Currently, the issue of whether the UK will have a hard Brexit or a soft Brexit is in the balance. A soft Brexit requires the conclusion of a Withdrawal Agreement to take effect on the Brexit date of 29 March 2019, and this in turn requires finalisation of the agreement at the October European Council meeting to allow time for ratification. The agreed terms of the transitional arrangements, whereby the UK would in effect stay in the EU Single Market and Customs Union until the end of 2020, will only become effective on the conclusion of the Withdrawal Agreement, of which the transitional arrangement terms form part. Critically, the conclusion of the Withdrawal Agreement depends mainly on the UK finding an acceptable solution to the Northern Ireland border issue, whereby both parties' objectives of a frictionless border are realised, whilst protecting the integrity of the EU Single Market and Customs Union and also safeguarding the UK's aim of protecting the UK internal market. At present, there is no clear solution in sight.

The conclusion of a relationship agreement is not dependent on there being a Withdrawal Agreement. In any event, a relationship agreement would only be finalised and take effect sometime after the Brexit day. The framework for the future relationship would be set out in a political declaration attached to the Withdrawal Agreement. However, if no Withdrawal Agreement were concluded, the negotiation of a relationship agreement would be more challenging and would most likely suffer a delay.

The Northern Ireland border issue

If the UK is not able to propose acceptable solutions to ensure a soft border between Northern Ireland and the Republic of Ireland, the Joint Report of December 2017 (of the negotiating parties) provides that regulatory alignment with the rules of the Single Market and the Customs Union will be maintained by the UK in respect of Northern Ireland. It is possible to debate the precise scope of this arrangement, as it could be seen as limited to specific economic areas concerning the all-island economy, but it may well require the trading border to be drawn between Northern Ireland and the rest of the UK (the so-called "border in the Irish Sea" solution). This would not be acceptable to the current UK government and especially the Northern Irish DUP on which the government relies for support. So if the UK is unable to persuade the EU to accept its proposals, the prospect of a hard Brexit hardens.

The UK government has put forward two options for customs arrangements following Brexit, as a means of avoiding border controls for customs purposes. The first is known as the "maximum facilitation" or Max Fac solution, involving the use of technology to avoid checks, delays and infrastructure at all UK-EU borders, including the Northern Ireland border. This would mean expanding current "authorised economic operator" or "trusted trader" schemes, together with technological improvements to streamline the electronic processing of product movements.

The UK's second proposal is known as the Customs Partnership and involves the UK applying the EU's tariffs at its external borders and refunding traders the difference between the EU's and the UK's tariffs where the UK's are lower and where the goods do not travel beyond the UK into the EU27.

The EU is understood to have expressly rejected the Max Fac solution and to be at best sceptical of the Customs Partnership proposal. The UK government is now in the process of redeveloping its customs arrangements proposals with a view to finding a compromise solution in time for discussion in the June Council meeting and finalisation as part of the Withdrawal Agreement at the October Council meeting. It should be noted that the concept on which the proposal is based, of one country collecting duties using another country's tariffs, and then refunding traders by reference to the ultimate destination of the goods, is completely unprecedented. EU negotiators are understood to have asked the UK government to clarify such questions as: how can the UK collect EU tariffs when no longer a member of the EU; how does the UK intend to channel customs duty collected in the UK into the EU's central budget; how should EU customs authorities reciprocate for products destined for the UK; and how will the UK ensure compliance with rules of origin?

There is a significant concern with both options, that they could not be developed and finalised by the end of the intended transitional agreement (the end of 2020), meaning that an extension to the transitional arrangement and continued UK membership of the EU Customs Union would be necessary.

There is a third option to achieve a soft border between Northern Ireland and Ireland, and this is for the UK to enter into a bilateral Customs Union with the EU on leaving the EU and the EU customs union. This would place the UK in a comparable position to Turkey, which is not in the EU customs union, but has a bilateral customs union with the EU for industrial products, but not agricultural products. However, there are not insignificant drawbacks to this solution, for the UK. As a party to a customs union with the EU, the UK would need to harmonise its external tariffs with the EU's Common External Tariff and therefore would be unable to conclude its own independent free trade agreements.

Under a bilateral customs union agreement, the EU would be in charge of negotiating access to the UK market through free trade agreements with third countries. It is questionable to what extent the EU would take account of UK interests. The UK would not be participating in the EU's institutions and would be unlikely to have any influence on EU trade policy. Most importantly, the UK would not gain any automatic access to the markets of the third countries which would be given access to UK markets.

In any event, a customs union between the UK and the EU would not achieve frictionless trade. Once the UK is outside the Single Market, border inspections to check technical standards conformity would be required, and transportation permits may also need to be checked at the border. A customs union agreement could help make the border as frictionless as possible, but would not remove all needs for border infrastructure and would therefore still to some extent leave a need for a hard border.

