Brexit Update 13th July 2018

By July 27, 2018 Brexit Updates

Top 3 developments  

  • Government White Paper published as Davis and Johnson resign
  • UK seeks frictionless border through ambitious settlement
  • CETA faces difficulties in Italy

UK Update

All Chequered Out…

A week is a long time in politics. Theresa May has come under fire following the publication of a white paper setting out the UK’s ambition for a future relationship with the EU. Both the Brexit Secretary and Foreign Secretary have resigned over the deal, with May acting fast to replace them and other ministers that have resigned in opposition to the agreement made at Chequers. The deal, which seeks a high level of integration on goods regulations as part of a wide free trade agreement aimed at removing friction to trade and maintaining supply-chains for manufacturers and exporters, also sets out a high level of divergence on the service sector of which UK exports are more reliant. The Free Trade Agreement goes far beyond that agreed by the EU and any other third state, calling for a facilitated customs agreement and common rule book for goods that the Government believes would negate the need for checks at borders, including the border between Northern Ireland and the Republic of Ireland. It would in effect make the UK and EU one customs territory, with tariffs collected at UK and EU ports from imports outside the two territories dependent on the final destination of the imported good. Where the final destination is unclear, the higher tariff of the UK or EU will be charged, with businesses able to claim back the tariff if necessary. The Government envisages this to be the case for 4% of imports when a trusted trader system is in place.

May will now need to head off a rebellion from her own ranks who are seeking for the UK to take a different path in negotiating a deal with the EU, whilst also seeking to sell the deal to the EU. If further concessions are given to the EU, or the EU seeks a watered-down agreement similar to that of Canada with an added security element then the Government is likely to come under increased pressure to abandon the Chequers deal and accept EU intransigence. Further complications come in Parliament, where May will need to gain majority support for the final future relationship framework alongside the EU Withdrawal Agreement with its financial commitments. If May fails to do this, it is as yet unclear what the outcome will be. However, it is likely in the first instance for negotiations to possibly be extended through emergency legislation given a lack of parliamentary support to pursue no-deal. The Government would also likely be asked to publish its plans for no-deal in the event that the final agreement does not pass through Parliament, potentially splitting Parliament further as Brexiteers are emboldened, whilst others see the negative consequences of leaving without a deal.

What’s next?

The EU’s Brexit Negotiator, Michel Barnier, will meet with EU27 leaders on the 20th July to determine how they want to respond to the UK’s plan. Whilst Barnier has said he looks forward to the continuation of Brexit negotiations on Monday, with the Withdrawal Agreement ‘80% complete’, others in the EU have spoken down the UK’s proposals with one diplomat calling it ‘cake’ in reference to the EU’s position on what they see as the UK’s ambition of wanting to retain the benefits of membership outside of the EU without the associated costs and responsibilities. Irish Taoiseach welcomed the UK’s white paper, saying that “we are perhaps entering the space” where the EU can relax its red lines in response to the UK relaxing its own. We will have to wait a week at least therefore before we know the viability of May’s proposals based on both the EU and Parliament’s responses.

…All Trumped Up

US President Donald Trump arrived in the UK following a successful NATO Summit buoyed by increased defence spending commitments by European states after warning that the US did not look favourably on those that had not yet met the 2% of GDP threshold for defence spending set in 2014.

He turned his ire onto the UK following the summit, criticising the deal struck at Chequers, whilst declaring Boris Johnson, who resigned over the deal, as a great friend and a potential great Prime Minister. He further declared that he had told May how to deal with the EU in negotiations but added that May had not followed his advice. On the trade aspect of the Chequers deal, Trump said that they would effectively be negotiating with the EU and not the UK with so many restrictions in place which could mean no deal is agreed. The comments come as a red flag to Brexiteers in the party, and act as a warning to May of the challenges of life outside the EU. A US comprehensive free trade deal is seen as one of the prizes of leaving the EU and a failure to gain approval from Trump following his visit may leave May facing ever growing opposition.

Raable at DExEU

Dominic Raab has replaced David Davis as the Secretary of State for Exiting the European Union following the latter’s resignation. Raab, who was formerly a Minister of State for Housing and Planning and is a close ally of Davis, will be taking a back seat in negotiations with the EU, which instead will be run by May’s team in the Cabinet Office. The arrangement, which Davis found unacceptable, will mean that Raab will be charged with preparing the UK for the UK’s exit, including no-deal preparations. Additional duties will include providing the negotiating team with material to help in negotiations, leaving May as the clear lead in ongoing talks. May has sought to exert her authority in the days beyond the Chequers Summit with her cabinet where the UK’s position was agreed. This was made clear in a response to Boris Johnson’s critical resignation letter, where May set out that the agreement reached marked the end of individual views being expressed by the Cabinet, with those not willing to give support to the deal right to step down – known as collective cabinet responsibility. Raab will continue to make statements on Brexit and will meet with EU Chief Negotiator, Michel Barnier next week.

Leadership? On your marks. Get set. Wait!

Whilst May seeks to limit the fallout from losing two senior cabinet Brexiteers, others are lining up to criticise the Chequers plan and May’s vision for the UK’s relationship with the EU post-Brexit. European Research Group Chair Jacob Rees-Mogg has declared openly that he would not support the paper once its turned into a future framework with the EU. Whilst Rees-Mogg has said that his problem is with the policy not the personality, other Conservative MPs are seeking to trigger a vote of no confidence in May. Under Conservative Party rules, 48 MPs must submit a letter to trigger a leadership contest, a contest May is determined that she will win given the late stage of negotiations and lack of a viable compromise candidate to replace her and gain the support of the whole party to pass the final withdrawal agreement and future relationship framework through Parliament. If triggered and May won, no additional challenge could be made within 12 months, meaning May would remain in place beyond Brexit, leading strategists to believe she may relish the challenge given the likely outcome.

