Brexit Phase Two Talks on Trade Begin
This week, the Pound is once again reacting to Brexit politics, as the UK moves into Phase Two of negotiations, after the European Council’s announcement on Friday that “sufficient progress” has been made on the UK’s part. Prime minister Theresa May and Foreign Secretary Boris Johnson didn’t waste time in making efforts to unite the government ahead of critical cabinet meetings this week.
Over the weekend, each made optimistic statements about their hopes for Britain’s future trade relationship with Europe. May’s message was necessarily vague, since she must forge a united stance amongst a cabinet rife with disagreement over the specific details regarding Brexit. “We will not be derailed from this fundamental duty to deliver the democratic will of the British people,” she wrote in the Sunday Telegraph.
Boris Johnson warned that the UK must not become a “vassal state” of Brussels, telling the Sunday Times: “What we need to do is something new and ambitious, which allows zero tariffs and frictionless trade but still gives us that important freedom to decide our own regulatory framework, our own laws and do things in a distinctive way in the future.”
Have our cake and eat it, too?
On Monday 18 December, May held her first meeting of the week with what has been dubbed her “Brexit war cabinet,” a cabinet subcommittee of ten people including Chancellor Philip Hammond and Foreign Secretary Boris Johnson. It has been reported there is a growing consensus toward the UK having a gradual “divergence” from EU rules and regulations after Brexit as opposed to maintaining a closer “alignment” with Brussels.
The prime minister was said to have argued for a “bespoke and ambitious” trade deal between the UK and EU which would be more in line with international standards, rather than conforming to European regulations. This concept for trade after the transition period would be similar to the free trade agreement Canada has, but it would also feature additional agreements including services.
This recalls Boris Johnson’s famously lofty Brexit ambition, that he is “pro having my cake and pro eating it,” suggesting that somehow the UK could retain the benefits of belonging to the single market after leaving it.
While the UK government again discusses what their ideal post Brexit “end-game” scenario is again today, the reality is that these plans are subject to approval by the EU. The European Union’s chief negotiator, Michel Barnier instantly threw icy water on any hope that the UK would be able to maintain any “special arrangement” regarding the City of London’s financial services when the UK leaves the single market.
City finance concerns
UK Finance, a trade body that represents almost 300 major banks and other UK financial institutions wrote an open letter to Theresa May and Phillip Hammond warning that alignment with EU finance rules is critical to a smooth transition. UK Finance wrote that the UK should seek a far more ambitious trade agreement than the one the EU has with Canada because they currently have “a position of regulatory convergence that the UK and Canada didn’t have.”
The trade body wants the City to be the central focus of Brexit negotiations, warning that “an unnecessary loss of income to the UK would be the result if the financial services sector couldn’t retain the current high degree of mutual cross border access it has today. The trade body notes that the banking sector contributed £35.4bn to the UK’s public finances in 2016 and 2017, highlighting what is at stake in the upcoming negotiations.
Michel Barnier, EU chief negotiator has repeatedly dashed the government’s hopes for a unique trade deal with the EU that includes financial services. Barnier told The Guardian “the British have chosen themselves the red lines. In leaving the single market, they lose the financial services passport.” He scuppered Brexit secretary David Davis’ previous assertion that the UK could strike a deal with EU that would maintain financial services, saying “there is not a single trade agreement which is open to financial services. It does not exist.”
The financial services passporting Barnier has spoken of is the means by which the UK’s financial firms now do business freely across the EU. Barnier has previously said that leaving the single market means that Britain’s financial firms will forfeit these passporting rights. According to the Financial Conduct Authority, 5,476 UK-registered firms hold at least one passport to trade in either a single member state or the European Economic Area. Various reports have estimated that losing the passporting rights could see some 10,000 jobs leave the City and a loss of as much as £9bn in UK investment and capital market revenue.
No cherry picking
Like Boris’ cake allusion, Brexit statements perpetually feature the words “cherry picking.” First, Chancellor Angela Merkel said that Britain would not be able to cherry pick the aspects of the European Union that it wants to keep, such as the single market without also accepting principles like free movement.
EU Brexit negotiator, Guy Verhofstadt, also said the UK can’t cherry pick the benefits of being a member of EU and was echoed by Italian prime minister Paolo Gentiloni. The reference has been in the domain of Europeans wagging fingers towards the UK, until very recently.
Now a senior government official has revealed that Brexit secretary Davis will warn the European commission that it cannot “cherry pick some sectors” in the trade deal negotiations. Responding to the EU’s firm stance, the government source said “they either want to have a broad economic relationship with the UK, or they don’t.” The source said that the UK plans to treat services, which comprise early 80 per cent of the UK economy, as inseparable from agreements on goods.
For his part, Barnier has apparently determined that a Canada-style trade deal is the UK’s only option. Last week, he showed EU leaders a slide that illustrates the future relationship based on the UK’s red lines that prohibit any other type of trade deal rather the Canada Free Trade Agreement. As the prime minister hosts her second critical cabinet meeting today, her spokesman says she is still seeking “a significantly more ambitious deal than the EU’s agreement with Canada.” Presumably that would be the Canada plus plus plus deal that David Davis said the UK can have with the EU.
It’s clear that having finally gotten to Phase two, negotiating trade is hardly a piece of cake and not nearly as delightful as a bowl of handpicked cherries.