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The Progressive Policy Think Tank

A strategy for the Article 50 negotiations

After months of paralysis, obfuscation and backbiting in Westminster, Theresa May is set to finally give a long-awaited speech on the key objectives for the government’s forthcoming negotiations with the EU.

‘Brexit means Brexit’ will no longer cut it; neither will her somewhat ambiguous references to trading with and operating within the single market, while regaining control over our own borders. With the government committed to invoking Article 50 within the next three months, this time the Prime Minister will need to put more flesh on the bones of her Brexit vision.

So what should be the strategy for the government’s negotiations? EU withdrawal is one of the most profound policy undertakings of post-war Britain. There is a huge amount at stake, from the security of tens of thousands of workers whose jobs depend on the single market to the rights of EU nationals living in the UK and UK nationals living abroad. Moreover, there is no straightforward way for the UK and the EU to find a joint agreement: both parties approach these unprecedented set of negotiations from fundamentally different viewpoints, with divergent interests and apparently irreconcilable red lines.

How the government approaches the negotiations is therefore absolutely critical for its success. Ahead of May’s Tuesday speech, we put forward our own suggestions for a framework for the government’s negotiating strategy. The number of moving parts, complete unknowns and unanswered questions make this a fiendishly complex task. The nature of the final deal is of course impossible to ascertain at this point. So this is simply our suggested outline for the government’s opening negotiating position. It is of course an ambitious set of initial objectives – starting out with anything less would be strange – but it also recognises many of the substantial challenges involved in securing an advantageous deal. We address ten issues of particular priority.

Issue 1: The parameters

The first challenge the government will face after invoking Article 50 will be how to manage the parameters of the negotiations. The government needs to ensure that the European Commission is willing to engage in negotiations about a new trade arrangement between the UK and the EU in parallel with, rather than subsequent to, the withdrawal negotiations. The alternative would be disastrous, as it would likely result in the UK falling out of the EU without any trade deal in place – meaning the introduction of a range of stringent barriers (including tariffs) on UK-EU trade. The legal text of Article 50 is ambiguous on the question of parallel negotiations, though the UK has a strong case to make that negotiating a withdrawal agreement without knowledge of the destination relationship would be pointless. But the UK will need to move fast to get clear and public EU agreement, in order to calm markets once Article 50 is invoked.

Issue 2: The timing

Second, the government should look to get agreement from the 27 other member states to in principle extend the Article 50 timeline, if the initial 2-year period proves to be insufficient. The chief negotiator for the European Commission, Michel Barnier, has proposed a timeline of less than 18 months to complete the negotiations, before they need to be ratified by the UK, the EU27 and the European Parliament. This gives a very limited period in which to negotiate a new agreement. Comparisons with the length of time taken to agree CETA – the EU-Canada trade deal, which has taken seven years to negotiate, and has not yet come into force – and other similar trade deals are misleading, because these involved bringing down trade barriers and aligning standards, while a UK-EU agreement will start from a place of close trade and regulatory integration. Nevertheless, 18 months is an extraordinarily short time to agree what will be an unprecedented and complex deal, in potentially acrimonious circumstances. On top of this, the upcoming elections in France, the Netherlands and Germany (and possibly Italy) could stall things further.

The government could try to secure a transitional deal – perhaps temporary membership of the EEA, as some have called for – but even this negotiation could be subject to complex wrangling, and so could significantly delay the process of reaching a final deal. The government might be better off moving fast to try to persuade the other 27 member states to unanimously agree a provision for potentially extending the timeline for the Article 50 negotiations; otherwise the UK could face being forced out without a deal in March 2019.

Issue 3: The framework

Third, May should set out clearly what the scope of the negotiations should entail. Here the options are numerous. But at its core is the trade-off between market access and restrictions on EU migration. Close relations in trade in goods and services are clearly of vital importance – low barriers to trade will protect jobs, keep down prices for consumers, and support economic growth. But the result of the referendum demands some form of change to the current free movement rules. The EU’s immediate response will of course be ‘You can’t have your cake and eat it’. But any sensible negotiation will have to bear these two seemingly contradictory – and yet incontrovertible – principles in mind.

