Deal Mixology

Regardless of whether a deal is reached this year, Britain may still revert to WTO terms.

The European Council’s Europa Building

On 18 June, premiers of all 27 EU nations will congregate at the last European Council summit before Britain’s deadline to extend the transition period.

Within the conclave of the Europa Building, EU leaders will war-game the scenarios available on Johnson’s plate. According to the Withdrawal Agreement, Britain has two options; extend the transition period by exactly one or two years, or not to extend past 2020 at all.

The trouble is that even with these extensions, there still may not be enough time for the UK-EU ‘future relationship’ to pass through the entire legislative machinery of the EU before 2021. British businesses, already ravaged by COVID-19, may face yet another barrage of economic uncertainty at the end of the year. Why? Because the future trade deal, by its very nature, is so comprehensive that it will be “mixed”.

A ‘mixed agreement’ is a deal between the EU and another country which covers legal powers both at an EU and a national level. This could be a trade agreement that also deals with investment protection issues and intellectual property rights pertaining to the national laws of individual EU countries.

The EU can only provide consent to this agreement so long as it is approved in all 37 national and regional parliaments of the EU27. The EU-Canada Comprehensive and Economic Trade Agreement (CETA) showed how this can be painfully slow. Not only was the agreement held up by the Wallonia regional parliament, but also that of the French Community of Belgium and the region of the city of Brussels. Key sticking points were the fear of an influx of lower quality Canadian goods entering these markets.

CETA took seven years to negotiate, followed by another 11 months to ensure that enough EU countries were on board to allow for ‘substantial parts’ of the agreement to be applied provisionally. It still hasn’t technically been accepted by all EU countries, (only 13 have ratified, including the UK) where you’d find regulatory blackholes, in that those countries’ national laws affected by CETA are left in their original pre-agreement state.

Back in March 2018, government officials anticipated such problems and foresaw that the deal would be mixed. Had everything gone smoothly with May’s Withdrawal Agreement Bill, then this Phase I of the negotiations would have been done by March 2019, leaving 20 months before the transition period was over at the end of 2020. These 20 months to negotiate the future trading relationship (Phase II) were reduced to 11, as the Bill kept being rejected by Parliament.  With almost daily parliamentary chaos, followed by May’s exit and Johnson’s landslide victory in the December election, Phase I was only formally over by February 2020.

If Johnson is happy with a “Canada +++” deal, i.e. a slightly closer relationship with the EU than that of Canada, and CETA was a mixed deal, then the UK-EU future trading relationship would be so as well. Brexiteers have sought after a CETA-style arrangement as it would allow enough independence from the EU, with enough access to the Single Market to prevent any damage to the economy.

The problem for Britain is that unlike CETA, when it comes to the future trading relationship, we’d be coming from a position of alignment with EU rules, to a regulatory state outside the jurisdiction of the EU, i.e. reverting to WTO terms. This could potentially create a no-deal scenario when it comes to the likes of investment protections.

What this means for UK’s economy is difficult to gauge. The government had previously promised to set up equivalent schemes to protect IP rights in the event of no-deal. Yet how easy would this be? The UK could potentially be drawn into long and protracted negotiations with individual EU countries, with knock-on effects in all sectors including medicine, financial products and arts and culture. An increase in economic certainty is not on the cards. Investment protection legislation involves stopping governments from expropriating assets and so is highly politicised, meaning there are no guarantees.

Crucially, it’s fair to say that the 17.4m voters did not vote for a ‘No-Deal’ outcome, which could simply be resolved by extending the transition period. The question is whether Leave voters would be willing take this economic hit over the perceived ‘damage to democracy’ by not completing the Brexit process. In this article, I’m only discussing Brexit in terms of trade, yet No-Deal could have serious ramifications in terms of culture, identity and faith in government institutions.

Despite being in the middle of a pandemic, our chief negotiator in Brussels, David Frost, is convinced that the deal can be settled within the next 7 months and that COVID-19 gives us even more of a reason not to extend the transition period.

Yet cynics would argue that as the ratification process usually takes so long, it would probably last longer than the two-year maximum period of extension under the withdrawal agreement, so there’s no point in extending anyway. Perhaps EU negotiators knew this and wanted Britain to face up to the harsh realities of leaving the EU? Or perhaps the UK is happy to muddy the waters in blaming the damaging effects of Brexit on COVID-19, banking on the public forgetting about this damage before the next General election in 2024?

In any case, should the government want to mitigate such uncertainty, it could consider the following solutions:

1.)   A Non-Mixed Deal

The agreement could be “non-mixed”, in that it only touches upon EU law and doesn’t need the approval of individual EU countries. A deal could be reached in as short a time frame as it takes for EU officials to turn up in Brussels.

Why this isn’t the norm? According to Anna Stellinger at the Confederation of Swedish Enterprise, imagine a Taj Mahal or Wembley Stadium Lego structure that you can easily build at home with your kids. Except the ‘non-mixed agreement’ part is the floppy plastic base on which you build the structure. Telling the public that a non-mixed agreement is “Getting Brexit Done” would be selling this piece of plastic as the entire Taj Mahal.

Once the transition period ends, we’d be reverting to WTO terms on all the areas not covered by the agreement anyway. At least British negotiators could head into the storm eyes-open then face the period of uncertainty posed by the endless ratification process offered with a mixed deal. Brexit may be over, but in all likelihood both parties would spend the next decade building upon this bare-bones deal. Brace yourself for a Department of ‘the Future Relationship with the EU’ cropping up on Whitehall.

Who decides the ‘mixity’ of the UK-EU future trade deal? Ultimately the decision is up to both UK and EU negotiators. The EU could drag their feet, insist that the deal is mixed and force the UK to ask for an extension as it would be impossible to get through enough of the ratification process by the end of this year. But perhaps David Frost wants to face the prospect of some parts of the deal reverting to WTO terms. Anything, just to get the deal done.

2.)   Bilateral deals with EU countries

Switzerland and Norway do it. And so to quote Farage “Wouldn’t it be awful if we were like Norway?”. After a serious bout of referendum fatigue that tore the country apart, Norway’s relationship to the EU is a complex one built over decades.

At first glance, Norway must make regular contributions to the EU budget and has to abide by EU rules without a say in how they’re made. Yet Norwegians have kept some control over issues that matter to them most, which includes fisheries and the management of its sovereign wealth fund. As the nation suffers from Brexit exhaustion, it’s unlikely there would be a high-level of public scrutiny over a UK-Belgium trade deal exclusively covering investment protections.

3.)   Greater Fudge

As a general tule of thumb, the “political” will always beat the “technical”. In other words, we will find a way and fudge will reign supreme. Most likely that’s what Boris is banking on by playing hardball with the extension deadline.

May’s former Brexit guru Raoul Ruparel has concocted the latest recipe, the PREP, aka a conditional extension. This would grant British businesses a few more months to react to whatever deal is reached, so that they are not hit with a double-whammy of the lockdown followed by any drastic regulatory changes caused by Brexit. Yet this buffer time period would only kick in once a deal is reached, of which there are also no guarantees.

The government should find a way out of this quagmire. This would most likely be through a combination of opaque bilateral trade deals and multiple layers of legislative fudging. Failing that, there’s always the endless process of ratification which could set up a thrilling spectacle of Brexit gurus, spads and journos alike, traipsing across Europe to see the deal passing through the 37 parliamentary chambers of the remaining EU27. You’d hope one of these interrailers might ask “Is this really taking back control?”.