companies with UK suppliers has moved part or all of their business out of the UK. Of course we don’t know to what extent this is due to Brexit – it may well be have to do with the Bank of England’s devaluation. Also, we don’t know for sure if certain economic developments would have been much different in the absence of a transition deal. In any case, business federations are loudly proclaiming their desire to have a transition deal agreed as quickly as possible, so their concerns should be listened to. At a time when the US is experimenting with dangerous protectionist policies and the European Commission is clumsily responding with tit-for-tat threats, businesses shouldn’t have to worry about the EU’s obsession with imposing its own arbiter on a deal or inflexible politics in Northern Ireland and Gibraltar.

Wednesday, February 28, 2018

How long will the EU’s Brexit inflexibility last?

Published on CapX
While the debate rages about the European Commission’s draft treaty setting out the terms of the Brexit divorce and transition period, we’ll soon learn more about the UK’s vision for its future relationship with the EU.
On Friday, Theresa May will make yet another big speech on Brexit. She will set out in more detail how the British government sees UK-EU relations after the transition stage, which is due to end by January 1, 2021 and the terms of which still haven’t been agreed.
Thankfully we already know, in general terms, what Theresa May will say. The proposal has been dubbed the “three baskets approach”.
The first basket contains sectors in which Britain would be happy to voluntarily take over EU regulations. These are areas where this is needed to prevent supply chain disruption. Aviation, car manufacturing and chemicals are three salient examples. Would the UK really want to insist on having different standards for steering wheels?
Then again, the “voluntary” part is also key. Britain would be happy to avoid damage for supply chains by taking over EU rules, but ultimately it shouldn’t be forced to do it automatically. What if the EU were to come up with an onerous update of its costly REACH chemicals regulation, which faced a lot of protest when being drafted? It’s known that the EU regulatory process is, to put it mildly, not always science-led. The European Parliament in particular has demonstrated a fondness for the more superstitious side of things. In such cases, Britain may find it useful to be able to refuse to simply copy the EU’s rules, instead raising the issue at a joint committee where both sides can then try to find a compromise in order to avoid the UK losing market access and supply chains being disrupted.
The first basket, then, is basically what Switzerland negotiated with the EU after it voted against single market membership in 1992. But in other areas Britain would refuse to import EU rules. Instead, it would try to obtain a declaration from the EU that UK rules are “equivalent”. This is the second basket.
A good example of this approach would be clearing houses. It’s quite realistic for the UK to obtain this status given that the EU grants US clearing houses access to the EU market and that blocking UK clearing houses from offering their services to EU27 clients would fragment the clearing market and badly affect finance opportunities for companies in mainland Europe.
Of course, in many cases, the EU will refuse to declare divergent UK regulation to be “equivalent” and deny market access, even if this harms EU27 consumers. After all, Trumpist economic thinking is alive and well in the EU27. Special interests and powerful exporters will come before consumers, even if that flies in the face of economic orthodoxy.  Hence the need for the “third basket”, for sectors without equivalence.
Is this UK government approach realistic? The short answer is yes. Brexiteers like Boris Johnson, will be very keen on the ultimate UK right to say no, but are sympathetic to industry’s concerns about supply chains, so to take over 99 per cent of the EU’s rules is fine, as long as Britain can say “no” when EU rules really don’t make sense. The Swiss approach squares that particular circle.
Where there are no supply chains, why should the UK government take over EU regulation rather than merely try to get its own rules to be declared “equivalent”?
Many will say that, however reasonable such an approach sounds, the EU will not agree to it. I don’t think that is the case. Why would the EU refuse the UK’s offer to copy and paste many of the EU’s rules, while only asking in return that for the sectors where it does that, the EU offers market access?
