When it comes to Brexit, one might be forgiven for experiencing an acute sense of déjà vu.
After averting the dreaded “no-deal” Brexit cliff in late 2019 and finalizing a withdrawal agreement that saw the U.K. formally leave the European Union on Jan. 31, the two sides now find themselves perched on yet another cliff as they try to work out an arrangement that will govern trade between the U.K. and EU by Dec. 31, the end of the current transition period.
But British Prime Minister Boris Johnson has set an Oct. 15 deadline to resolve the terms of the U.K.’s departure from the EU, declaring that he is prepared to walk away from the table if no trade deal is reached by then.
Most observers agree that a deal has to be cobbled together by early November — at the latest — to allow time for ratification by all EU member states and parliaments in London and Brussels.
Businesses, too, will need time to adjust to any trade deal that sets up a range of rules and regulations — not to mention tariffs — to govern future trade between the world’s largest trading bloc and the globe’s fifth-largest economy.
But in late August, trade talks hit the rocks, revealing disturbing signs of strain in relations between London and Brussels.
“It felt as if we were going backward more than forward,” the EU’s chief negotiator, Michel Barnier, told reporters after the talks broke up on Aug. 21. “At this stage, an agreement between the U.K. and EU seems unlikely.”
Boris’s Deal Breaker?
Then in September, Johnson threw another wrench into the negotiations by walking back Britain’s commitment to the so-called Northern Ireland protocol, a key element in the divorce deal that is intended to keep the border between Northern Ireland and Ireland open so as not to jeopardize the 1998 Good Friday Agreement, which ended three decades of political and sectarian strife in Northern Ireland.
That border — which is the only land border between the U.K. and the EU — was one of the most contentious obstacles to a withdrawal agreement. Negotiators ultimately came up with a cumbersome compromise whereby Northern Ireland would continue to abide by some EU regulations under the bloc’s single market (which ensures uniform standards), thereby making border checks on goods coming from Northern Ireland into the EU unnecessary.
Northern Ireland would, however, remain in the U.K. customs union, so any goods that travel from the U.K. to Northern Ireland would not be subject to tariffs.
If those goods, however, are deemed “at risk” of traveling onward to Ireland, an EU member state, then they would be subject to tariffs.
It’s a convoluted mechanism but one that avoids a physical border between Northern Ireland and Ireland by creating customs checks at ports.
But Johnson has thrown this arrangement into disarray by pushing legislation that would allow the U.K. to break the legally binding withdrawal agreement in a “specific and limited way” if the EU interprets the agreement, particularly the section on Northern Ireland, in an “extreme and unreasonable” way, according to his government.
Creative legalese aside, Johnson’s latest gambit could be a deal breaker for the EU, which has threatened legal action if the bill passes.
“It’s fair to say that there’s huge anger on this side,” Irish European Affairs Minister Thomas Byrne said in response to Johnson’s announcement. “This is a dangerous and provocative act, and it is illegal.”
Barnier and his British counterpart, Michael Gove, recently tried to cool tensions, insisting they are determined to clinch a deal despite this latest setback. And the process of passing Johnson’s controversial bill in the British Parliament could take most of October and November — and any EU legal action is unlikely to go to court before the end of the year — giving negotiators some breathing room to strike a deal.
Back to Square WTO-One
Still, nothing with Brexit is assured and if no trade deal is reached by the self-imposed Oct. 15 deadline, the U.K. will automatically revert to trading with the 27-member bloc under World Trade Organization rules. This means the U.K. would be treated like any other country that doesn’t have a trade deal with the EU and would therefore be subject to WTO-dictated tariffs and customs.
On average, EU tariffs are relatively modest, but for certain key goods like cars and food, they can be as high as 35%. Given that nearly half of all U.K. goods are exported to the EU, these new tariffs could cripple British businesses.
Under WTO rules, the U.K. would also be forced to levy tariffs and import quotas on EU imports, raising the cost of European goods for British consumers. It will also have to raise tariffs on goods from non-EU countries with which it does not have a free trade deal.
Recognizing the problem, the U.K. has been removing some tariffs it imposed as an EU member state in areas that don’t pose a threat to its domestic industries.
Johnson’s government also said it will implement a unilateral six-month “light touch” after January on EU imports. Yet details remain sketchy, and in any case, such a move would likely break WTO rules, which forbid discrimination in the treatment of imports. So, if the U.K. lowers tariffs for the EU, it has to lower them for all WTO members, which could lead to cheap imports flooding the country.
On that note, it’s not just trade with the EU that’s at stake. It’s trade with the rest of the world, too.
As an EU member state, the U.K. was able to trade with non-EU countries under the bloc’s free trade agreements. But once the U.K. exits the transition period on Dec. 31, British businesses will lose those trading privileges and established rules.
London will have to negotiate new trade deals with dozens of countries — most notably, the United States. Theoretically, the advantage is that the U.K. can forge its own trade deals under more favorable terms, but there’s no guarantee of that and in any case, hammering out trade deals is a long, arduous process — one that has so far barely gotten off the ground for the U.K.
Another hurdle is that talks with other countries are being held up because of the lack of progress with the EU.
