Government Finally Shows Its Hand - An Edelman Analysis by Edelman

GOVERNMENT FINALLY SHOWS ITS HAND 12th July 2018

Pawel Swidlicki Senior Account Manager

KEY TAKEAWAYS The Government has today published its long awaited White Paper on the future UK-EU relationship. Two years on from the referendum, the UK finally has a detailed proposal that acknowledges some of the hard choices Brexit entails. However, it faces an almightily difficult path amid hostility both from Brexiteer MPs who have come out in open revolt against it, former Remain supporters who want an even softer Brexit, and the EU who will likely still see this as too bespoke and favourable an arrangement for the UK. The White Paper is essentially a much more detailed version of the principles agreed at Chequers – with no major changes. Despite the subsequent resignations of David Davis and Boris Johnson and hostile reception by Leave MPs and media, the Chequers approach appears to have survived intact. Below is my summary of its key points: •

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The centre-piece of the UK’s proposal is a free trade area for goods which aims to ensure “frictionless access at the border” – with zero tariffs and avoiding the need for customs and regulatory checks – whilst maintaining the integrity of cross-border supply chains. For the likes of Airbus and BMW, who raised concerns about this issue, this will be welcome news. Crucially, it would enable products to only undergo one set of approvals and authorisations in either market. The flipside of this free trade area is a common rulebook for goods including agri-food, albeit “covering only those rules necessary to provide for frictionless trade at the border”. This would entail the UK making “an upfront

12 July 2018

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choice to commit by treaty to ongoing harmonisation with the relevant EU rules”, i.e. not just maintaining current EU rules but also future ones. Parliament would still have to legislate for them and could in theory say no, but overall this provision falls far short of the full sovereignty many Brexiteers would like.

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On customs, the UK wants a phased introduction of the new Facilitated Customs Arrangement. This would remove the need for customs checks and controls between the UK and the EU as if they were a combined customs territory. It would also still enable the UK to control its own tariffs for the purposes of striking new FTAs with the rest of the world.

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New, looser trading arrangements on services, including financial services, and digital. These will provide regulatory freedom where it matters most for the UK’s services-based economy and allowing the UK to pursue its own path in terms of regulating the industries of the future such as AI.

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The commitment to ending free movement is restated, to be replaced with a new, undefined arrangement which “enables UK and EU citizens to continue to travel to each other’s countries, and businesses and professionals to provide services”. In order to satisfy those who want greater parity between EU and non-EU migration in future, there is a reference to the UK potentially offering similar terms to other close trading partners. However, the details are unlikely to be available until the Migration Advisory Committee report is published in the autumn.

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The new relationship would be underpinned by “binding provisions that guarantee an open and fair trading environment”. These include a common rulebook for state aid, cooperative arrangements between regulators on competition, and agreeing to maintain high standards through non-regression provisions in areas including the environment and employment rules – essentially a commitment not to water down current EU standards in these areas.

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As regards the highly sensitive area of fishing policy, the UK proposes to put in place “new arrangements for annual negotiations on access to waters and the sharing of fishing opportunities based on fairer and more scientific methods – with the UK an independent coastal state.”

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In terms of the governance of the new relationship, the UK proposes “joint institutional arrangements” which would provide for regular dialogue and support its smooth functioning. In areas covered by the common rulebook, there would be a clear process for updating the relevant rules, which respected the UK’s sovereignty and provided for Parliamentary scrutiny. They would include “robust and appropriate means for the resolution of disputes” including through a Joint Committee and binding independent arbitration. The ECJ would play a role but crucially, its rulings would not be directly binding on the UK.

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The Government acknowledges that it will still need to agree some form of backstop mechanism to prevent the possibility of a return to a hard Irish border. Without this fall-back mechanism the EU, and Dublin in particular, would never sign off the withdrawal agreement, transition and future trade agreement. However, the White Paper also states it is confident the relationship it sets out essentially makes backstop redundant anyway by preserving the status quo on the Irish border. This has proved the biggest single Brexit challenge so far and the difficulty of finding a mutually acceptable version should not be understated. The EU’s proposal for special status for Northern Ireland is unacceptable to the UK government and above all the DUP.

ANALYSIS: WHAT NEXT? Ordinarily, the release of the White Paper will have been leading the news bulletins but that has been blown out of the water by the visit US President Donald Trump – although typically he waded into the row by saying he was not sure that May’s proposals were what people voted for. Either way, with under 9 months left to go till Brexit day, battle lines are hardening and the scope for ambiguity and trying to make different interest groups happy is over. May has finally made a stand and even if many wish the party management were better most agree it had to happen sooner or later – there simply is no conceivable form of Brexit that could keep Jacob Rees-Mogg and Philip Hammond both happy. The Chequers principles and today’s White Paper set out a form of Brexit that few people will love – indeed this is borne out by initial polling – but one which May ultimately hopes enough people can live with. If a significant chunk of the party’s MPs cannot become reconciled with it, the Government may have to rely on Labour MPs to rebel against their own party to vote for the final deal although they will likely demand further softening (e.g. on services) which will in turn risks losing further Tory MPs. The key question now is what the EU say. After months of demanding the UK spells out what it wants they now have a tangible proposal to discuss. They will be pleased with some of the content but for the level of access the UK is seeking on goods (much higher than a standard FTA) they are likely to demand further concessions on free movement, the role of the ECJ and budget payments. It is possible that May has now gone almost as far as she can in terms of concessions, and any further dilution of her red lines could prompt more pragmatic Brexiteers like Michael Gove and Dominic Raab to pull their support, a move which would most likely collapse the government.

Meanwhile, the customs and trade bills return to Parliament next week. Brexiteers have tabled a series of wrecking amendments. While they don’t have the numbers to pass, it will be the first opportunity to gauge their level of support.

STAKEHOLDER REACTION VICKY FORD CONSERVATIVE MP

There is a complete understanding that if we want to keep an open border with Ireland, we must have common standards on goods and that if we want to keep the UK united, it needs to apply to all the UK.

GUY VERHOFSTADT EUROPEAN PARLIAMENT NEGOTIATOR

Welcome UK proposal for a future Association Agreement. We will analyse White Paper in light of our priorities: Citizens Rights, an operational backstop for Ireland and a deep economic relationship based on the integrity of the Union & internal market. 12 July 2018

JACOB REES-MOGG CONSERVATIVE MP & ERG CHAIR

We will be a rule taker, de-facto subject to the European Court of Justice and it's hard to believe that there is even a tinge of pink left in Mrs May's red line on this

PETER PTASSEK GERMANY’S BREXIT CO-ORDINATOR

Welcome UK Brexit White Paper. EU27 will now assess it against its principles - such as integrity of the Single Market, indivisibility of the four freedoms, and autonomy of EU decision-making.