In an attempt to square the Brexit circle, the government could try to negotiate an ‘EEA minus’ arrangement – i.e. it could try to negotiate leaving the EU and re-joining the European Economic Area (EEA) as a member of EFTA, with a special provision on restricting free movement. Staying in the EEA would guarantee more or less full membership of the single market, which would maintain the UK’s trade relationships with the EU in goods and services. But any attempt to negotiate an opt-out or special provision on migration is unlikely to be successful: the EEA agreement allows little room for flexibility on freedom of movement. There is a ‘safeguard measures’ clause within the EEA agreement, but it has only been used with respect to migration by Liechtenstein, a country of under 40,000 people. At the same time, any special provision for the UK could open a can of worms, as the other (non-EU) members of the EEA (Norway, Iceland and Liechtenstein) might want to negotiate similar kinds of opt-outs. While the option should not be ruled out, the prospects of successfully negotiating an ‘EEA minus’ deal are therefore limited.

On the other hand, the government could go down the opposite route, and take immigration out of the negotiations altogether. It could simply argue that it will impose whatever restrictions on immigration it likes, and that the negotiations with the EU should focus on other things, primarily trade in goods and services. However, this approach would be a perilous mistake, for two reasons. First, it would automatically set expectations of a limited Free Trade Agreement (FTA) with the EU, similar to other FTAs, such as the deal between the EU and South Korea. While this would be better than nothing, it would not offer the level of access – particularly in trade in services – to best serve the UK economy. Our opportunities for a successful deal would be greatly curtailed from the offset. Second, it is extremely hard to simply disentangle trade in services from the question of labour mobility, particularly when the UK’s membership of the EU has facilitated a complex network of trade relationships involving the cross-border movement of people to facilitate trade in services between the UK and other member states. Even FTAs between the EU and third countries (such as CETA) now typically involve some provisions on labour mobility. The UK will struggle to put the question of migration completely to one side in the negotiations.

A more promising approach would be to negotiate something like an ‘association agreement’ with the EU, as proposed by former MEP Andrew Duff and modelled on the association agreement between the EU and the Ukraine. The ‘association agreement’ is a deal between the UK and Ukraine that creates a ‘Deep and Comprehensive Free Trade Area’ (DCFTA) between the UK and the EU, covering trade in goods and services and common standards, alongside close cooperation in a range of other areas, such as energy, justice, and foreign policy. Of course, the deal could not simply be replicated for the British case – for one thing, the context of the agreement is to facilitate closer European integration, rather than the reverse – but it could provide a useful template for a future UK-EU relationship, not least because it contains scope for close market access on services, as well as goods (without a free movement requirement). If the UK were to model its strategy on a deal like this one, it could aim to seek an ambitious and far-reaching DCFTA that maintains much of the goods and services integration between the UK and the EU, while also containing a compromise on the free movement of movement of people. It could also be extended to include a wider set of mutually beneficial arrangements, covering issues such as security, defence, and foreign policy.

Issue 4: Tariffs

What might an ‘association agreement’ of this form contain? Perhaps one of the simplest issues to address in the negotiations will be tariffs on goods, as this is a common feature of standard FTAs, and there is a clear interest in both sides arriving at a sensible deal. Trade in goods with the EU is a major component of our total trade: the latest figures indicate that in the three months to November 2016, the UK exported £38 billion worth of goods to the EU, just under 50 per cent of our total goods exports. At the same time, the UK imports more than it exports and our trade deficit with the EU for the three months to November 2016 was £25 billion.

So here the UK should straightforwardly aim for zero tariffs on goods travelling between the UK and the EU, as exists currently. Maintaining zero tariffs on industrial goods will probably be the easiest thing to negotiate, which will be of reassurance to the car industry; based on the experience of previous trade agreements between the EU and third countries, tariffs on agricultural and fisheries products will likely be trickier, but still feasible.

Issue 5: Rules of origin and the customs union

Much of recent discussion has focused on the pros and cons of the UK leaving the EU’s customs union, which provides for the free flow of goods around the EU while imposing an external common tariff on third countries. This is a misleading formulation, however – no non-EU country is part of the EU customs union, so there is little chance of the UK staying in the EU customs union post-Brexit. On the other hand, there are some countries, such as Turkey that have their own customs union with the EU.

