The Phase 1 Deal:
Costly EU demands on regulatory alignment could prevent us securing
trade deals elsewhere
By Martin Howe QC
Our government on our behalf is
offering to pay the EU around €45-50 billion of money that we don’t
legally owe, to submit to our courts and our Parliament being overruled
by a wholly foreign court after we have left the EU, and to commit to
keep our regulation in agriculture and possibly other fields “aligned”
with the EU in order to resolve the Irish border issue. This is all so
that we can reach the nirvana of having not a actual trade deal, but
just talks about a trade deal.
The terms about the post-exit jurisdiction over us of the Luxembourg Court will be the subject of a separate briefing shortly.
It is clear that we do not
legally owe these vast sums to the EU. Indeed it is probable that in
law we have a net credit in our favour (as per this
analysis of the UK’s potential financial liabilities by myself and
Charlie Elphicke MP).
The fact that we do not owe the
money does not necessarily mean that it is wrong to agree to pay some
money. I would advise a client as part of a settlement to agree to pay
money that is not owed, if the overall benefits of a settlement,
including the benefit of achieving a harmonious and beneficial future
relationship with the other party, were sufficient to warrant the
But if you are going to agree to
pay a large sum of money that you do not owe, you need to look
carefully at what is the value of the benefit you will get in return.
The benefit is supposed to be the trade agreement that we will
negotiate with the EU once we move on to the stage of actually talking
to them about our future relationship. But no one has actually looked
at what the EU will realistically offer in the way of a trade
agreement, and demonstrated that it would really be worth €40-45
billion, or indeed that it would be worth paying any money at all for
what will be on offer.
Open or closed free trade agreement?
The key question about any trade
deal with the EU is whether it will be open or closed. An open
trade agreement is one which allows goods and services to be exported
between the parties if they satisfy certain standards, but does not
restrict the right of either party to allow in goods and services from
third countries. The most that an “open” trade agreement should say
about goods and services from third countries is that if they are let
in on easier terms than laid down in the trade agreement, then
exporters from the other party to the trade agreement should also have
the right to export their goods and services on those easier terms (a
“most favoured nation” or MFN clause).
By contrast, a closed
trade agreement will specify that goods and services that meet a
certain standard may be traded between the parties, but will prohibit
the parties from allowing in goods and services from third countries
which do not meet that standard. While such an agreement will
facilitate trade between the parties, it does so at the cost of
restricting trade with third countries and preventing the importation
of goods and services from outside which are cheaper or better than
those available within. This is particularly so where the standards
adopted are artificial and really designed to shield domestic producers
from competition rather than being truly necessary to safeguard the
interests of consumers.
The paradigm example of a
“closed” trade agreement is the EU’s internal market (the actual
accurate Treaty name for what is often referred to as the “single”
market). That is based on harmonising detailed and prescriptive rules
and regulations for all kinds of goods and services. While this assists
in facilitating free trade between countries within the internal
market, it does so at the expense of driving up costs, and more
importantly it restricts trade with third countries whose exporters are
required to comply with the rules. In addition, and unlike a closed
free trade agreement where the common standards are mutually agreed, a
country which joins the EU internal market from outside must submit to
the EU unilaterally imposing changes and further rules on it with which
it must comply.
These features of a closed trade
agreement restrict unilateral trade liberalisation, but more
importantly will render it difficult or sometimes impossible to
conclude beneficial trade agreements with third countries. For example,
you may be unable to offer a third country access to your own market
for its insurance companies on the basis of home country regulation,
because you are bound to apply a prescriptive set of rules under the
trade agreement to any insurer who does business on your market. The
third country will then be most unwilling to agree a trade deal under
which your insurers can access their market on the
basis of home country regulation.
The government rightly rejects
seeking continued UK membership of the EU internal market for this
reason, as well as for the reason that internal market membership would
necessarily also involve continued free movement of persons.
So what will be on offer from the
EU under a free trade agreement which gives preferential access to the
internal market? A lot of light was cast on this question by a lecture
given by Michel Barnier on 20th November 2017 (emphasis added):
UK will, of course, have access to the Single Market. But this is
different from being part of the Single Market. And a good deal on our
future relationship should facilitate this access as much as possible.
And avoid a situation where trade would happen under the WTO rules for
goods and services. To achieve this, there is a third key: we
need to ensure a level playing field between us. This will not
be easy. For the first time ever in trade talks, the challenge will be
to limit divergence of rules rather than maximise convergence. There
will be no ambitious partnership without common ground in fair
competition, state aid, tax dumping, food safety, social and
environmental standards. It is not only about rules or laws.
It is about societal choices – for health, food standards, our
environment and financial stability. The UK has chosen to
leave the EU. Does it want to stay close to the European model or does
it want to gradually move away from it?”
He went on to link these issues
to the ratification of the UK’s future partnership with the EU. Those
who choose to ignore these comments do so at their peril. It is clear
that the EU will not be willing to conclude a free trade agreement with
the UK unless we accept wide ranging obligations across our own
internal market, and also necessarily as regards imports from third
countries. Of particular significance are the references to “food
safety” and “food standards”.
The EU has no legitimate interest
in the food standards of food eaten by UK consumers after we have left
the EU. The references to these issues are pure protectionism: to lock
in the highly profitable UK food market for EU producers and to exclude
competition from outside. We are a net food importing nation with a
strong interest in having low food prices – which would be of
particular benefit to the many low-income families who voted Leave. Our
consumers have spent the last 45 years paying prices for food inflated
well above world levels, with the benefits of our captive market going
mainly to EU producers outside the UK.
