On Friday, 8 December, the European Commission and the UK announced a deal has been reached on the UK's withdrawal from the EU, and the parties can now start to negotiate the future relationship agreement, including critical matters like trade. This means that sufficient agreement has been reached on the 3 key issues of withdrawal which the EU considers vital: (i) the UK’s financial ("divorce") settlement with the EU; (ii) the rights of EU citizens already in the UK; and (iii) the status of the Northern Ireland border.
The calculation of the UK's financial settlement (thought to be €40-€60 billion) and the status of EU citizens had already been largely settled, in what was perceived as a climb down by the UK negotiators. The most noteworthy aspect of the agreement is the resolution of the "hard border” question. The agreement requires approval of the EU Heads of State at a European Council meeting on 15 December, though this is thought to be a formality.
The maintenance of the status quo
Effectively, it has been agreed that there will be no restriction on movement and trade between Northern Ireland and Ireland, nor will Northern Ireland be separated in any way from the rest of the UK after Brexit. The UK is set to maintain full alignment with EU single market and customs union rules which support north-south cooperation, the all-island economy and the protection of the Good Friday Agreement.
Although there is some element of ambiguity in the wording, arguably all of the EU single market and customs union rules could be deemed to support the economy of the island of Ireland and north-south cooperation. This significantly reduces the risk of regulatory divergence between the UK and Ireland. As a result of Friday's agreement, it is difficult to envisage a situation where the UK can “go its own way” on matters such environmental, food, and product regulation in circumstances where it has an obligation to remain aligned with Northern Ireland and Ireland.
The absence of regulatory divergence is ultimately great news for Irish and Northern Irish businesses. It provides comfort and certainty on future arrangements for those that operate cross-border and providing for unhindered access to the UK market. This is critical for the large number of farmers and agri-food producers on both sides of the border. The maintenance of the Common Travel Area between Ireland and the UK is also welcome news for the tens of thousands who cross the border each day for work.
It is now likely that the UK’s status will be most closely aligned with other EEA signatories outside the EU, such as Norway or Switzerland. Although Norway and Switzerland are not directly subject to the jurisdiction of European Court of Justice and retain some limited autonomy on single market issues, an oft-cited disadvantage of this position is that they are largely subject to the EU's single market rules without having a say on what those rules are.
Once approved by the European Council, the EU and UK can move to the second phase of negotiations to conclude a “future relationship agreement”. The main component of this will be a comprehensive EU-UK Free Trade Agreement ("FTA").
The absence of a FTA would result in significant tariffs being imposed on goods flowing between the UK and EU Member States. For example, average tariffs of products flowing from 3rd countries into the EU in 2017 included: 35% on dairy products, 25% on sugars and confectionery, and 20% on beverages and tobacco. The cost of importing and exporting goods at these rates is clearly untenable for UK's economy and its trading partners given the existing levels of trade.
However, comprehensive free trade agreements are notoriously difficult to conclude. It is noteworthy that the Comprehensive Economic and Trade Agreement ("CETA") agreement between the EU and Canada came into force provisionally in September this year, despite negotiations having begun in 2009.
It now appears more likely than ever that Brexit will be a “soft” one.