Brussels will be flattered by the thought that others are importing its own regulations; and EU companies with supply chains between the UK and mainland Europe will also push very hard for this.
Therefore, it is surprising that the initial EU reaction vis-à-vis the “three baskets approach”, even before its official unveiling on Friday, has been quite so negative.
The first reaction came in the form of slides published by the European Commission, which claimthat the approach would amount to cherry-picking and represent a “risk for integrity and distortions to proper functioning of [the] internal market”. This claim ignores the fact that the EU has such a deal with Switzerland. That, apparently, doesn’t endanger the internal market.
Furthermore, European Council President Donald Tusk called the approach “pure illusion”, describing it as “cake philosophy”. Irish PM Leo Varadkar also felt the need to mention cake, saying it was “not a significant move away from having your cake and eating it”. Even Dutch PM Mark Rutte, one of Britain’s friendliest neighbours said: “I told [May] we don’t like cherry-picking and that it’ll be difficult to come to a bespoke deal along the lines some in the UK are suggesting.’
Despite the fondness to dismiss “picking and choosing” or “having your cake and eating it”, EU leaders are well aware that the EU did close such a deal with Switzerland and that even within the internal market, the opening of markets has been selective. Germany has for years obstructed opening its insurance market, in spite of the fact that doing so is a Treaty obligation.
In reality, the EU truly is one big festival of picking and choosing. But, of course, it’s possible that such flexibility will not be granted to the UK. That however would impose a very high cost to both sides, with estimates of up to 1.2 million job losses for the EU27 alone in case of a cliff-edge “WTO” Brexit.
Behind the scenes, things look less inflexible. A Swedish government report makes mention of the Swiss deal, internal Belgian Foreign Ministry deliberations are looking at the arrangements foreseen in the proposed TTIP trade deal between the EU and the US, and some more market-friendly German commentators are openly dismissing Barnier’s “no pick and choose” approach. Warnings that Brexit woes are hitting German businesses in the UK hard and outlooks are growing increasingly pessimistic, focusing some German minds on the economic consequences of inflexibility.
Even EU Commission chief Juncker has admitted that he thinks EU unity is unlikely to survive the second phase of the Brexit talks once big business starts pressuring capitals to accept British proposals on cherry picking. He fears that “in the end we’ll have several extras, several exceptions that will make Europe a mess”.
It is a fiendishly complicated negotiation, but the one big advantage is that, unlike in other trade talks, there won’t be talks on which sectors should be opened up but instead on which sectors should face restrictions. This is likely to lead to warnings from industry that will hopefully avoid most of the damage. And, as the UK government has pointed out, it’s of course a great advantage that Britain will have implemented all of the EU’s rules already, a big difference with Japan and Canada, and a reason why some optimism is warranted.
Former UK deputy PM Nick Clegg does offer some fair criticism of the UK government’s approach, when he writes that under this Tory plan, “the state anatomises a sophisticated economy into three discrete zones and gives each a different regime”. That’s correct, but it’s also the case for Swiss-EU relations. Moreover, it’s mainly the EU side demanding market restrictions, so perhaps he should focus his wrath on them.
In practice, it may be that only two sectors are identified: goods and services. That avoids the legal complexity involved in defining which exports belong to which sector. As the EU’s Single Market in services hasn’t been opened up properly, the UK also has less to lose here from demanding the right to have divergent rules and lose some market access.
It is regrettable that for now the EU is effectively refusing the UK’s offer to voluntarily copy EU rules in selected sectors to get market access there. Clearly, the EU instead wants Britain to copy its rules in all sectors. That is to choose self-harm over the kind of flexibility the EU has already offered Switzerland. Let’s hope that after Theresa May fleshes out the UK government’s approach in more detail, that rigidity starts to disappear.