It is obvious that the EU want to
maintain this situation as far as possible and will ruthlessly use a
free trade agreement with the UK as a lever to achieve that objective.
If we accede to such restrictions, the problem is not just that our
consumers will carry on paying well over the odds for their food for
the long term future. It will also severely damage or destroy the
prospects of concluding free trade agreements with major trading
partners, such as the USA and Australia, both of whom have very
important agricultural export interests.
The Irish border issue is not
about the peace process - it is about Ireland's wish to maintain
exports into a protected UK market
This is what the row over the
Irish border is about. The Irish government present this as being about
concern for the Northern Irish peace process. It is nothing of the
kind. Both the Irish government and their EU27 backers are cynically
exploiting that issue as a lever to drive the UK to agree to follow EU
agriculture rules after we have left, in order that Irish and other
EU27 producers can continue to exclude competition from the rest of the
world from the lucrative UK food import market.
That the UK government has agreed
to "maintain full alignment" with EU Internal Market and Customs rules
as a condition of accessing talks on trade is sheer madness. The "spin"
seems to be that as a result of the intervention by the DUP, the actual
scope of this commitment (i.e. which Internal Market and Customs Union
rules, and what exactly "alignment" means) has been rendered so
ambiguous and unclear that, like Humpty-Dumpty, the UK can declare that
these words mean what the UK says they mean, neither more nor less -
and that what they mean is very little.
This is a dangerous game. Let us
quote the actual paragraph in the Phase 1 Agreement:
"49. The United Kingdom remains committed to protecting North-South
cooperation and to its guarantee of avoiding a hard border. Any future
arrangements must be compatible with these overarching requirements.
The United Kingdom's intention is to achieve these objectives through
the overall EU-UK relationship. Should this not be possible, the United
Kingdom will propose specific solutions to address the unique
circumstances of the island of Ireland. In the absence of agreed
solutions, the United Kingdom will maintain full alignment with those
rules of the Internal Market and the Customs Union which, now or in the
future, support North-South cooperation, the all-island economy and the
protection of the 1998 Agreement."
There is no doubt that the EU
will insist that this means what they want it to mean, which is that
the UK has unconditionally accepted a wide ranging obligation to keep
our regulations on agricultural and other goods in line with EU
regulations and also to keep external tariffs in line - otherwise what
can the reference to the Customs Union possibly mean? They will insist
on such terms being inserted into any free trade agreement on offer to
us, and we will have gravely undermined our negotating ability to avoid
the imposition of such terms.
It is obvious that the EU will
use the same tactic of forcing the UK up against the clock which has
worked so brilliantly in causing the negotiating collapse by the UK
which led to the Phase 1 agreement. They will push the trade
negotiations to late 2018, and say that a trade agreement, and the
promised but not legally secured transition period, will only be
available to the UK if we accept their terms for a free trade deal
however unpalatable to us.
The End Game: a Vassal-State Brexit without the benefits of either ‘Leave’ or ‘Remain’
The referendum campaign involved
two opposed visions for Britain’s future. Under the first, favoured by
the Remainers, the UK would stay in the European Union, participate in
its councils, and -- to the extent possible -- seek to shape its future
development in line with the UK’s interests.
Under the second vision, favoured
by the Leavers, the UK would leave the European Union and take back
control of its laws, borders and money, and would trade with the world
outside the restrictive constraints of the EU’s customs union and
common commercial policy.
Each of these visions is
internally consistent, and has its pros and cons. The British people
however voted decisively against the first and in favour of the second
But where we stand today, we are
in grave danger that neither vision will be achieved. Instead, we are
in peril that a third scenario will come about, one not favoured by
either side. That is for the UK to cease its formal membership of the
EU, thereby losing its vote on EU laws, and its ability to influence --
or if necessary veto -- future Treaty changes. But at the same time we
would remain subject to continued EU control of our tariffs and
external trade policy, and continued EU control of a huge range of
market-related internal laws.
We would have changed our
relationship with the European Union from being a Member State into
being a Vassal State: a mere rule taker who must comply with laws
devised, interpreted and enforced by foreigners and by foreign
institutions. This would have the gravest economic and political
The economic consequence is that
it would make it impossible for us to benefit from the freedoms which
we will enjoy as a result of leaving the European Union. We would be
unable to reduce the very high duties and non-tariff barriers which the
EU’s policies oblige us to impose on basics such as food and clothing.We would be severely hampered or prevented from concluding free trade agreements with non-EU markets.
Such a vassal-state Brexit would inevitably lead to Brexit being dubbed
a failure, when the truth would be that Brexit had never been tried.
But the political consequences would be even more dire. Such an outcome
would be - and would be seen to be - a clear betrayal of the promise
made to all who voted in the referendum that their decision would be
implemented. There could be nothing more corrosive to the already
strained trust of millions of people in our political system, or more
likely to produce an explosion of frustrated anger
Can we escape the trap?
Far from it being worth paying
the money in the Phase 1 agreement in order to reach a beneficial free trade agreement with the
EU, it is increasingly and glaringly clear that the only free trade
agreements on offer from the EU are likely to be ones which it would be
worth paying good money not to belong to. And it seems that
in order just to reach the stage of having talks with the EU about
future trade that are likely to prove worthless, our government is
willing to compromise the independence of our courts and the sovereignty of our Parliament over our laws, and to give a
commitment about aligning our regulation with the EU’s which - even if unclear - will
endure even no trade agreement is reached.
The only possible escape from the
deep trap which we have dug for ourselves is to prepare actively for a
no-deal exit in March 2019, and to be willing to execute that plan if
the EU insists (as it will) on terms in a trade agreement which
interfere with our ability to trade independently of the EU.