It is therefore possible that the UK could negotiate a customs union with the EU as part of the Article 50 negotiations. The most obvious advantage would be that, inside a customs union, exporters from the UK into the EU would not have to comply with ‘rules of origin’ – that is, they would not face checks to prove that the goods they are importing into the EU originate from the UK or from a third country. But the quid pro quo would be the UK effectively having to adopt the EU’s trade policy. Turkey, for instance, has a customs union agreement with the EU for industrial goods, and must follow the EU’s common external tariff for these, without any influence over their levels. Moreover, if the EU signs a trade deal with a third country to reduce tariffs, then Turkey is obliged to try to sign a similar deal on goods, because otherwise importers could use the EU as a ‘back door’ to import goods into Turkey tariff-free. A customs union agreement along the lines of the Turkey arrangement therefore seems to be of little advantage to the UK. It is possible that the UK could sign a different agreement that is more beneficial, but the inextricable logic of the customs union – that rules of origin can only be abolished internally if a common trade policy is adopted externally – suggests that such an option is unlikely.

The government would in all likelihood be better off not seeking a new customs union agreement with the EU. It should, however, identify those goods for which it would be particularly challenging for UK exporters to comply with ‘rules of origin’ and aim for a less stringent process for those goods to be included in derogations on the ‘rules of origin’ as part of the association agreement, as Canada has secured as part of CETA. This would allow for a sensible balance between limiting the bureaucracy of rules of origin in particularly challenging cases while allowing the UK to pursue its own free trade policy and sign bespoke deals with other non-EU countries.

Issue 6: Trade in services and other non-tariff barriers

While overall it is true that the EU sells more to the UK than vice versa, in services – and in particular financial and insurance services – the UK has a trade surplus with the EU. For the third quarter of 2016, the UK’s trade surplus with the EU amounted to just under £10 billion. The UK’s total service exports to the EU were worth £27 billion, 44% of total services exports.

Unfortunately, services are far more contentious in free trade deals than goods, because the key barriers to trade do not simply relate to tariffs but to non-tariff and ‘behind the border’ restrictions, such as authorisation schemes. Here is where drawing on the EU-Ukraine Association Agreement will be of importance, as it provides an unprecedented level of integration on services between the EU and a non-EEA country. In particular, in return for Ukraine adopting relevant parts of the EU acquis, it provides for most services the freedom of establishment (whereby service providers can set up a permanent base in another country without unjustified restrictions) and for a range of services market access for cross-border supply (whereby service providers based in one country can sell services from their country to a customer based in another – e.g. via phone or email). The UK should seek a similar but ideally even more ambitious deal, including other aspects of the internal market in services, such as the mutual recognition of qualifications, in return for committing to maintain the relevant EU legislation, so that EU and UK regulation continue to be fully aligned post-Brexit.

Particularly crucial for the UK is the financial services sector. In return for continuing to follow EU legislation, the UK should also seek continued passporting rights for financial service firms, in order to allow them to provide cross-border services across the EU without setting up subsidiaries in other member states. This is far superior than simply aiming for ‘equivalence’ to be able to export certain financial products to the EU – given the latter is a recent innovation which only applies to particular financial products and which is subject to a potentially prolonged process of decision-making by the European Commission. Given the importance of financial services to the UK economy, the government should also explore the possibility of a joint UK-EU committee to scrutinise, assess and influence legislation on financial services, in order to ensure the UK is not simply a ‘rule-taker’ on its largest export sector. In return, the UK could offer for it continue to be subject to the CJEU (Court of Justice of the European Union) for financial service-related matters. (See below for a discussion of dispute resolution for other areas.)

As part of the negotiations, the UK should also seek to agree continued full alignment with EU legislation in other key trade-related areas, including conformity assessments, public procurement, intellectual property, state aid, competition, consumer rights, food safety, and so on. This will all be necessary for continued close trade relationships in goods and services.

Issue 7: Dispute resolution

Any new trade deal between the UK and the EU will require some formal procedure for resolving trade disputes. Indeed, if the UK continues to adopt a large body of EU law in return for close access to the single market, as we propose here, then there will need to be a parallel process for overseeing this legislation and administering the new relationship. A possible way forward here could be a new joint UK-EU court with a balance of UK and EU judges to address relevant UK-EU disputes, as proposed by the Cambridge law professor Markus Gehring. It is likely that, as with the EFTA court and with the EU-Switzerland Joint Committees, in practice much of the decision-making would reflect the judgments of the CJEU. But this arrangement could provide a sensible political balance between retaining close trade relations with the EU and ending the direct legal jurisdiction of the CJEU in the UK.

