• The President of the European Council has issued negotiating guidelines for the future trading relationship the EU wants with the UK.
  • The guidelines set out a narrow view of future relations, warn of the “negative economic consequences” of the UK’s choices, and reiterate, “nothing is agreed until everything is agreed.”

On 7 March 2018, Donald Tusk, President of the European Council, issued draft trade guidelines for the Brexit negotiations. In an accompanying statement, Turk said that “that because of Brexit [the EU and the UK] we will be drifting apart” and Brexit “will make [trade] more complicated and costly than today, for all of us. This is the essence of Brexit.”

Adverse Consequences

The guidelines warn that, for the UK, being outside the customs union and single market “will inevitably lead to frictions,” and will have “negative economic consequences”. Brexit means “divergence in external tariffs and internal rules as well as absence of common institutions and a shared legal system.” Checks and controls will be needed to “uphold the integrity of the EU Single Market as well as of the UK market.”

No Cherry Picking

A country that is not a member of the EU, undertaking the obligations that come with membership, cannot have the same rights and enjoy the same benefits as a member. Further, since the four freedoms of the Single Market are “indivisible”, there can be no “sector-by-sector” approach which would amount to “cherry-picking” and would undermine the integrity and functioning of the Single Market.

Free Trade Agreement

With Prime Minister May having confirmed recently that the UK will leave the single market, the customs union and the jurisdiction of the European Court of Justice, Tusk said that the only remaining possible model is a free trade agreement, such as the one made with Canada recently.

I propose that we aim for a trade agreement covering all sectors and with zero tariffs on goods. Like other free trade agreements, it should address services. And in fisheries, reciprocal access to fishing waters and resources should be maintained.

Donald Tusk, President of the European Council

The free trade agreement is to be concluded once the UK has left the EU. By nature, it will not offer the same benefits as Single Market participation or membership of the EU. It will address:

  • trade in goods across all sectors on the basis of zero tariffs and no quantitative restrictions, with appropriate accompanying rules of origin;
  • customs cooperation as appropriate in order to preserve the regulatory and jurisdictional autonomy of both sides as well as the integrity of the EU Customs Union;
  • avoidance of technical barriers to trade and a framework for voluntary regulatory cooperation;
  • trade in services; and
  • other “areas of interest” such as access to public procurement markets, investments, and intellectual property protection including geographical indications.

Financial Services

Publication of the guidelines came shortly before a speech by the UK Chancellor at HSBC’s Canary Wharf headquarters when he warned that punishing the UK by restricting the City of London’s access to EU financial markets after Brexit would penalise all European businesses and consumers, not just British ones, again advancing the UK government’s position that a bespoke trade agreement that maintains equivalent levels of regulation would be in the interest of the UK and the EU27. Any trade deal that does not include financial services ought to be rejected, he said.

We should be under no illusion about the significant additional cost that would be borne if this market were to fragment.

Philip Hammond, UK Chancellor of the Exchequer

However, the EU’s guidelines do not mention financial services specifically. They call for limited arrangements for services generally and for regulatory co-operation, so as to allow “market access to provide services under host state rules, including as regards right of establishment for providers, to an extent consistent with the fact that the UK will become a third country” recognising that the EU and the UK will cease to “share a common regulatory, supervisory, enforcement and judiciary framework.” The agreement should also include “ambitious provisions on movement of natural persons” and a framework providing for recognition of professional qualifications.

Data Flows

The EU and the UK appear to be a ways apart. In her recent speech, May sought “more than just an adequacy arrangement” on data protection. However, the guidelines reject this and state that, “in the light of the importance of data flows in several components of the future relationship, personal data protection should be governed by Union rules on adequacy with a view to ensuring a level of protection essentially equivalent to that of the Union.”

Governance and Evolution

The guidelines state that the free trade agreement will need to address “management and supervision, dispute settlement and enforcement, including sanctions and cross-retaliation mechanisms” and that the overall governance should be designed taking into account the positions stated by the UK. If the UK’s stance changes, it says, the EU is prepared to “will be prepared to reconsider its offer” to the UK. EU officials call this the “evolution clause.”

How this plays out is still to be seen. The EU27 Member States will consider the guidelines and are expected to adopt them at the European Council summit later this month.