27 February 2018
The prime minister may have found a measure of agreement within the government, but her ‘three baskets’ position faces multiple hurdles in Brussels.
Georgina Wright

Georgina Wright

Research Assistant and Coordinator, Europe Programme

2018-02-27-BrexitCabinet.jpg

The ‘Brexit War Cabinet’ at Chequers. Photo: Getty Images.
The ‘Brexit War Cabinet’ at Chequers. Photo: Getty Images.

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Reports of the meeting of the ‘Brexit War Cabinet’ convened by Theresa May, the British prime minister, at Chequers last week, suggest that an agreement of sorts has been reached on the UK government’s guidelines for a transition and a future trade deal with the EU. But though the Cabinet is united over the reported plan, all indications are that it will not be acceptable to the EU.

It has been suggested that the prime minister will propose, in a speech on Friday, a comprehensive free trade agreement (FTA) composed of ‘three baskets’: areas where the UK and EU would remain fully aligned; areas where the UK and EU would remain broadly aligned or seek similar outcomes through different means; and finally, areas where the UK and EU would diverge entirely. The ambition is that this would allow the UK and EU to maintain ‘frictionless’ trade in areas of common interest, while progressively diverging in others. The UK would also propose a new institutional structure to resolve disputes and enforce common rules.

But recent documents published by the European Commission as well as the rhetoric of Donald Tusk suggest such a proposal will be unsatisfactory to the EU, for three reasons. One, there are concerns that it would upset the existing ‘level playing field’ between the UK and the EU, as EU industries could face unfair competition from their UK counterparts in areas where the UK has opted to diverge. Two, any new institutional structure may not be robust enough to ensure rules are respected, implemented and enforced. Three, it would create a precedent for other third countries to follow, which the EU would be unwilling to set.

On the first point, if the ambition is to strike a comprehensive trade agreement, it is very difficult to see how the EU would accept the UK abiding by some rules, while ‘selectively’ diverging from others. The EU is a legal ‘ecosystem’, a highly sophisticated web of legislation and structures that regulate the single market. When exporting to the single market, third-country products and services are expected to meet a range of EU standards, including on health, animal welfare, and the environment.

The EU’s Article 50 guidelines already made clear that a UK FTA would require conformity with EU standards and regulations that ‘encompass safeguards against unfair competitive advantages’. In practice, this would mean respecting a large share of the EU’s competition and state aid rules – areas where several members of the Cabinet have specifically asked to diverge from in the past. Such an approach would also run up against the commitments the UK has already made as part of the draft withdrawal agreement negotiated in December, which committed the UK – in the absence of other solutions – to maintaining the regulatory alignment required to facilitate cross-border trade on the island of Ireland.

Second, there is the problem of ensuring that these common rules are supervised and suitably enforced. Within the EU, this responsibility is shared by several institutions, including the European Commission, the European Council, the European Court of Justice (ECJ) and national authorities. Norway, Iceland and Liechtenstein rely on parallel structures. As the case of Switzerland shows, gaps in supervision and enforcement, as well as the lack of a dispute-settlement body, can present significant obstacles and delay trade flows.

One solution, which the UK government is expected to propose on Friday, would be to create a new joint EU–UK court. But there are two reasons why the EU may reject this. First, it is unclear how this new body would relate to the ECJ. The EU would be suspicious of any proposal that could impinge upon the ECJ’s position as the ultimate interpreter of EU law. Second, it would not, on its own, fully resolve the issue of market surveillance and compliance. In the single market, this responsibility is shared between national regulators and the European Commission (for member states) or the EFTA surveillance authority (for non-EU countries that are party to the European Economic Area, namely Norway, Iceland and Liechtenstein).

Meanwhile, a joint UK–EU structure may sit uncomfortably with those in Britain who are advocating a clean break from regulatory cooperation with the EU. So while abiding by similar rules would certainly reduce barriers to trade, they cannot, and would not, make trade frictionless.

Finally, the EU knows that any special treatment it gives the UK would be closely monitored by third countries seeking greater access to one of the world’s largest markets. While all FTAs involve a certain degree of cherry-picking, one that offers the UK tailored and deep access for certain policy areas, while accepting divergence in others, such as agriculture for example, could put the EU in the uncomfortable position where it is forced to reopen some of its trade agreements for countries seeking to export more goods and services to the EU.

For example, just last Friday, Emmanuel Macron promised French farmers that a new EU deal with Mercosur would not threaten French beef production, or flood the EU market with produce that did not respect the EU’s ban on the use of hormones in meat. To maintain a level playing field with the EU, the UK may find itself accepting more EU standards and rules than anticipated.

Labour’s proposal for a new customs union might mitigate some of these difficulties, but it also contains pitfalls. Applying a common external tariff on imports would help preserve a level playing-field (for example, the UK and EU27 would apply the same tariff for Chinese cars). Being part of a customs union would also reduce checks on the Irish border, although some conformity assessments would still need to take place, particularly for those goods and services not covered by the agreement.

But Labour has made clear that a customs union would only be possible if the UK were consulted during the EU’s trade negotiations and/or when setting these tariffs. How this new regulatory consultation would work in practice is unclear. It is also hard to imagine how the EU, and national parliaments, would accept a more formal process of consultation without significant concessions in other areas, for example on freedom of movement. In practice, in a clash between UK and EU positions or priorities, it would likely mean the UK losing the argument.

Of course, all of the UK government’s proposals will be subject to negotiation in Brussels as well as domestically. But any comprehensive deal will require a strong regulatory framework which ensures regular dialogue and solves some of the legal questions around supervision, enforcement and dispute settlement.

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