Brexit trade package heading towards FTA on level playing field

EU27 governments currently expect the framework for the future relationship with the UK to be based on a free trade agreement (FTA). This expectation is based on the UK government’s publicly stated red lines, leading to the assumption that any model including closer political cooperation would not be acceptable.

To date, the EU27 have been remarkably consistent in their position regarding the requirements of a future relationship. Central to any future relationship with the UK is the principle of the level playing field.

Simply put, European governments and businesses require that if competitors from another country are to access the European market it must be on the basis of an equal footing.

The level playing field is achieved typically through regulatory convergence.

As the UK is an existing member, and will at the date of exit have the same rules and regulations as the rest of the EU, there exists a high degree of regulatory convergence. The question is how long with that last? And what can the EU27 do to make sure any divergence from existing regulations is kept within a tolerable bandwidth within the confines of an FTA?

 

Legal mechanisms

These questions were discussed at length at a recent Council working party, Article 50, where the European Commission presented at length on the possible political and legal mechanisms with which at least the semblance of a level playing field may be achieved.


The areas of greatest concern are:

  • State aid
  • Corporate taxation
  • Environmental and Labour standards

A key tenet of the EU27’s approach to discussions around a future FTA will be to bind the UK to keeping current standards, along with arbitration mechanisms aimed at state aid and taxation.

In that sense, it really would be a bespoke agreement, a Canada plus. Various senior UK ministers have repeatedly called for a Canada plus, or even a Canada plus plus plus. What they may find less palatable is the EU27 insisting that these plusses represent rules that would bind the UK into keeping high standards and controls on state aid and corporate taxation, measures far beyond what has been included in other EU level FTAs.

Much of what is being discussed in relation to safeguarding the level playing field by the EU27 would break new ground in terms of regulatory alignment imposed by an FTA.

On state aid rules, the Commission intends to include a number of measures in the future relationship agreement that would bind the UK into a system not dissimilar to what is currently in effect. This could include wide-ranging rules on financial transparency, the strengthening of an independent regulatory authority and dispute resolution.

 

 

A key tenet of the EU27’s approach to discussions around a future FTA will be to bind the UK to keeping current standards

 

As the Commission has highlighted in their presentation to the EU27, current international rules do not go far enough to ensure a level playing field regarding state aid.

 

Settlement mechanisms

On taxation, measures under consideration again go far beyond what has been achieved in other FTAs to date and would require, amongst other things, for the UK to sign up to a binding code of conduct.

This would also involve monitoring of these measures by the Commission on behalf of the EU27, as well as robust dispute settlement mechanisms.

Environment and labour is also interesting, as it would likely affect the UK’s ability to significantly relax current standards, a measure some UK politicians have been very keen to promote as a key Brexit benefit. The EU27 will likely push for a non-regression clause as part of the FTA to prevent a selective weakening of domestic labour and environment protection below the pre-Brexit level.

The EU27 are keen to avoid a significant shift in the competitiveness of European industry compared to the UK following the latter’s withdrawal from the EU’s sphere of regulatory influence.

The very palpable fear among EU27 governments, fanned by comments from UK ministers, is that the UK government could stage a veritable bonfire of regulations, particularly targeting environmental and labour standards, compounded by an aggressive reduction of corporate tax and loosening of rules around state aid to support domestic infrastructure providers and encourage foreign direct investment.

The basic framework that would govern such an agreement is yet to be discussed, and we are even further away from the detail negotiations of an FTA. According to the Council Guidelines on the negotiations as well as the more recent negotiation directives, we can expect a political discussion on the framework for the future to begin in April, concluding with a political declaration, annexed to the Withdrawal Agreement but without the standing of a legal text.

In the end, nothing is agreed until everything is agreed. Business will need to evaluate what level of regulatory uncertainty is manageable in their supply chains and in their relations with customers as the negotiations progress.