Time to prepare for the risks and opportunities of the future EU-UK relationship

At an extraordinary summit on Sunday, EU leaders endorsed the UK’s Withdrawal Agreement, putting a provisional end to the first phase of Brexit. The deal still needs to be approved by both the British and the European Parliament – a matter which keeps countless commentators busy these days, although it is not the subject we will dwell on here. For whether the UK “crashes out” of the EU in a “no deal” scenario or the agreement eventually gets endorsed, both sides will ultimately reconvene to discuss their future relations. This is where Brexit gets interesting for economic operators. For them little will change during the transitional period – assuming it will happen – of 21 to 45 months at most. But beyond? A week may be a short time in politics; four years is shorter than most investment cycles. In other words: Whoever cares about the future EU-UK trading terms needs to start acting soon. If the tension around the divorce agreement is anything to go by, we will be in for a rough ride. EU unity held to the last day of the Brexit talks because the other 27 Member States wanted to get it over with. The other 27 national leaders meeting in Brussels on Friday called for a swift ratification of their divorce deal by the new British parliament so that talks on the future relationship can start during a transition period due to run until next December. But in the days leading up to the November 25 summit, France lobbied for stronger language around fisheries, Poland demanded clarity on climate change obligations and a variety of trade-heavy Member States – from Denmark to the Netherlands to Belgium – grumbled about the vagueness around a future trading relationship. Most vocal, however, was Spain which threatened to “veto” the agreement until it got explicit guarantees about Madrid’s say on Gibraltar’s future status in any long-term EU-UK agreement. EU trade pacts with countries such as South Korea, Japan and Canada have taken between five and nine years to complete. EU officials say Johnson’s plan to diverge from EU rules, rather than mirror them, could make negotiations even more complicated. These issues were eventually resolved or, rather, kicked into the long grass. They will come back when the real prize will be negotiated – the close economic partnership, as it is often described. That deal will, in terms of process and adoption, be akin to a Free Trade Agreement (FTA), albeit a so-called “mixed” one – an anodyne term denoting that assent will be required not only by the EU, as such, but by each and every Member State. The real peculiarity, however, of the future EU-UK trade is going to be its objective: It won’t be an agreement about facilitating mutual access or opening markets – all this is a given between EU member states – but a negotiation designed to minimise disruption from potentially divergent legal, regulatory and tax regimes; an attempt to keep the long-term cost of the divorce as manageable as possible for both sides.

This is because the envisaged broad scope of this agreement will include both matters handled by the EU – for instance trade in goods or services, public procurement and intellectual property rights – and issues remaining in the national and regional domain, like non-direct foreign investment and investor-state dispute settlement mechanisms.