Negotiating the Future

The UK Government is confident that a unique and ambitious trade agreement with the EU can be negotiated and finalised by 31 December 2020. Dr Helena Raulus, Head of the joint UK Law Societies’ Brussels Office looks at some of the issues that have arisen in other recent free trade agreement (FTA) negotiations, which may help to determine whether or not this is possible.  

Purpose of trade agreements

The purpose of FTAs is to eliminate certain trade barriers or obstacles. These barriers can be tariff or non-tariff ones. Tariffs are easy to determine, often the difficulties arise from non-tariff barriers – differences in taxation regimes for domestic and other companies, different environmental or consumer standards that require changes in the composition of products or, as in case of regulated professions, licensing and authorisation to provide services.

The internal market is the deepest form of such economic integration and it does entail abolition of all barriers, tariff and non-tariff alike, in all four areas of economic activity: goods, persons, services and capital.

Only sectors that are specifically excluded from the scope of the Treaty and corresponding legislation do not get the benefit of the abolition of barriers. This common set of legislation also sets out what actions are justifiable, even if they would raise barriers on trade between the parties. Over the years, the Court of Justice of the EU has developed an impressive body of case law that aims to limit what barriers are allowed and on which conditions.

By contrast, an FTA is not a package such as the internal market and as such it consists of a narrower set of rules, with different enforcement mechanisms and sectoral coverage. FTAs usually aim to open up several sectors of the economy and this remains one of the basic questions in the FTA negotiations.

Identifying sectoral priorities

Before even starting the negotiations for CETA, Canada and the EU held two years of internal assessments (known as a scoping exercise) and stakeholder consultations to determine which sectors should be favoured in the outcome of the agreement.

Although the question is slightly different for the UK-EU FTA, as in this case barriers will actually be raised in comparison to the current regime, the basic mechanism and calculations behind the negotiations are the same. The basic question is, which sectors should continue to benefit from a beneficial access when compared to the WTO.

The EU has done its internal assessments as to what are the important sectors for the various agreements that it has agreed in recent years: Canada, Singapore and Japan. The EU, therefore, knows very well its offensive and defensive interests and those of its negotiating partners. It also means that it has a firm and well-defined negotiating position which is hard to modify given the process leading to its adoption (agreement of all EU member states). What about the UK? Would following the FTA model set out by CETA and EU-Japan mean that such an assessment is not necessary? Or perhaps the EU-UK relationship is sufficiently distinct to merit a thorough analysis of what a potential FTA could cover and what the effect of bigger barriers may have on the UK’s most successful sectors?

Fitting in all the pieces

After a decision is made on which sectors to promote, it is time to negotiate the agreement.

Such negotiations have several substages and it is important to understand that, before the negotiations on the substance begin, two parties are often involved in months of talks on the architecture of the agreement and how it is drafted. After that is agreed, the exchange of offers can happen.

This effectively means that teams from both sides come forward with their own priorities and negotiate the result. A good result will be a compromise, where both parties end up giving up some of their priorities – essentially like filling all the pieces in a giant puzzle, with additional line-by-line negotiations on whether and to what extent there will be reservations or special provisions and requests from different states.

This took 5 years in the case of CETA. The good news is that after CETA has been agreed, it does provide for a basic architecture for an FTA.  

Yet, it is not just a matter for signing up to CETA. It has been negotiated and concluded with Canada-EU interests in mind. Is the UK’s economic make-up the same as Canada’s? Hardly so.

Each line will still need to be negotiated and a package that fits the UK’s interests as well as the EU’s would need to be reached. Therefore, the dynamic is the same for the UK-EU negotiations too. There will be areas of interest for the UK that it wants to provide for a maximum access and areas where this would be more beneficial for the EU. As pointed out already, the purpose of this FTA is unique in that whereas FTAs are usually about removing barriers, this one will be about preventing incoming barriers arising. Rushing the negotiations and signing up to an EU template may see new barriers arising in the areas of most interest for the UK – this may affect the deal available for business and professional services, such as our legal services.

To make things even harder, any advances that the UK makes may need to be granted to the other parties that the EU has agreements with. FTAs often include forward Most Favoured Nation (MFN) clauses. These clauses prescribe that any advances that are made available to the new parties, in other newer FTAs, should be made available also for the existing trading relationships.

Getting over 1000 pages agreed is simply hard bargaining that requires a lot of man-hours, not to mention a clear sense of priorities – what can be lost and what should not be lost – in the negotiations.

Playing catch-up 

Negotiating an FTA is essentially crafting an agreement that fits a particular economic relationship and defines it into the future. The special nature of the UK being a former member of the EU does not change any of that.

The issue is rather that if the UK government were to hasten concluding this type of agreement, there is a high risk that the result will mainly end up benefiting the EU’s economic make-up and disadvantaging the UK’s. As explained above, the EU has its offer ready, it has carried out its internal consultations and participated in previous negotiations, whereas there is still a long road to go from the UK side on this.