Amid the crippling uncertainty caused by the novel coronavirus and the measures needed to fight it, British businesses still have no idea what will happen to trade with their biggest partner at the end of this year.
Although the U.K. and European Union reached a deal on their divorce in October of last year, and though Brexit officially took place at the end of January, the two are still in a transition period that runs out at the end of 2020: The U.K. is out of the EU but, as far as trade is concerned, it is still effectively a member.
So what happens at the end of December? That’s what the two sides’ negotiators are trying to determine in talks that resumed Tuesday: This is round four. But fans of predictability will find little to hold on to at this point. If anything, the smart money is on a collapse in negotiations.
Writing in a Monday Politico op-ed, Carolyn Fairbairn—head of the Confederation of British Industry (CBI)—warned that the failure to strike a trade deal is “a real possibility at the end of the year” unless somebody gives some ground.
“Both the U.K. and the EU negotiating teams have rigid mandates and are following them to the letter,” she wrote. “Negotiation by videoconference doesn’t allow for the kind of sideline conversations that normally help smooth differences in trade talks.”
Fairbairn noted that the stockpiles businesses had previously built up to cope with a no-deal Brexit have been used to “plug supply shortages created by the pandemic,” and half the country’s manufacturers are experiencing supply chain problems. Cash reserves have been depleted.
“For many firms fighting to keep their heads above water through the crisis, the idea of preparing for a chaotic change in EU trading relations in seven months is beyond them,” she wrote. “Faced with the desperate challenges of the pandemic, their resilience and ability to cope is almost zero.”
So what are the issues that are holding up some kind of mutually acceptable resolution?
One big issue, random as it may sound, is that of fishing rights.
The EU wants European vessels, from countries such as Germany, France, and the Netherlands, to continue to have fishing access to British waters as they do now. But the British side wants a revised system of quotas that would reserve more of the fish in that territory for British fishermen.
Although the fishing industry constitutes a mere 0.12% of the U.K.’s gross domestic product, this issue formed a major part of the case for Brexit, with campaigners regularly talking about the country “reasserting” control over its waters.
Ironically, as the BBC reported a couple of weeks ago, the U.K.’s historical willingness to sell off its fishing rights means around 55% of the English fishing quota is in the hands of British-registered vessels that are owned by companies in Spain, the Netherlands, and Iceland.
But nonetheless, here we are, and neither side seems likely to budge. The EU’s negotiators can only operate within the mandate set for them by the bloc’s member states, and that mandate calls for maintenance of the status quo. Meanwhile the British government, led by arch-Brexiteer Boris Johnson, would be humiliated if it allowed that to happen.
Level playing field
The other big sticking point revolves around a so-called level playing field for future competition between the U.K. and the EU.
A European idea, this essentially means the U.K. would need to maintain rules equivalent to the EU’s on things such as taxation, climate protection, and state aid, if it is to maintain free trade relations. The U.K. argues that other EU free trade deals don’t include such a concept—which would again be antithetical to the point of Brexit: to free the U.K. from EU rules.
Prime Minister Johnson’s team has been adamant that there will be no trade agreement unless the EU ditches its insistence on the level playing field.
“We have been clear that the U.K. will have high standards and, in many cases, higher standards than those in the EU. However, we cannot accept any alignment with EU rules, the appearance of EU law concepts, or commitments around internal monitoring and enforcement that are inappropriate for [a free trade agreement],” said David Frost, the U.K.’s chief negotiator, in a mid-May letter to his EU counterpart, Michel Barnier.
On Tuesday, a spokesman for Johnson told reporters that no compromise was forthcoming. “We have always been clear that there is no question of splitting the difference on the level playing field and fish. We aren’t compromising on these, because our position on these is fundamental to an independent country,” the spokesman said. “Any agreement has to deal with this reality.”
Meanwhile, EU officials are briefing the media that many in Brussels suspect the Johnson administration does not actually want a deal at all, but rather for the two sides’ trade relationship to fall back to default, tariff-laden World Trade Organization rules at the end of the year.
The two sides’ negotiators will provide an update on Friday, after several days of virtual talks. And if they don’t make serious progress, then all eyes will be on the British government, to see if it will request an extension to the Brexit transition period.
The EU side is perfectly willing to allow such an extension, but Johnson has consistently maintained that the transition period will end on Dec. 31. He has until June 30 to change his own mind and request an extension; after that, if no deal is struck by the end of the year, there’s no option to keep negotiating.
London Mayor Sadiq Khan yesterday joined the likes of International Monetary Fund chief Kristalina Georgieva in urging Johnson’s government to change tack, because of the impact of the pandemic.
“The last thing the country needs as it tries to find a way back from the devastation wreaked by coronavirus is more chaos and uncertainty,” Khan wrote. “I urge the government to put political ideology aside and pursue the pragmatic route of seeking an extension to the negotiations so that we and our European partners can focus on recovery from COVID-19.”
No dice, the government responded. “An extension to the transition period would bind us into future EU legislation, without us having any say in designing it, but still having to foot the bill as we would still have to make payments into the EU budget,” a spokesperson said. “The EU themselves have said that their next budget will be unusual, and we would have no say in what it would go towards.”
“The desire for no further delay is understandable,” wrote the CBI’s Fairbairn in her op-ed. “But while it may be tempting for some to down tools and accept that WTO terms are the best either side can hope for, there are many livelihoods and businesses at stake. The current air of resignation surrounding the Brexit talks must be shaken off.”
The EU might be the larger participant in a potential deal, but the impact of collapsed talks would have implications not just for British jobs and businesses.
When the European Commission last month forecast that EU economic output would contract by 7.5% this year, largely owing to the coronavirus, it added the caveat that this was based on a “purely technical assumption of status quo” in terms of future U.K.-EU trading relations.
If there is no deal, and tariffs are imposed on both sides, that will be anything but the case.