“It’s very difficult for these countries to do a deal with the U.K. before the U.K. deals with the EU,” Tim Bale, deputy director of the think tank UK in a Changing Europe, told The Washington Diplomat. “They need clarity about what will happen to U.K.-EU trade first. Until then, to some extent, they are flying blind in any talks.”
Double Whammy
The U.K. was originally expected to leave the EU in March 2019, allowing a 21-month transition to negotiate the nuts and bolts of a future trading relationship.
But last year’s knife-edge talks and last-minute maneuvers delayed the formal departure to Jan. 31, 2020, thus shortening the transition period — which Johnson has vowed not to extend — to just 11 months.
It was already an ambitious timeline. Then came the coronavirus.
The U.K. has been hit particularly hard by the pandemic, with nearly 42,000 deaths as of this writing — the world’s fourth highest, proportionate to the population.
The economy has also suffered greatly. In the three months of the most severe lockdown — April, May and June — the U.K.’s GDP shrank 20%, according to the Office of National Statistics.
And now the country is facing a second wave of infections that recently forced Johnson to impose new restrictions, including fines for those who don’t wear masks or break social-gathering rules.
Meanwhile, EU countries such as Spain and France are also grappling with a resurgence in COVID-19 cases even as their economies are still reeling from the first outbreak. During peak lockdowns in April, May and June, the EU economy on the whole likely shrank by 13%, according to European Commission projections, with the economies of Spain, Italy and France forecast to contract by around 16%.
Hammering out a trading relationship that would satisfy all 27 EU member states was always going to be an uphill battle. Doing so in the midst of a pandemic and historic economic contractions is more akin to climbing Mount Everest.
The combination of a second wave of coronavirus cases and the possibility of the U.K. leaving the EU without a trade deal could be disastrous for the British public.
A July 2020 U.K. Cabinet document leaked in late August to The Sun newspaper — normally a pro-government publication — talked of “worst-case scenario planning” with food supplies under threat, the state health service overwhelmed and the possibility of troops having to be deployed to help police maintain order.
While it was a worst-case scenario, “if there is no trade deal, there will be tangible disruption in terms of shortages, even of food,” warned Bale. “It will also be far more disruptive for the U.K. than the EU.”
Sticking Points
The EU-U.K. talks have been largely stuck on two issues.
The first remains fishing, even though it represents about 0.12% of the U.K.’s GDP and a similarly modest proportion of the EU’s.
The latter wants wide continued access to U.K. waters, post-Brexit, with quotas for catches that would be set for the long term. The U.K., however, wants to be able to renegotiate such quotas, potentially every year. London also wants to be able to restrict access to the U.K. 200-kilometer Exclusive Economic Zone, which contains some of Europe’s most lucrative fishing grounds.
The “level playing field,” meanwhile, is an EU insistence that post-Brexit, the U.K. maintain EU standards on the environment, labor and consumer protection. This derives from a fear that the U.K. will undercut EU products by lowering standards once it is no longer subject to EU regulations. The U.K., meanwhile, argues that the whole point of Brexit was to be able to set its own standards.
“Built into this dispute is the idea of state aid,” said Bale. “Within the EU, it is very difficult to subsidize industries, [because] if you do, you can be in breach of rules to discourage unfair competition. In the U.K., however, the ruling Conservative Party is moving away from traditional, liberal, free-market policies and wants to use state investment to ‘level up’ the country by providing aid to particular regions.”
A dispute resolution mechanism is a related sticking point, with the EU pushing for the European Court of Justice to fulfill this function, while for many Brexiteers, leaving the ECJ was a major plank of their agenda.
Finding New Friends
While these issues remain unresolved, negotiations with third parties are likely to languish, although these have stumbling blocks of their own.
The U.K.-U.S. trade talks, which entered their third round in July, have hit major snags over agriculture, and the tremendous uncertainty over the outcome of November’s presidential election has put everything on pause. Even if Donald Trump is re-elected, there’s no guarantee that he would follow through on pledges to forge a deal with Britain given his aversion to free trade.
Talks with Japan, however, have made progress, with an agreement in principle signed on Sept. 11. Japan is the U.K.’s 13th-largest export market, with around 1.9% of total exports. (The EU accounts for 46%.)
Meanwhile, the EU has some 40 trade deals in place with 70 countries worldwide. So far, the U.K. has negotiated “roll-overs” for 19 of these deals, representing 50 countries or territories — meaning that the current terms will continue to apply to the U.K., even after the end of this year. While that number looks high, the 50 countries represent only around 8% of total U.K. trade.
In 2019, many people feared what would happen if the U.K. crashed out of the EU without a withdrawal agreement in place.
The two sides ultimately signed a divorce agreement, but that clearly didn’t end the drama — or acrimony.
Now, the U.K. and EU stand on the precipice of yet another crisis — only this time, with a global pandemic raging, they’re staring into an even greater abyss of uncertainty.
Jonathan Gorvett (jpgorvett.com) is a contributing writer for The Washington Diplomat and a freelance journalist specializing in Near and Middle Eastern affairs. Anna Gawel (@diplomatnews), managing editor of The Diplomat, contributed to this report.