Thursday, February 22, 2018

The ECJ isn’t the right actor to make political choices related to trade deals

Published on Euractiv and Belgian newssite Express 

Trade deals should focus on opening up trade and should not be overloaded with all kinds of other purposes. And when politics does sneak into trade deals, it should be left to the elected politicians and not to judges, writes Pieter Cleppe.
Free trade deals are being more and more politicised. That’s not only due to the opposition against free trade. It’s also because these treaties are more and more overburdened with all kinds of issues that, strictly speaking, have little or nothing to do with scrapping protectionist trade barriers.
Then we’re not just talking about the European Commission’s plan to only sign trade deals with countries that ratify the Paris climate change accord or about the all kinds of clauses in trade deals that impose specific standards and regulations, for example on how extensive intellectual property protection must be.
This did lead to a lot of protest in the case of the proposed trade deal between the EU and the United States, TTIP, as well as with the EU-Canada trade deal CETA. There, many have expressed concerns about differences in food protection standards, obviously accompanied with a lot of exaggeration and hysteria.
We wouldn’t have this problem if trade deals would contain no standards but would simply scrap national protectionism, without aiming to align legislation and with trying to declare as much of each other’s regulation as equivalent.
All EU trade deals now include a clause stipulating that human rights are central to relations with the EU. The intentions here are obviously good, but who will be the judge of this and how strict can and should one be while judging whether or not there have been violations?
The opening of world trade in the past fifty years has lifted a couple of billion people out of extreme poverty, which has also improved the level of human rights protection. Imagine if this had not happened, because the West had refused to trade with countries where there are violations of human rights?
Yet a step further now is the EU’s top court in Luxembourg investigating whether existing treaties between EU and non-EU countries comply with international law provisions on the self-determination of peoples or the respect for human rights. This is often tricky political territory for judges.
In January, the advocate-general of the European Court of Justice, Melchior Wathelet, produced a non-binding advice on the so-called EU–Morocco Fisheries Partnership Agreement, which will have to be renewed this year or will otherwise expire in July.
Wathelet is a former Belgian politician, who’s controversial for having released a convicted child rapist early from prison in the early 1990s, which led to a major political crisis in Belgium afterwards. Perhaps his background as a politician makes him less reluctant to wade into politics as advocate-general.
In his advice, he says to consider the deal between the EU and Morocco to be invalid in so far as it applies to Western Sahara and its adjacent waters. This is because he thinks the EU violates international law, more precisely “the right of the people of Western Sahara to self-determination” and because it “recognize[s] an illegal situation” resulting from the Moroccan control of the area.
A core reason, according to the ECJ’s advocate-general, is that the deal prevents the exploitation of the natural resources of Western Sahara to benefit the inhabitants of the area.
Wathelet claims this support isn’t sufficiently generous, stating that “only 35% is destined for the Western Sahara, whereby there is no proof whatsoever that these funds effectively benefit the population of  Western Sahara”.
On the basis of this, he concludes that the “self-determination of the population of the Western Sahara” isn’t respected and that therefore fishery activities enabled by the trade deal shouldn’t be possible in the adjacent waters.
This despite the fact that a report prepared for the European Commission mentions that this partnership agreement does effectively provide several regions in Western Sahara with financial support whereby at least two-thirds of the funds go to the Western Sahara regions Dakhla-Oued Eddahab and Laâyoune-Sakia El Hamra.
Whether Wathelet has his facts wrong or not, ultimately the question is whether it’s desirable to let a Court make decisions here that are ultimately political.
It must be said that here we’re only talking about advice from the man whose job it is to represent the “general interest” in the court case and that the ECJ judges themselves still need to rule, something that is scheduled for 27 February.
Behind the scenes, Algeria has been involved in the Western Sahara dispute, so we’re talking about a sensitive geo-strategical issue, where Morocco has been convinced to at least propose a degree of autonomy.
The interests are considerable. If this Treaty with Morocco were to be legally torpedoed, we’d witness quite a bit of economic damage, as 90% of Moroccan fishing happens in Western Saharan waters and half a million jobs depend on it indirectly.
The EU accounts for two-thirds of Moroccan exports, so disturbing this relationship may destabilise a country that isn’t all too stable to begin with. Also, for EU countries this is important: about 120 ships from 11 EU member states are active in the area.
Apart from that, Morocco is also an important partner in stopping irregular migration flows and combatting terrorism, which happens to be an issue in Western Sahara itself.
Naturally, the importance of good EU-relations with Morocco is one of the reasons why the European Commission simply wants to renew the partnership and that’s also what most EU member states seem to prefer, unless the European Court of Justice throws up obstacles.
As a result of the tendency to increasingly politicise trade deals, difficult political trade-offs need to be made, for example with regards to the question to what extent trade deals with authoritarian countries are a good idea and what to do in case a territory is disputed.
The politicisation itself is already a problem, but to shift such sensitive decisions onto courts that don’t possess the legitimacy to make political decisions can endanger important trade deals. Resulting in a whole range of geo-strategical consequences.
Therefore: let trade deals focus on opening up trade and do not overload them with all kinds of other, perhaps even valuable purposes. Trade has proven to lift people from poverty and promote good neighbourship. And when politics does sneak into trade deals after all, leave it to elected politicians and not to judges.