3 March 2020
EU and UK Announce Mandates for Trade Partnership Negotiations, Revealing Thorny Path Ahead
On 25 February 2020, the European Council adopted its decision to authorise the opening of the future partnership negotiations with the UK. Then, on 27 February, the UK published its own negotiating mandate for trade talks with the EU. Though both sides show a willingness to negotiate, a clash is expected on, among others, a “Canada style” agreement which the UK is seeking, and a level playing field in matters such as environmental and labour law, which the EU is pushing for. A major added complication is that both sides need to agree on their post-Brexit relations before the end of 2020, unless an extension is sought (which the UK has made clear it is against).
The European Council’s negotiating directives were adopted on 25 February 2020, and are based on the draft recommendation put forward by the European Commission on 3 February 2020. The Commission states that the EU fully respects the Political Declaration agreed between the EU and the UK in October 2019. The adopted directives cover all areas of interest for the negotiations, including trade which will be of particular interest to Hong Kong and other third-country traders. Other areas include economic cooperation, law enforcement and judicial cooperation in criminal matters, foreign policy, security and defence, participation in Union programmes and other thematic areas of cooperation.
While the Commission President Ursula von der Leyen announced that her side “want to build a close, ambitious future partnership, as this is in the best interest of people on both sides of the Channel”, Michel Barnier, the chief negotiator, was more straight-talking: he said “we are determined to reach a deal that protects EU interests”. Formal negotiations with the UK are set to begin in the week of 2 March 2020.
The Commission notes that it intends to achieve as much as possible during the transition period. “We are ready to work 24/7 to make the best out of the negotiations”. It is possible to extend the transition period by one to two years; however, such decision must be taken jointly by the EU and the UK before 1 July. If no decision is taken by July 2020, there is no other legal basis for extending the transition beyond 2020. The risk of a no-deal is still therefore a reality. Businesses are warned that they need to prepare now for the end of the transition period, as the UK will no longer be in the Single Market or the Customs Union, and no deal would mean that it becomes like any third country with which the EU does not have a preferential relationship.
Even if a free trade agreement (FTA) were to be agreed by the end of this year, the Commission has made clear that it will not allow goods to be exchanged between the UK and the EU as they are today. Hong Kong companies may be alarmed to learn that trading under FTA terms will be of a very different nature compared to the free movement of goods enabled by the EU's Customs Union and Single Market. In an FTA context, rules of origin and customs formalities will apply; all imports will need to comply with the rules of the importing party; and all imports will be subject to regulatory checks and controls for safety, health and other public policy purposes.
That being said, the proposal that the EU is ready to table is destined to be very ambitious, with no tariffs and no quotas across all goods, including agricultural and fisheries products. This so-called “privileged access” is said to be conditioned on the existence of robust provisions ensuring a level-playing field, guaranteeing competition between economic operators on both sides. This means that both sides must agree on effective assurances to guarantee common high standards on social (labour), environmental, tax, state aid and competition matters. According to the European Commission, It is the EU’s standards in these areas that will serve as a point of reference to establish such guarantees.
The Commission warns that without an FTA in place by the end of the transition period, tariffs and quotas will apply to all trade in goods between the EU and the UK. In this scenario, both sides must apply what are known as “MFN tariffs”. Indeed, under the WTO Most Favoured Nation (MFN) principle, benefits given to one trading partner need to be extended to all other WTO members, unless a preferential trade arrangement, such as an FTA, allows for preferential treatment. Therefore, without an FTA in place as of 1 January 2021, economic operators and consumers in both jurisdictions will not be able to expect privileged treatment.
The UK Government, for its part, published its official “Approach to Negotiations” on 27 February 2020. The document makes clear that the UK is aiming for a Comprehensive Free Trade Agreement (CFTA). This Agreement, according to the UK, should be along the lines of the FTAs already agreed by the EU in recent years with Canada and with other “friendly countries”. Indeed, on the same date, Bloomberg Law reported that Prime Minister Boris Johnson has told the EU that he will walk away from the negotiating table in June if it is not clear that the UK will obtain a Canada-style trade agreement with the EU.
The UK’s official note also expressly states that “the Government will not extend the transition period provided for in the Withdrawal Agreement. This leaves a limited, but sufficient, time for the UK and the EU to reach agreement.”
The reality is that the time afforded to the negotiations may not in fact be sufficient, given that Boris Johnson’s Government has pushed back against regulatory alignment, and neither side seems ready to budge on their core requirements.