Issue 8: Migration

Migration is destined to be the most contentious (and perhaps the most unpredictable) area of the Brexit negotiations. In return for continued close trade relationships in goods and services, the UK should agree to search for a compromise on the free movement of people with the EU. There is no guarantee that a compromise is possible, and it is likely that the Prime Minister will want to keep the full details of her red lines close to her chest, but there are certainly in principle a range of possible options that fall between the current status quo of free movement and a straightforward application of the non-EU work visa rules to EU workers.

Two possible compromises should be on the table (perhaps in combination). First, the UK should be willing to consider a temporary, rather than permanent, system of controls on EU migration – something like the ‘emergency brake’ proposed by a number of voices during the lead-up to the referendum. This would face a better chance of receiving serious consideration by EU member states, because a temporary derogation on free movement may not be simply interpreted as a contravention of the fundamental principles of the single market. Second, the UK should consider a devolved system of migration, retaining freedom of movement in parts of the country (such as London and Scotland) and not others. Putting aside the practicalities of the proposal (which we address elsewhere), this could find some sympathy in European capitals, given that, in principle, the UK would still be admitting unrestricted flows of workers to those areas of the country with the most buoyant labour markets.

At the same time, the Brexit negotiations (assuming, as we discuss above, that the withdrawal process is negotiated alongside a new trade agreement) must fully secure the free movement rights of EU nationals already living in the UK and UK nationals already living in the UK. In principle this appears straightforward, but there are a range of technical issues. What happens, for instance, to EU citizens living in the UK who are technically not exercising treaty rights, for whatever reason? Should the protection of rights extend to the protection of access to social security, healthcare, exportability of benefits, and so on? And should non-EU nationals who have secured residence in the UK through free movement law have their rights fully protected? The UK should clearly separate this part of the negotiations from the discussion of the future rules for EU migration, and set out to secure a maximal agreement on free movement rights for EU nationals in the UK and vice versa, in order to ensure these protections are not watered down.

Issue 9: Budget payments

Another core issue of political sensitivity is whether the UK should continue to make payments into the EU budget post-Brexit. Despite some of the rhetoric during the referendum campaign, the government has proved notably open-minded about the question of budget payments. There is certainly a strong case for the UK to continue to pay into the EU budget in some form. But as the former senior European Commission official Jonathan Faull has explained, it would be a mistake to think that the UK could simply ‘buy’ access to the single market at a price. Instead, it seems sensible to continue some payments into the budget under a new arrangement, but this would be for concrete results and outcomes. In particular, the UK should pay into the EU to get access to certain funds and schemes, such as Erasmus+ or Horizon 2020, and it should pay for the maintenance of any regulatory bodies or EU agencies with which it still wants to participate. Finally, as a gesture of good will and as a means of strengthening trade relations, it should also put on the table the option of making payments, as EEA members such as Norway do, to reduce social and economic inequalities across the continent.

Issue 10: Non-EU trade deals

As mentioned above, outside a customs union arrangement with the EU, the UK would be free to strike its own trade deals with non-EU countries. But a key priority for the UK must be to retain or replace the trade deals with non-EU countries that the EU has already agreed, including FTAs with South Korea and Mexico (and those that are in the process of being fully ratified, such as FTAs with Canada, Singapore and Vietnam). The legal status of many of these agreements precludes the UK simply retaining them once it leaves the EU. To avoid going back to the drawing board on trade outside the EU, the government therefore needs to negotiate an arrangement with the EU (and with the non-EU countries involved) to retain or renegotiate these deals post-Brexit.

Of course, these ten areas only scratch the surface of how the negotiations could proceed, and do not touch on a range of other critical areas, from energy policy to cross-border security. But they are a starting point for considering how to secure a sensible, realistic balance between the UK’s competing objectives. Whether the EU27 is willing to play ball is an entirely different matter – they of course have their own political priorities. The negotiations will be far from straightforward, and could turn sour if a compromise proves elusive. It is therefore vital that the government approaches them with flexibility and pragmatism. A clear-headed opening strategy is a good place to start.

This article is part of a wider programme of work by IPPR on how the UK can secure a ‘Progressive Brexit’. In the coming weeks and months, we will be publishing further research into the Article 50 negotiations, investigating some of the potential opportunities and challenges of exiting the EU and setting out a progressive vision of post-Brexit Britain.