Whilst it is unlikely that a leadership contest will be triggered, given the potential risks and ramifications, including uncertainty and calls from the opposition for another election, the Telegraph has reported party whips are urging those who have submitted letters to rescind them to ensure the contest doesn’t go ahead. Brexiteers are instead seeking to disrupt the plan through forthcoming votes on the Trade Bill and Customs Bill, tabling amendments that would force May to alter her offering to the EU through UK legislation. It is as yet unclear whether this could pass however, given the need for a majority in Parliament to support the amendments.

City Uncertain

The City remains sceptical of the Government’s plans for a post-Brexit settlement after the publication of the white paper and announcement by Chancellor Philip Hammond that the ‘mutual recognition’ plan which City leaders favoured for UK-EU regulations and rules had been dropped. Policy Chair of the City of London Corporation, Catherine McGuinness, called the plan “a real blow for the UK’s financial and related professional services sector”. Others in the City however railed behind the plan, which would see UK financial services gaining less access to EU markets, but greater regulatory autonomy which the Bank of England and others sees as of particular benefit to the UK’s financial sector. Services trade with non-EU countries grew by 73% between 2007 and 2017, whilst the UK’s service sector made up 79% of gross value added to the UK economy in 2017. This is an area the UK sees itself expanding on as it diverges from the EU, with financial services making up a substantial part of that. The lack of mutual recognition, and ‘a new economic and regulatory arrangement for financial services’ is likely to mean that a deal on enhanced equivalence measures is pursued. It is unclear how far these will go however, with the City needing certainty to allow them to adjust financial offerings accordingly.

The Final Frontier

Airbus CEO, Tom Enders, has said that the UK’s security depends on being a part of ongoing pan-European space and defence projects, a point that the Prime Minister agreed upon when she addressed Parliament this week. Enders called on the UK and the European Commission to find a solution to ongoing disagreements over programmes, including the much reported upon Galileo satellite programme. Ender’s further called the UK one of only two serious powers in the EU, possibly referring to France with its defence capabilities, or Germany for its economic prowess. Airbus is one of many companies working on projects in the defence and space sectors and is likely to lose out on contracts worth millions unless a deal is done.

Aviation ambitions set sky high

The white paper sets out the UK’s negotiating position on the future of the aviation industry. On supply chains, it seeks to apply a common rule book, a free trade agreement and facilitated customs agreement to ensure the movement of goods between the UK and EU remains frictionless. This would alleviate much of the concern of Airbus and others who rely on frictionless crossings between the UK and continental Europe to maintain capacity and continue to operate a just-in-time model that ensures competitiveness through supply-chain efficiencies. The UK also wants product testing to be valid in both territories, meaning manufacturers would only need to undergo one series of tests, with UK tests maintaining parity and applicability with EU tests.

The Government is further seeking to remain under the regulatory oversight of the European Aviation Safety Agency as a third member state under Article 66 of the EASA regulations, as Switzerland currently operates. The UK acknowledges that it will not have voting rights, however is seeking active participation in EASA, which would include providing expert opinion to inform the central regulatory authority in hope of ‘supporting collective work on aviation safety’.

The UK further wants to maintain reciprocal liberalised access through an Air Transport Agreement, allowing UK and EU carriers to operate from, to, and interestingly within, the UK and EU territories allowing carriers to operate internally within each other’s territories. On air traffic management, the UK is seeking close cooperation to maintain interoperability and wants to continue to work with the EU on aviation security to address shared threats.

On ownership, the white paper sets out the EU-Canada Air Services Agreement which allows for a fully liberalised bilateral approach to ownership and control as a potential future model which would negate to an extent current ownership rules for third state carriers operating internally between EU states.

In sum, the proposals are ambitious, however given a great deal relies on a facilitated customs agreement and common rule book being agreed with the EU, there is a possibility that supply chains could still be affected. The levels of integration the UK is seeking on aviation matters is likely to be looked favourably upon by the industry. However, the EU Commission’s response will ultimately determine the extent to which the Government’s proposals gain traction and lift off.

EU UPDATE

CETA at Risk

Italian Deputy Prime Minister Luigi Di Maio has refused to sign off the Comprehensive Economic and Trade Agreement (CETA) which was agreed between the EU and Canada after several years of negotiations. Di Maio has said that the Italian Parliament will reject the agreement due to concerns over protected industries and products within Italy. Italy currently has the highest number of Protected Designation of Origin (DGO) and Protected Geographical Indicator (PGI) which give protection to products such as Prosciutto di Parma Ham. Canada has agreed to recognise 40 of the 292 DGO and PGI labels of Italian origin, something the Government and legislators want increased prior to ratification. The difficulties underlie the complexities involved in agreeing trade agreements between the EU and third states. Whilst negotiations are led by the European Commission, the parameters are set by member states and final agreements must be ratified by all 28 member states prior to the trade agreement coming into effect.

Upcoming Key Dates

  • 16th July: Negotiations continue
  • 16th July: Remaining stages of the Taxation (Cross-Border Trade) Bill. Customs.
  • 17th July: Remaining stages of the Trade Bill
  • 20th July: Michel Barnier meets EU member states to discuss UK White Paper
  • 18th October: EU Council Summit, including sign off of the EU Withdrawal Agreement
  • 29th March 2019: UK planned exit from the European Union
  • 30th March 2019: UK planned transition period.
  • 31st December 2020: UK planned exit from the transition agreement.