The proposed UK/EU Relationship Agreement

The framework for the EU's approach to the relationship agreement negotiations are set out in the EU Council Guidelines of 23 March 2018. These provide for the EU to have as close as possible a partnership with the UK. The EU Council proposes a balanced, ambitious and wide-ranging free trade agreement. However, the Guidelines stress that a non-member of the EU cannot have the same rights and enjoy the same benefits as a member. The EU, and in particular it's negotiating team, believe that countries are either in or out of the Single Market altogether. The EU would therefore not entertain the possibility of participation in the Single Market (or equivalent terms to Single Market participation) for some sectors but not others. It is for this reason that, for example, the EU negotiating team has for the time being resolutely declined to open trade specifically in financial services, insisting that outside the Single Market there can be no financial services passport.

The EU is taking the EU/Canada free trade agreement, the Comprehensive Economic and Trade Agreement (known as the CETA) as the likely basis. The UK is seeking a more bespoke free trade agreement using the CETA as a starting point. As the UK is already very closely integrated with the EU and is geographically closer, it may be possible for the UK to achieve closer integration than Canada. However, given the EU's approach, whilst the UK may be able to obtain certain exceptions as compared with Canada, a bespoke deal seems unlikely.

It is clear that the EU and UK plan a close future partnership which will cover trade in goods (with a commitment to no tariff barriers or quantitative restrictions), "appropriate" customs co-operation, access to public procurement markets and protection of intellectual property. Provisions on the movement of people may be included that go further than standard trade agreement rules, including recognition of professional qualifications.

The EU's Guidelines propose a framework for "voluntary regulatory co-operation". However, the EU team reportedly considers UK proposals for widespread mutual recognition to be unrealistic. However where the regulatory co-operation is voluntary, there can be no binding outcome, so there would probably be a lack of certainty for businesses.

The UK wants to discuss with the EU the terms on which the UK could continue to participate in EU agencies, such as the European Medicines Agency, the European Chemicals Agency and the European Aviation Safety Agency. The UK wants full participation but the EU's position is that the UK can have operational participation but not decision-making participation. By comparison, the EU-Ukraine Association Agreement allows Ukraine to participate in relevant EU agencies (where the establishing regulations permit), but Ukraine must enter into separate agreements with the EU for participation in each such agency and to set the amount of its financial contribution.

The EU Guidelines refer to agreements on transport, and road freight is an important area. The UK government aims to negotiate a comprehensive land transport agreement between the UK and the EU allowing road haulage for licensed operators between the UK and EU27 to continue. Such an agreement would help maintain vehicle standards and avoid lengthy checking processes. The EU's Guidelines allow for this.

Relationship Agreement - Services

The planned agreement will provide some degree of freedom to provide services, in particular under "host state" rules (including temporary provision of services abroad under "host state" rules).

Free trade agreements concluded by the EU generally treat host state rules as applying to services provision, which gives rise to non-tariff barriers. The opening of trade in services beyond what was agreed in the Canada/EU agreement would be without precedent. The degree of freedom of trade under such a free trade agreement would be greater than under WTO rules alone, but would be considerably less than under the Single Market.

It should be noted that a right to provide services under "host state" rules is generally much less permissive than the Single Market model of allowing provision of services under "home state" rules, the so-called passporting approach. It is likely, therefore, that the UK will, in leaving the Single Market give up the right for UK-based services providers to provide services in the EU27 based on UK regulations, and under a relationship agreement take on obligations for UK-based service providers providing services in the EU27 to do so in accordance with local regulations of the EU27.

Relationship Agreement – Key outstanding issues

In various areas, the parties have not yet reached agreement. The UK is still seeking acceptance of a degree of mutual recognition of home state authorisations as a basis of allowing future UK-EU trade in goods and at least some services. There is the question of how to ensure data protection on international data transfers between the EU and the UK, and whether the EU's "adequacy" ruling approach will be applied for transfers of personal data from the EU to the UK, or whether the UK's desired "firmer" solution will be found. As already mentioned, the question of the UK's ability to participate in EU agencies, and if so whether this could extend to decision-making, is yet to be resolved.

The parties also need to agree on the means of settling any disputes arising under the agreement. The EU insists that the European Court of Justice should be the forum as the sole arbiter of EU law and EU legal terminology, whilst the UK seeks an arbitration system.

The EU Council Guidelines also provide for the aim of guarantees of a level playing field regarding competition and State aid, tax, social, environmental and regulatory measures. No specific proposals have yet been publicised in this regard. The EU wants the relationship agreement to include provisions requiring the UK not to make the UK more attractive to business at the expense of the EU by, for example, significantly lowering corporate tax, offering State aid to UK companies, or reducing social and environmental standards. The relationship agreement is therefore likely to require a degree of alignment of UK rules with the EU's requirements in these areas, including competition and State aid. The European Commission is reportedly considering applying a principle of requiring the UK not to lower standards below the pre-Brexit level. By contrast, the UK's position is that such restraints on UK competitiveness can only be possible in exchange for improved levels of access to trade with the EU. The EU's position seems to show a concern on the part of the EU of UK deregulation post-Brexit. This could give some negotiating strength to the UK.